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At a modest rate of increase of 10 per cent
per annum, it could cross US $ 100 billion in
the next 10 to 12 years. The misgivings about
adequacy of the allocations notwithstanding, defence
expenditure is indeed huge in absolute terms and,
therefore, it calls for very astute management.
Broadly, there are four reasons why financial
management merits greater attention.
One, the outlays, at least in the near future,
are likely to be less than the projections made
by the Ministry of Defence (MoD). At present,
the resource crunch is limited to the revenue
segment but the capital budget will also come
under greater strain in the coming years with
the pace of capital acquisitions becoming faster.
Two, because there is such a widespread delegation
of financial powers to the Services down the line,
some of which is exercisable without the concurrence
of integrated financial advisors, that the possibility
of avoidable, if not wasteful, expenditure taking
place and, more importantly, liabilities being
created for subsequent years without any check,
cannot be completely ruled out.
Three, because a number of defence organizations,
which would have to earn profits to sustain themselves
had they not been part of the defence establishment,
actually survive on direct or indirect budgetary
support from the defence budget. Military Farms
are a prime, but not the only, example.
Four, because there are reports of sub-optimal
or non-utilization of assets and stores, procured
at substantial costs, some defence assets not
getting exploited for the purpose for which they
are created, and some of the assets not generating
as much revenue by way of receipts and recoveries
as they should.
More reasons could be added to underscore the
need for more efficient financial management in
defence but a prima facie case could be made out
on the basis of these four reasons alone. Fresh
thinking is required overall to rationalize budgets
and look for cost-effective ways of achieving
the objectives served by them.
One of the pre-requisites for astute financial
management is cohesive defence planning. While
a long term solution to the travails of planning
and funding of plans may take some time to emerge,
annual plans must be prepared in respect of every
area of activity – and not just a few, such
as the major civil works and capital acquisitions
– to regulate the expenditure within the
allocated resources. In the long run, serious
thought needs to be given to the creation of a
Defence Planning Board, as suggested by the Defence
Expenditure Review Committee in its report submitted
in May 2009.
Such a Board could effectively address many important
issues that have a bearing on planning and, by
implication, financial management.
In the absence of the broad framework of a fully
synchronized and accurately costed defence plan,
financial management is limited to monitoring
of expenditure against allotment with a view to
ensuring full utilization of the budget. This
is not what financial management is all about.
A clearly defined financial management policy
needs to be laid down after careful consideration
of various issues, some of which are mentioned
here.
Speaking strictly in the context of annual budget,
the first issue concerns the manner in which the
budgetary requirement is worked out. Under the
existing system, the annual requirement is estimated
at several echelons within the Services and the
departments on the basis of unspecified assumptions,
by applying unknown costing methodology and without
any consideration of the likely availability of
resources or linking it with outcomes.
These requirements are aggregated and projected
to the Ministry of Finance after a cursory scrutiny
because of the constraints of time and wherewithal.
There is no inherent virtue in decentralization
of the responsibility for estimating budgetary
requirement. The requirement on account of pay
& allowances and capital acquisition alone
accounts for more than two third of the total
defence outlay.
To begin with, MoD could prepare estimates on
these accounts centrally, based on inputs from
the Services and other departments. The responsibility
should gradually be centralized to cover the entire
revenue and capital segments of the defence budget.
The Defence Accounts Department could play a significant
role in this regard by making available reliable
and accurate data required for preparation of
the budget estimates. It already does so in the
case of estimates of defence pensions.
The estimates so prepared would be the result
of collective wisdom of the MoD, the Services
and application of a uniform methodology, including
the technique of zero-based budgeting, which would
ensure greater accuracy.
The second issue concerns allocation of funds
to the budget holders and delegation of financial
powers to incur the expenditure. Once the size
of the defence budget is finalized during the
pre-budget discussions between the Ministries
of Finance and Defence, the amount earmarked for
defence gets distributed by MoD to the Services
and other departments, In turn, they would allocate
their share of the revenue budget to various budget
heads, such as the pay & allowances, stores,
transportation, works and miscellaneous expenditure.
The capital budget also gets similarly distributed
among various budget heads, which are notionally
clubbed under two categories: capital acquisition
and other-than-capital acquisition.
