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Defence Expenditure: The Holy Cow

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Charged Up: The defence budget should be accumulated instead of surrendering the amount each year Normally argumentative Indian politicians avoid debating the defence budget. Their interest in defence expenditure is mostly limited to making political capital out of suspected or real corruption in defence deals. Hopefully, there will be some discussion on defence spending in Parliament this time as the country is heading for its biggest ever programme for modernising its forces — more than Rs 2 lakh crore of capital spending is on the cards over the next five years. A series of big defence procurement deals are in the pipeline — requests for proposals have already been made for many big deals, including those for the 126 medium multi-role combat aircraft, 8,400 light specialist vehicles, 140 ultra-light 155-mm 39-calibre and tactical communication system. These procurements will add up to about $15 billion (Rs 6 lakh crore). Many more multi-billion dollar deals are on their way, including the one for more than 200 light, multi-role helicopters for the army and the air force and and a few hundred motorised and towed 155-mm 52-calibre artillery guns. Charted Territories For the first time, India’s defence budget will cross the Rs 1-lakh-crore mark. That should be certainty given India’s extensive programme to modernise its armed forces. The current year’s budget is Rs 96,000 crore. Expect the Finance Minister P. Chidambaram to finish his term with the same pro-procurement fervour that he opened his term with. In 2004-05, Chidambaram stole the previous BJP-led government’s armed nationalism platform by increasing the defence budget by 27 per cent to Rs 77,000 crore and the defence capital budget by 60 per cent to Rs 33,483 crore. In its last budget in 2003-04, the Vajpayee-led NDA government added only Rs 300 crore to the previous year’s defence budget of Rs 65,000 crore, as procurement was hit by the Tehelka exposé of corruption in army procurement. That year, the Ministry of Defence (MoD) also returned Rs 9,000 crore that remained unused. Even under the UPA, the trend of defence budgets remaining unspent has continued. In 2006-07, the MoD returned Rs 3,000 crore because of the delays in decision making on procurement despite formulating a Defence Procurement Policy in 2006. Brigadier (Retd) K.A. Hai, chief executive of Mahindra Defence Systems, says, “There is plenty of money for defence expenditure, but the defence procurement process needs to be more efficient to use it properly.” It is a paradox that Indian forces are waiting for arms and equipment and at the same time the ministry of defence is left with unspent budget. Most large procurement programmes are delayed resulting in cost escalation and technological or stratetgic obsolescence of the bought items. One recent example of an urgent equipment purchase going awry is that of 197 light helicopters for the army. In December 2007, the ministry of defence cancelled the $550 million order eight months after awarding it to Eurocopter because the company’s rival objected to its fielding of a civilian helicopter for trials instead of the actual helicopter to be supplied. The process of proposals, trials, and negotiations will start again in a few months and will take 2-3 years to be completed. The same helicopters will vie for the order again, unless the ministry changes specifications, which will mean more delay. According to Ajay Lele, a research fellow at the Institute for Defence Studies and Analysis (IDSA), the most important thing the finance minister can do with the defence budget now is allow the rollover of the unspent funds. “Large defence procurements tend to be lumpy and the defence budget should be allowed to accumulate instead of surrendering the unspent money each year,” says Lele. “That will allow long-term, strategic thinking in defence spending.” M.V. Kotwal, senior vice-president of heavy engineering and head of the defence business at Larsen & Toubro, agrees. “Rolling over of unspent defence budget will remove the uncertainty over funding of the postponed programmes,” he says. The nascent private defence industry in India wants the FM to help its growth. Hai wants the 26 per cent cap on FDI in defence to be raised in order to get global defence companies to form joint ventures with Indian companies. Kotwal, on the other hands, would like the FM to provide the forces with their separate capital budget so that they could become partners in domestic arms and equipment development programmes. “The buyers involvement in development projects is critical for their technological and commercial success,” he says. The Plot Thickens Chidambaram could also pay heed to the Army chief, General Deepak Kapoor’s complains over shortage of officers in the army. The general recently cried for conscription to plug the gap of 11,238 officers in army from the authorised number of 46,615 officers. Lele contends that because of poor pay and job conditions both soldiers and officers are trying to leave forces. This is also the reason one sees an increase in the number of soldiers committing suicides or shooting superiors. Moreover, business is the new frontier of adventure and heroism for the educated youth in the new economy-centric India. In any case, the Sixth Pay Commission could end up increasing the revenue defence budget by nearly Rs 10,000 crore when it is implemented. At the same time, Chidambaram has an opportunity to push for reforms in the domestic defence manufacturing sector, which is dominated by protected defence PSUs and ordnance factories. Because of their inability to make high-end, modern equipment, India remains dependent on imports to upgrade its forces. According to Kotwal, one fiscal incentive that the FM could budget is deemed export benefits to the domestic industry for import substitution. The Road Ahead One way or another, the defence budget is expected to snowball as Indian forces modernise and their role extends beyond protecting the borders — fighting insurgency in border and interior states, tackling terrorism in urban areas, and policing the South Asian region. If the defence budget is pegged at 3 per cent of the gross domestic product (GDP), as it would be for 2007-08, in five years it will touch Rs 2 lakh crore. That if the GDP (2007-08 estimate Rs 31,14,452 crore) continues to grow at 8-10 per cent each year. Chidambaram may dispense with his curt brevity on defence this time. He said less on defence proposals than on paan masala. Let’s hear it for the forces and the soldiers this time. What has he got to lose this time anyway? feroz.ahmed@abp.in (Businessworld Issue 25 Feb-3 Mar 2008)