Faced with deteriorating finances, the government has decided on an unusual step: cutting the defence budget for this year.

According to sources, the Centre has proposed a cut of "a few thousand crores" in the defence budget for 2011-12. The Centre has never cut budget allocation for the military in recent years, even though the defence ministry has surrendered unspent money to the government several times in the past.

Sources said the "reluctant" move was prompted by acute fiscal distress, thanks to a huge shortfall in tax collection and disinvestment, as well as miscalculation of subsidies.

It is the first time in recent memory that the government is cutting the defence budget in the middle of a financial year. Last financial year, 2010-11, the ministry had overshot the budget by Rs 4,237.69 crore. In the years before that, the ministry had on several occasions surrendered capital budget allocations, failing to spend them in time. But never has the government introduced a budget cut before the financial year is over.

The government's decision is unusual for many reasons. One, the defence budget for 2011-12 was only 8.47% over the previous year because the revised budget had overshot the allocation. Second, the ministry is in the final stages of several contract negotiations.

Accordingly, sources said the government would proceed cautiously in approving new defence contracts in the current financial year, ending March 31. "We are not stalling modernization, we are going ahead with all contracts as planned," an official said. However, he admitted that the proposed cut in defence budget could mean at least a few purchases may have to be delayed to the next financial year starting on April 1.

The last quarter of the financial year is usually the busiest season for the defence ministry in terms of purchases. A large number of contracts are cleared in the final quarter. However, the "saving grace" is that this year, the ministry had already committed a significant portion of the capital budget meant for new purchases in the first three quarters, another source said.

The defence budget for 2011-12 presented in Parliament on February 28 last year was Rs 1.64 lakh crore. It was believed that the allocation was a sign of the government's efforts to insulate defence modernization from steps for fiscal austerity. The capital budget was Rs 69,199 crore, meant for new purchases. It is from this capital allocation that the government will be cutting a few thousand crores.

The unusual move to cut the defence budget, which will be reflected in the papers to be tabled in Parliament in the coming budget session starting on March 12, is reflective of the larger fiscal problems facing the government.