There is merit in the argument that the Services
and other departments should have the discretion
of setting their own priorities but the priorities
can obviously be set within the available resources.
More importantly, the priorities have to be set
to achieve pre-defined objectives envisaged in
the five-year and annual plans. Since the resources
are limited, MoD must play a very active role
in the preparation of plans and budget estimates,
set the annual targets and allocations should
be monitored to achieve those targets. To be able
to play the role of an arbiter, MoD needs structural
changes urgently.
Understandably, MoD wants the Services to have
the best of the equipment to ensure technically
qualitative edge today and tomorrow. But the need
to have the best has to be ensured at the best
prices, and there has to be optimum utilization
of the equipment during its lifecycle. Superiority
in quality and appropriate numbers can also ensure
deterrence. Weapons are needed to deter a war,
and if the country is attacked, then to win the
war.
The third issue concerns the manner in which
new projects, schemes and measures are sanctioned
and its impact on financial management. When viewed
in isolation, each new measure, project or scheme
may appear to be innocuous with seemingly manageable
requirement of additional funds, but the aggregate
of all such proposals may require additional funds
in subsequent years beyond the expected growth
in the budget. Increased capital expenditure has
a direct bearing on the requirement of funds under
the revenue segment, as the expenditure on exploitation
and maintenance is met from the revenue budget.
Costing and post-contract management need to
be strengthened. These issues merit special attention
because of the potential they have of making defence
expenditure unsustainable in future.
The fourth issue concerns the manner in which
the budget is spent. The present arrangement is
based on a rather mystifying concept of authority-cum-responsibility
centers. A plain understanding of the concept
would be that a functionary responsible for a
particular activity should also have full authority
to spend the budget to achieve the specified targets.
But that is not how the system works. The officer
managing a workshop, depot or dockyard, for example,
may not have full financial powers to execute
the tasks assigned to him. The financial powers
are delegated in a highly complex manner, with
hundreds, if not thousands, of ‘competent
financial authorities’ according sanction
for incurring expenditure to the extent of the
powers delegated to them on myriad objects and
activities.
This could possibly result in redundancy, uneconomic
purchases, creation of unfettered and unregulated
financial liabilities for subsequent years and,
in some cases, procedural impropriety. This could
also result in introduction of new practices by
default or design, altering of existing authorizations
and scales.
It is true that a large proportion of the financial
powers delegated down the line is exercisable
with the concurrence of the integrated financial
advisors but under the present dispensation the
question as to how independent these advisors
are, when it comes to rendering the advice, is
moot. The lack of any system of regular and effective
internal audit of sanctions, issued by authorities
starting from a Service HQ to the lowest echelons,
completes a rather worrisome picture.
There is no inherent virtue in unbridled delegation
of financial powers. There has to be a paradigm
shift in the way the financial powers are delegated
with those responsible for producing quantifiable
and measurable results being given full power
to spend the budgetary allocation, subject to
their preparing outcome budgets, and others being
given the power to spend money only for meeting
the day-to-day requirements, within the allocation
made to them.
The fifth important issue concerns creation,
monitoring and liquidation of liabilities.
Since the accounts are not maintained on accrual
basis, assessment of the extent of this problem
is not feasible. However, it cannot be denied
that creating a financial liability and deferring
its liquidation to subsequent years is not a good
idea. Expenditure is incurred by our ships while
visiting other ports, by the banks and treasuries
on account of disbursement of pension to defence
pensioners, by delegations going abroad, by the
Pay Accounts Offices of the DGS&D on account
of the supply orders placed by the Services against
DGS&D rate contracts, by the Railways on movement
of troops and stores, and so on. It is difficult
to predict when the accounts would be received
by the Defence Accounts Department from these
agencies and when the liabilities would be liquidated.
No centralized account of the liabilities so
created is readily available and monitoring is
almost non-existent in this area. As mentioned
earlier, this is a potentially explosive situation
and a situation could arise when, during a particular
year, sufficient funds are not available even
to meet the committed liabilities from previous
years.
The sixth issue concerns the efficacy of the
existing mechanism for monitoring utilization
of funds. The present system is based on monitoring
the progress of expenditure in quantitative terms.
