The defence budget for 2007-08 is likely to see a modest increase of around 4.5 per cent - if the Army is unable to find a way to spend Rs 4,000 crore (Rs 40 billion) on capital equipment.

In November-December last year, the finance ministry had held back Rs 3,000 crore (Rs 30 billion) from the Army's capital outlay, which had remained unspent during the year.

The services were warned they would lose another Rs 4,000 crore in the budgetary outlay for the forthcoming fiscal, unless they showed evidence of intent to spend.

The finance ministry said its hands were tied. Under the fiscal responsibility law, those ministries that had been unable to spend the money they had been allocated in the prescribed timeframe, would have to return the unspent funds.

For the services, this story is not new: 2004-05 was the only year when there was no surrender of funds left unspent by the services. Before and after, every year, money has been returned to the Consolidated Fund of India.

This is because of complex procurement procedures, the government's new offset policy and the reluctance of officers to put their signature assenting to big-ticket expenditure for fear of being accused of accepting kickbacks.

An additional factor deterring expenditure this year was the change of guard in the defence ministry midway through the year, when Pranab Mukherjee was moved out and AK Antony appointed in his place, bureaucrats said. "It has taken Antony time to acquaint himself with procedures," they added.