|By Amit Cowshish||Published: May 2017|
NEW DELHI. The report of the Standing Committee on Defence (SCoD) on the capital outlay of the defence services for the year 2017-18 only reaffirms what is already common knowledge and makes the same old recommendations which have yielded little result in the past.
The allocation continues to be less than the projected requirement, allocated funds remain underutilised, reliance on imports continues unabated and indigenous production is yet to pick up.
Against the projection of Rs 1,46,155 crore (approximately $22.15 billion, assuming exchange rate of Rs 66 to a dollar) for capital expenditure of the services and other departments, only Rs 86,528 crore ($13.11 billion) has been allocated for 2017-18.
The defence services account for approximately 92 per cent of the overall gap of Rs 59,627 crore ($9.03 billion) between demand projected by them and the allocation made against that.
Army, which has been lagging behind in modernisation, has received just about 60 per cent of what it had asked for. Air Force has not done any better with the allocation being approximately 54 per cent of the requirement projected by it.
In comparative terms, Navy has done well by getting approximately 68 per cent of its projected requirement. If the shortfall in allocation for revenue expenditure by the three services and other departments vis-a-vis their demand is also taken into account, the total shortfall would be close to $20 billion.
It requires no clairvoyance to predict that this will impact defence preparedness in terms of acquisition of modern capabilities, maintenance of the existing assets, as well as the stock of ammunition and other ordnance stores. It is naive on the part of SCoD to think that the problem can be solved either by berating MoD for not providing adequate funds to the services or merely urging it to ensure that the allocation matches the demand.
MoD is dependent on the Ministry of Finance (MoF) and the latter has to grapple with several constraints in raising enough resources to meet the requirements projected by various ministries and departments.
The problem has defied solution because of the assumption that underfunding is on account of politico-bureaucratic shenanigans. It is difficult to imagine why the government would not be willing to provide more funds for defence if it could.
Seminars and round-table discussions are mostly used as forums for expressing angst at inadequacy of the defence budget and pointing out that the threat to our security requires substantially higher level of funding. This does not help.
What is required is a serious attempt by defence economists, think tanks and analysts to come up with a blue print of how the allocation for defence could be raised to match the demand, taking into account all the constraints that finance ministers face while formulating the union budget.
In fact, Finance Minister Arun Jaitley, who also presently holds the defence portfolio, is ideally placed to do break the logjam by asking MoD-funded Institute of Defence Studies and Analyses (IDSA) to spearhead this exercise which could throw up interesting options for the finance ministry for enhancing the defence budget.
This is also a god opportunity to clear the air about what leads to underutilisation of the capital acquisition budget. The critics are quick in blaming MoD’s internal finance division and the MoF for this and SCoD seems to be buying this idea.
The argument is that MoF stalls approval of big ticket procurement proposals which require the approval of the finance minister or the Cabinet Committee on Security (CCS), depending on the value. While this possibility cannot be completely ruled out, it continues to be a matter of popular perception and not necessarily the truth.
The finance minister should ask IDSA, or set up a joint task force of the two ministries, to carry out an empirical study to determine the causes and ensure that remedial action is taken based on its findings.
The problem of underutilisation cannot be solved by setting up a non-lapsable defence modernisation fund which has again emerged as the most favoured solution to the problem of underutilization. This idea has been surfacing time and again since 2004 when the then Finance Minister Jaswant Singh announced the intention to set up such a fund while presenting the interim budget for 2004-05.
With the change of government that year, the idea got relegated to the background not because of the bureaucratic apathy – view often expressed in the seminars – but primarily because the ministry did not find much merit in setting up the fund.
Now clearly under pressure from SCoD, which has been persistently advocating creation of the fund, MoD has refloated the proposal to MoF in February 2017. This is a wild goose chase.
The underutilised sums are not in the form of cash balances which could be transferred to the non-lapsable fund and drawn at will by MoD.
Therefore, even if the fund is created, MoF will still have to raise the money through the normal budgetary process during the year in which MoD may need to appropriate funds out of the fund and MoD will still need to seek the parliament’s approval before appropriating any sum out of this fund.
This brings the problem back to the ability of the government to raise enough financial resources to meet the demand of not just MoD but also other sectors, such as health, education and infrastructure development.
That is why it is important to start a public debate on how could the government raise its resources to a level where it could meet defence’s requirement without any adverse effect on other sectors.
The parliamentary committee also sees dependence on foreign suppliers as a bane for sustainable drive for modernisation of the armed forces and against the grain of ‘Make in India’. The facts indicate otherwise.
The committee itself has noted that during the last two financial years (2014-15 and 2015-16), as many as 108 contracts for a total amount of Rs 1,12,737 crore ($17 billion) have been signed, of which 73 contracts for a total sum of Rs 72,303 crore ($11 billion) are with the Indian vendors.
This portends well for the future of the Indian industry and the objective of indigenisation of defence production.
But this also requires more astute financial management. According to the reliable sources, the cash outflow against these contracts will begin in the right earnest from 2018 onwards.
MoD will do well to keep a tab on the rise in committed liabilities on account of the contracts it is signing and, more importantly, to ensure that the outflow remains within the allocations likely to be made during those years.
Any impending crisis on this count needs to be averted by taking necessary steps at this stage for India cannot afford to default on payment of committed liabilities.
The Indian defence industry has the potential to meet the requirement of the Indian armed forces but it would be unrealistic to expect it to leapfrog into the league of the global giants. It will need to move up the value chain through closer tie-ups with the foreign manufacturers.
This progression was sought to be expedited by MoD by adopting the ‘strategic partnership’ model, aimed at creating capacities in the private sector on a long term basis in six strategic segments, such as aircraft/helicopters, warships/submarines, armoured vehicles, missiles, command and control systems, and critical materials.
More than a year after the model was recommended by a committee of experts, it is nowhere on the horizon. Rather than going into the merits and demerits of the scheme and the causes of delay in adoption of the scheme, SCoD simply asked MoD to finalise the scheme at the earliest and left it at that.
Whether on account of SCoD’s persuasion or otherwise, the idea again seems to be picking up steam. In the process, however, issues that have a crucial bearing on successful implementation of the scheme should not get overlooked.
MoD needs to pause and consider whether it will not be simpler to let the foreign companies choose who they would like to take up as the Indian production partner rather than MoD going through the highly contentious rigmarole of selecting strategic partners only to be able to nominate one of them as an Indian production partner for a given project.
The author is a former top official of the Ministry of Defence, who dealt directly with military acquisitions till a couple of years ago.