Tuesday, 3 March 2015

Needed: defence budgeting structures



By Ajai Shukla
Business Standard, 3rd March 15

The National Democratic Alliance (NDA) has presented its second defence budget, a document remarkable only for its resemblance to the last one --- not a desirable attribute when the defence ministry and military need to radically change the way they do business. There is little real growth in spending, with the government resorting to the retailer’s trick of under spending last year’s allocations by three per cent and then increasing this year’s allocation by 10.95 per cent from that lower base. Given the 5-10 per cent annual inflation in defence equipment costs, the military’s buying power remains largely unchanged.

There is little to be gained from gazing into the clouded crystal ball of defence procurement, which follows unpredictable logics and patterns. Instead, the most useful analysis of an Indian defence budget relates to how the current year’s budget is being expended, which is discernible from the revised estimates that are released with the new budget.

From the revised estimates (see chart) it is evident that the current year’s budget has not supported New Delhi’s maritime emphasis (including Act East) and the intention to create a dominant navy in the Indian Ocean. There has been a reversal of the steady rise of the navy’s share of the overall defence pie: from single digits a few decades ago to 16 per cent of last year’s defence allocations. This year, a significant part of the navy’s allocations have been diverted to the army, which eventually spent 52 per cent of the overall defence allocation instead of the 49.5 per cent that it was allocated. The navy’s share of the defence budget has accordingly reduced to just 13.5 per cent, with would impact negatively on maritime readiness.  

This is doubly regrettable because the army --- to which naval rupees were effectively transferred --- is the most inefficient spender of all three services. It lavishes 85 paise of every rupee on revenue expenditure, with just 15 paise going on modernization. The navy, in comparison, bought warships with 59 paise of every rupee it received. Had the ministry allowed the navy to spend its full capital allocation, rather than diverting it to meet the army’s payroll, the navy would have spent a healthy 63 paise of every rupee on modernization. However, salaries and establishment costs must first be covered; and the navy has taken the hit for the army’s abysmal planning.

The army’s ballooning revenue spend remains a flashing red light, particularly its payroll that consumes almost 60 per cent of its budget. This column has earlier warned that the army’s growing manpower (whilst every other major military is reducing numbers) was leaving less and less money for equipment like artillery guns that are central to ground combat power. The revised estimates make it clear the situation is even graver than believed. While the current year’s budget earmarked an alarming 82 paise of every rupee for the army’s revenue expenditure, the reality was even grimmer --- army revenue expenditure will eventually consume 85 paise of each rupee this year.

What does this mean for the coming year? With the army revenue allocations even higher this year at 83 per cent of the overall army budget, any significant overspend would leave practically nothing for badly needed ground equipment like artillery and air defence guns, helicopters and communications equipment. Already, more than 90 per cent of the defence capital allocation is pre-committed towards instalments for purchases made during previous years. While the exact figures would become clear only after March 31, it is already evident that no more than 8,000-9,000 crore of the Rs 94,588 crore capital budget for 2015-16 would be available for new purchases. A few percentage points of army revenue overspend (it overspent 5.5 per cent this year) would whittle that down to zero.

On the other hand reducing revenue expenditure by a mere 5-6 per cent would double the outlay available for new procurements. This would allow the defence ministry to sign contracts for urgently needed equipment like the Rafale medium fighter, which is currently beyond our means. A solution could be to revisit the costly decision to raise a mountain strike corps for offensive operations across our rugged Himalayan border. There are several alternatives. For example, one of the three existing armour-heavy plains strike corps could be reconfigured into a light infantry mountain strike corps, with a new authorisation of equipment and soldiers.

Such ideas remain unexplored because of our impoverished planning structures. Currently, the budgeting exercise consists of incrementally increasing allocations under each budget head each year. Each department and service demands 15-20 per cent more than the previous year’s allocation; and the ministry pares that down and hands out the largesse.

Instead, imaginative budgeting demands a top-down approach, where strategic demands determine procurement priorities, and money is allocated for specific outcomes. For example, if it is agreed that the coming year demands the conclusion of contracts for submarines and aircraft carriers for the navy, while the army’s artillery guns and the air force’s Rafale fighter could wait, there should be no hesitation in allocating the navy a higher-than-normal 25 per cent of the defence budget, while the other services are pegged back that year. The following year, allocations could be skewed towards the army, or air force, depending on the priorities decided.

This would require all three services to be stakeholders in planning, armed with the assurance that priority acquisitions would be assured funding and procurement sanctions in a particular year. That would encourage the three services to actually frame priorities, both within a service and between services --- with the appointment of a tri-service chief allowing inter-service coordination. Presently, there are no priorities. The procurements for this coming year will not be those most urgently needed, but rather those ones that are nearing the end of a long procurement pipeline. Given the years of wait for those procurements, services quietly accept the equipment even if it is no longer urgently required. The military waits for acquisitions, with cash in their hands. If the acquisition matures, good. If others do not, the military returns the money unspent.

This helplessness stems largely from our dependence on large global tenders, which decision-makers treat with excessive caution. In contrast, the defence ministry treats indigenous procurements with greater confidence. It would be worthwhile, therefore, to explore the possibility of an entirely separate head for “Make” category projects, in which indigenous companies develop defence equipment with the defence ministry reimbursing them 80 per cent of the cost. Currently, two “Make” projects are under way --- a tactical communication system (TCS) and a battlefield management system (BMS) --- for which the budget allocates Rs 144 crore. Greatly expanding this initiative would be in line with the “Make in India” initiative, and would also provide the defence ministry with the leeway to control pay out, helping to ensure that capital allocations are expended in full.

Defence allocations



Revenue
Capital
Total
Share of the budget (%)
Revenue to Capital ratio




2014-15 (BE)
2014-15 (RE)
2015-16 (BE)
2014-15 (BE)
2014-15 (RE)
2015-16 (BE)










Army
104159
21574
125733
49.5
52
51
82:18
85:15
83:17










Navy
13726
23911
37637
16
13.5
15.25
37:63
41:59
37:63










IAF
23000
31481
54481
23
23.5
22
39:61
39:61
42:58










Jt Staff
1800
922
2722
1
1
1
70:30
70:30
68:32










OFB
2884
760
3644
1
1
1.5
51:49
72:28
78:22










DRDO
6570
7788
14358
6.5
6
5.75
39:61
48:52
45:55










Other
---
8152
8152
3
3
3.50
---
---
---










Total
152139
94588
246727
100
100
100
59:41
63:37
62:38

All figures in Rs crore