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ARTICLE : Defence expenditure
Wednesday, 20 March 2013 05:10


Defence Expenditure

Going beyond the Budget

THE ongoing post-Budget debates are on expected lines. As in the past, all essential concerns are on the table excepting, of course, defence. The discourse predictably centres around the adequacy of the amount allocated. No mention is made of the vital issues — value for money and progress on self-reliance. The new budget's allocation of $ 37 billion (Rs 2.03 trillion) amounts to an increase of 14 per cent over the revised estimates of 2012-13. However, when you take into account the annualised inflation rate of around 6 per cent, the actual increase is almost nothing.

Recently delivering a lecture in New Delhi, the Finance Minister had spoken about shifting from a compartmentalised to a comprehensive approach to security — encompassing all of its dimensions. With an eye on the Budget, a direct relationship between economic growth and the expense on defence was also highlighted. While no one can argue with the premise, its complexities demand further deliberation.

Defence needs to be viewed as an integral part of national planning so as to comprehensively quantify the overall requirement to meet our legitimate security needs and strategic aspirations. A coordinating mechanism must ensure that all the relevant planning and decision-making instruments of the state are in harmony and do not come in the way of either economic growth or defence preparedness. Considering that building defence capabilities takes a long time requiring assured and sustained financial commitment, the yearly pronouncement in the Budget of “allotting more money if required for defence” must be reviewed. The allocations are nullified further by “giving with one hand and taking back by the other” through cuts at revised estimates. Within these parameters, the allocation of 1.79 per cent of the GDP for defence requires more debate. Also, the present allocation constitutes 12.23 per cent of our annual expenditure, and the taxpayers have a right to know the “whys and hows”.

India is today one of the world's largest importers of defence equipment. In the next five years, we are likely to spend around $50 billion on imports. It's indigenous purchase ratio is barely 30 per cent. China, so often quoted as our strategic rival, is not only nearly self- reliant, it meets a substantial portion of its defence expenditure through the export of arms and other defence hardware. No wonder its defence spending has risen by 200 per cent in the last decade to reach $119 billion in 2010 (compared to our $36 billion). Indigenisation then can also be the key to prudent fiscal management by offsetting the expense on defence as well.

Secondly, the defence procurement procedures, which have been under constant revision, still result in delays due to procedural bottlenecks. Lengthy processes continue to contribute towards cost overruns, technology backlog and even corrupt practices. There is the view that “no-questions-asked- safety” lies in procurement through defence public sector units (DPSUs) and ordnance factories (OFs) alone. This, in fact, has given these undertakings a monopoly status leading to systemic inefficiency, lack of corporate accountability and competition, high costs and outdated technologies. With notable exceptions, these establishments primarily operate as aggregators or assembly units sourcing components from private producers. Hi-tech components are either outsourced or acquired as transfer of technology, leaving behind a static technological base.

Progressive corporatisation and joint ventures with the private sector will bring in market-based accountability and competition in quality, price and sales. It could also provide a window to, and a level playing field for, the private sector. While the government has to open the sector for the large Indian commercial base, the corporate sector needs to bring more to the table and go global. Investments in R&D and advanced technology are vital and have long-term spinoffs. Looking at the aggression Indian private companies have shown in other sectors, it is time they make strategic acquisitions in the global defence industry.

That said, excessive barriers on foreign bidders will preclude judging the competitiveness of Indian bids, enable cartelisation and increase the costs.

Instead, a marginal price preference to domestic suppliers whose import content does not exceed a certain threshold should be examined. Also, technological and volume growth is only possible in global competition. The strategic implications of defence procurements and transfer of critical technologies need the fostering of long-term relationships. In this context, the armaments and equipment inventory has to be viewed through its life cycle with upgrades that go well beyond mere buyer-seller relations. Our dreams of indigenisation and self-reliance will remain stillborn without sovereign decisions.

Finally, defence preparedness and growth cannot occur in isolated silos. For example, as of now, projects for ship building and coastal infrastructure pass through nearly a dozen ministries/departments. Likewise, defence exports do not figure in the plans of the Ministries of Commerce, Industry and Foreign Trade. The line between internal and external security having blurred, the structures and processes should have been correspondingly altered. Instead, they continue to exist and grow on separate tracks.

On a parallel note, it is worthwhile to factor in that the armed forces and Central police forces both stand at a figure of 1.3 million each. The MoD and MHA must coordinate issues of procurement of armament, infrastructure, training and manpower. The military has nearly 60,000 personnel in the age group of 35-40 retiring every year. They possess a healthy blend of professional skills, relative youth and rich experience, which remains unutilised. No other country in the world is known to indulge in such a waste. It is a pity that despite recommendations by many high-powered committees, their lateral induction into the Central armed police and paramilitary forces has been stymied on some pretext or the other. If implemented, the overall bills of pay and pension of the security forces would be reduced substantially. Add to this the savings on avoidable cost of infrastructure and training. Likewise, a huge portion of weapons and other inventory of military rendered surplus due to constant upgrades can be passed on. This measure will also reduce expense under the revenue head and make more money available for capital acquisitions.

The competing demands on the national exchequer of “guns” over “butter” have to be contextualised by striking a judicious balance. There is a need to look at the security-related expenditure in totality. Also, the expenditure on defence should not be treated as an add-on liability, but be an integral part of the national fiscal plan. A bold and realistic drive is necessary to revamp and upgrade the DPSUs and ordnance factories, bring in more FDIs and JVs. It is only then that the huge existing defence infrastructure will shift gear, give us value for money and harness our national industrial strength.




 

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