It becomes a cause for concern if, for example,
the expenditure is 25 per cent of the allocation
under a particular budget head by the end of the
2nd quarter of a year, though it need not necessarily
be so if the balance amount is kept back for meeting
the committed liabilities or for an activity or
event that is to take place in the 3rd or 4th
fourth quarter of the year. But the present system
of monitoring does not facilitate such analysis.
One very significant implication of this lack
of qualitative monitoring is the difficulty generally
faced in convincing the Ministry of Finance of
additional requirements at the revised estimates
stage. This Ministry generally looks at the trend
of expenditure by the end of October/November
and makes its own assessment of what the MoD would
need for the remaining months of the year. In
this scheme of things, expenditure incurred till
October/November becomes vital because the revised
estimates get linked to it.
The amount required for liquidating the committed
liabilities and for activities and events scheduled
to be held during the remaining part of the year
hardly get factored in while finalizing the revised
estimates under the revenue segment. There has
to be a more efficient procedure for close qualitative
monitoring of expenditure in the ministry. The
present arrangements are too diffused.
The seventh issue concerns generation of revenue,
regular disposal of non-moving and discarded stores
and accounting of recoveries and receipts. There
have been instances of revenue generated by exploiting
the government assets not being credited to the
Consolidated Fund of India, or being credited
only partially. There are amounts recoverable
from other ministries and departments for the
assistance rendered by Service personnel, as also
from states on account of aid to civil power.
There is lack of clarity and transparency as regards
the manner in which the rates and rents of defence
assets are fixed and revised, which is also true
of the rates at which certain items are issued
or sold. MoD is not a revenue generating agency
but it is imperative that adequate attention is
paid to fixing the rates and recovering any due
amounts.
The possibility of creating a separate budget
head for funding the activities that are not intrinsic
to defence needs serious consideration. There
is also a need to set up an agency to ensure disposal
of non-moving stores, discarded vehicles and other
disposable items.
The eighth issue concerns the capital acquisitions
by MoD. Almost one third of the defence budget
is spent on capital acquisitions. It is not just
the allocation, which stands at US $ 10 billion
for the current year, but the prospect of having
to handle still higher allocations and huge offsets
in the coming years that lends urgency and importance
to the issues related to capital acquisition.
Setting up of the Capital Acquisition Wing, introduction
of the system of collegiate decision-making through
various committees and continuous efforts being
made to modify the policies and procedures there
has resulted in faster pace of capital acquisitions.
It has also brought about higher transparency
and probity, apart from serving the cause of jointness
to some extent.
However, issues related to the organizational
restructuring of this wing and strengthening its
functioning by greater focus on professionalism
continue to remain inadequately addressed. Better
scrutiny of purchase proposal, more accurate and
realistic costing, expeditious processing, better
contract management and a host of other related
issues, such as training of personnel, that have
a bearing on efficient utilization of capital
acquisition budget are some of the organizational
issues that need immediate attention.
The report of the N S Sisodia committee could
provide a very useful starting point for initiating
a meaningful discussion in this regard.
The ninth issue concerns procurement of stores
from the revenue budget. The present system is
too disjointed. Structures, similar to those in
place for capital acquisition, need to be put
in place for procurement of stores from the revenue
budget. All regular provisioning of stores for
all the Services could be done jointly through
a Revenue Procurement Board. This would have many
advantages. First, it would relieve the units,
formations and establishments in the field of
the responsibility of procurement of stores, freeing
them to concentrate more on operational matters.
Two, it would bring about a certain amount of
jointness and reduce, if not eliminate, redundancy.
Three, it would ensure economy of scales and procedural
propriety.
Most of these issues need to be tackled at the
policy level.
It may not be a bad idea to create a truly inter-disciplinary
policy division in the MoD to look at all the
policy issues, including the policy on financial
management, comprehensively and not in a fragmented
manner with different wings and departments looking
after the issues related to the three Services,
joint staff, Coast Guard, Defence Research &
Development, Ordnance Factories, ex-servicemen
welfare and the defence PSUs. Some amount of coordination
does take place at the level of the additional
secretaries within each department of the MoD
but this is not an adequate substitute for a coordinated
institutional approach.
An overarching policy division in the MoD is
required.
The author is Financial
Advisor (Acquisition) and Additional Secretary
in the Ministry of Defence. The views expressed
here are personal and do not reflect any policy
of either the Ministry or this publication.
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