The Ministry of Defence is sui generis amongst all Ministries, as it has to provide the policy architecture to protect territorial integrity and sovereignty of India. Defence expenditure is the first charge of a budget, and being a ‘charged expenditure’, as per Article 112(3) of the Constitution it witnesses no discussion in the Parliament. There is an infernal secrecy, the way the major stakeholders like the Service Headquarters, the civilians in MoD, the engineers in DRDO, Ordnance Factories and the public sector interact with each other and set the priorities.
The Defence Finance is a pivot in MoD and is expected play the role of a midwife, to provide a realistic budget and an air of assurance that there is transparency and fairness in procurement and contracts. Finance involves a wide array of functions which include budgeting, costing, contracting and cost benefit analysis. It would, therefore, be appropriate in the fitness of things to examine how well these varied functions are being discharged MoD (Finance).
This is a critical exercise in all Ministries, including Defence (Finance). All Ministries are expected to prepare a Outcome Budget since 2005-06, linking allocation to outcomes. Despite the fact that services have massive Repair & Overhaul workshops, Military Farms; and Ordnance Factories and DPSUs produce a wide array of products, such an exercise is yet to undertaken by MoD (Finance). This leads to substantial cost inefficiency and suboptimal capacity utilization.
Further the budgeting exercise in MoD does not link the requirement for capital acquisition with maintenance needs over the life time of the major weapon systems and platforms. There is no exercise either how to link different levels of capability with corresponding budget requirement, taking note of Long Term Operational Requirement. Budgeting remains basically an exercise in incrementalism. The Ministry of Finance is fixated on Defence Budget/GDP and how to keep it below 3%; without proper evaluation of the larger concerns of India’s defence preparedness vis-à-vis the adversaries, in the long run.
Life Cycle Costing
Most countries follow life cycle costing for acquisition of their major platforms. This requires a high degree of professional knowledge involving technology, field trials, costing etc. When it was decided by the MoD that LCC would be adapted for selecting a MMRCA, aircraft, huge gaps in understanding these challenges was noticed. This resulted in a delay of more than two years to arrive at the lowest cost (L1)!
Understanding the nuances of a contract require good understanding of Contract Act and other legal document like Sale of Goods Act, Arbitration Act etc. Most of the finance representatives have weak understanding of how to vet these legal terms. In particular, clauses like price escalation, damager pose huge challenge in estimation and assessment. Price negotiation is another area; where it is often conducted in a very unprofessional manner. Examining cost break up in a single tender case remains a weak area in the absence of sound knowledge in costing.
Cost Benefit Analysis
Examination of cost Benefit of project proposals and cost of prototype in DRDO needs proper understanding of IRR. Besides investment and financing decisions, formation of JVs require sound expertise in these finance areas. While wide powers have been given to Defence PSUs as Navratna and Miniratna, for forming JVs and disinvestment, the expertise in MoD (Finance) is rather wafer thin make realistic assessment.
The Larger Perspective
The Government of India took a decision to introduce an offset procedure (2008) to leverage big ticket defence acquisition to get orders for our indigenous industry, technology transfer from OEMs, R&D from design houses and FDI from global manufacturing hubs to set up long term investment in India. These are part of a larger policy mosaic, to bolster the Make in India programme. The policy which was earlier defence specific, has now been expanded to dual use products of Ministries of Civil Aviation for aerospace items and items like bullet proof jacket, parachutes used by both Ministry of Home and Ministry of Defence. This policy requires very close coordination with various stakeholders and a high degree of professionalism. This policy is not making any major headway, as the coordinated effort that is required is conspicuous by its absence. Defence (Finance) loses sight of the larger perspective; confining itself to costing and audit aspects only.
Professionalism in Defence (Finance)
Presently this outfit is manned by officers from the organized Account Services like the IDAS, I&AS & IRAS etc. These officers do not degree in chartered accountancy or MBA (Finance). The training of these officials is largely confined to costing, auditing, with very little emphasis on the finance, investment and contracting. They do not get any intensive long term training by the IIMs. This handicaps them hugely in handling important investment decisions. Similarly they do not get exposed to National Law Schools as to how to handle contracting issues.
During an International seminar in Defence Finance in (2006), Prof. Keith Hartley, a leading writer on defence, brought out how there is a poor understanding of factoring defence economics into defence finance. Dr. Elisabeth Skons, the editor of SIPRI, brought out how the defence budget document of India does not lend itself to any scientific analysis of the trends in military expenditure. Similar sentiment were expressed by Head, General Accounting Office regarding poor quality of performance appraisal of projects and acquisitions. The lessons are draw from the leading experts globally show how our existing structural arrangement in Defence Finance does not lend itself to high professionalism.
Mr. Raghuram Rajan, when he was the RBI Governor, had underscored the importance greater professionalism and the need to pay better pay packages to attract talents both at the entry level and mid segment. Coming from an acknowledged finance luminary, earning sobriquets from Nobel Laureate, Prof. Paul Krugman, this advice could not have been more timely for the financial advisors. When we pay peanuts, we will get monkeys, as a wit will put it!
Broad Based Decision Making
One of the definitive experience during bilateral talks with strategic partners like USA reveal that decision making factors inputs from all the relevant stakeholders. A case in point is Pentagon where the defence delegation is often composed of the service officers providing strategic inputs, industry representatives bringing in business perception and the academic, the international relation aspects. The MoD in India is hugely stymied, as it generally keeps the industry a bay and protects its highly inefficient production outfits in the public sector. In an age of globalization, such an inward looking approach, would not make India’s defence industry the manufacturing hubs.
We need professional finance manager and not generalists to handle the onerous myriad expectation in the MoD (Finance). The Administrative Reforms Committee had suggested that every civil servant should do specialization after 12 to 14 years of service and preferably hold a Ph.D. in his/her area of specialization. This would provide them the gravitas to render professional advice. John Maynard Keynes had famously observed “The difficulty lies not in introducing new ideas but in replacing old ones”. MoD needs a change in mindset and abdication of old fangled ideas. Robert McNamara, who was a professional soldier (Army Chief, USA) brought in the concept of Zero Based Budgeting (ZBB) as the Treasury Secretary.
Finance is no longer the monopoly of an Organized Accounts Services; but of sound professionals who can straddle the manifold challenges of costing, audit, contracting and finance. For this, they need exposure to best of think tanks like the RAND Corporation, USA and professional training courses. The present move of government to send a delegation of all the financial advisors to foreign universities in USA for a week, is at best a cosmetic exercise. It fails to take note of the serious systemic fault lines that afflict the finance set in all ministries; and defene (finance) in particular.
There is also a need to abrogate special protection granted for Civil Servants in our Constitution through Article 311. The ARC has strongly argued against this article. The need of the hour is to take out special privileges, inculcate professionalism and embrace all stakeholders in the decision making process.