Indian Defence Review

Defence Budget 2017-2018 is due to be announced on February 1st, couple of weeks earlier than the normal practice of budget announcement in later half of February. There are many expectations, especially with the fast changing geopolitical dynamics of South Asia, particularly the growing China-Pakistan nexus and the threats thereof.

It would have been prudent if the government in saddle since May 2014 would have gone in for pre-budget presentations by the army, navy and air force to the Standing Committee on Defence of the Parliament (akin to procedure in the US) giving their existing operational capability, budget demand, and what would be the capability if that demand was met. The Committee then would have then projected the government what the defence allocations for next financial year should be. But this would have required extraordinary effort to get out of the status quo.

So, the usual procedure continues: Services forwarding their wish lists to HQ IDS; HQ IDS forwarding the compiled list to MoD; MoD forwarding same to the MoF after some tinkering, and; MoF imposing arbitrary cap without considering operational implications.

Allocating the Defence Budget or for that matter drawing up of the Long Term Integrated Procurement Plan (LTIPP) in absence of a National Security Strategy and Comprehensive Defence Review is bad.

But yearly defence allocations also hide true impact on defence despite successive finance minister’s boisterous announcements in Parliament, thumping of tables, and deliberate media hype that much more than what is needed for defence is being done. To add to this din are announcements that there never will be dearth of funds for defence.

Closer examination reveals that most defence budgets are actually ‘negative’ in real sense. This is true for the current financial year (FY 2016-2017). Though defence allocation for FY 2015-2016 and FY 2016-2017 were same Rs 2,46,727 crore, FY 2015-2016 allocation of Rs 2,46,727 crore amounted to about US$ 40 billion but the same allotment in current FY in the backdrop of the rupee depreciation coupled with yearly inflation rates of defence procurement amounted to far less availability, despite efforts to portray more than adequate by saying that “against likely expenditure of this year of 2,22,370 crore the budget allocation for 2016-17 is 2,46,727 crore”; implying that Rs 24,357 crores is the extra cushion – which it is not.

The above mentioned figure of Rs 2,22,370 as likely expenditure needs to be taken seen in the backdrop that since October 2015 the military was negotiating with the defence and finance ministries to finalize financial allocations for the coming financial year, 2016-17, projecting figures taking into account the inflation but the Finance Ministry simply ignored these requests.

Ignoring rupee depreciation and inflation in defence procurement these issues and then saying Rs 2,22,370 will be likely expenditure amounted to fooling the public. This in all probability is being repeated even now as the next defence budget allocations are being finalized.

There have also been cases of gross mismanagement of funds. One example is the revelation by Defence Minister Mohan Parrikar in March 2016 that $3 billion were lying “forgotten” in a Pentagon account in Washington. MoD had reportedly put the said money in a Pentagon account for weaponry that was to be bought under the Foreign Military Sales (FMS).

According to the grapevine, a cheque for $5 billion was handed over to visiting President Obama by the PM Manmohan Singh in year 2010. This sum was not even earning any interest for India.

A second example is the discovery last year that $8.3 billion are lying unused with public sector undertakings (PSUs) – paid as advance over the years. As per media reports, financial managers (of Defence Finance) were then been asked to review the system of providing advance payments to PSU’s while latter have been using the interest generated from these accumulated advance payments to show profits, instead of generating revenues from their core area of expertise – and this rookery was never caught in audits.

According to an internal audit, while the total amount outstanding from PSUs is Rs 55,892 crore ($8.3 billion), most of it was (Rs 51,573 crore) with Hindustan Aeronautics Limited. “These are advance payments made since as early as 1975 which had never been accounted for”. It is amazing that such practices have been continuing since at least 1975 while the military’s critical voids have been mounting – still surprised about the MoD-DRDO-DPSU-OF nexus?

When General Charles de Gaulle became president of France in 1959, France was militarily weak. What de Gaulle ensured was that the Defence Budget of France remained greater than 2 percent and touching 5 percent of the GDP, resulting in France emerging as a militarily strong nuclear power. That trend has continued with current French military expenditure standing at 5.4 percent of the GDP.

In India, though the Long Term Integrated Procurement Plan (LTIPP) is based on a hypothetical 3 percent of GDP, defence allocations have never really touched that mark. Even post the Kargil Conflict and public exposure to massive equipment shortages in the Army, the one time high 1999-2000 Defence Budget allocation was made at 2.41% of the GDP. However, there has been a down-slide since then, not to talk of the thousands of crores of Rupees that have been surrendered annually over the years.

The Parliament’s Standing Committee on Defence had noted in April 2015 that “such under-spending leads to a situation where the preparation of Defence Forces are nowhere near the target”. The Committee called for a “non-lapsable and roll-on allocation” fund for 5-10 years for defence equipment. Such a non-lapsable fund, administered by experts with strict controls on timelines, would reduce bureaucratic hurdles and be more attuned to practical realities. Even during NDA I, Jaswant Singh as defence minister had recommended that the unspent funds of defence budget must be allowed go into the next financial year.

It would surprise many to know that our current Defence Budget for FY 2016-2017 is actually the lowest ever since 1962. Considering that the LTIPP is worked upon a 3% GDP allocation, it would be appropriate to have the Defence Budget 2017-2018 pegged at that level or anywhere between 2.5 to 3% of the GDP.

Capital defence expenditure always has committed liabilities that are spread over a number of years. The yearly installments need to be met accordingly. Total capital allocations would be large in the backdrop of our critical voids and threat assessment on land, sea, aerospace and cyberspace.

India is already looking at weapon systems for all the three services, as also modernizing the military. It is generally seen that committed liabilities of in capital expenditure leaves little towards military modernization.

The Mountain Strike Corps itself requires considerable financial allocations. These aspects must be duly weighed in making budgetary allocations for defence considering the hybrid war we are engaged in.

To this end we must not neglect the requirements at the cutting edge, concentrating only on big ticket weapon systems. However, financial allocation being just one part, its utilization must be judicious and holistic, duly prioritized to this end, the government would do well to appoint a Chief of Defence Staff early and induct military professionals in the MoD and the defence-industrial complex.