Making defence expenditure more effective

In the first three months of every calendar year, industrialists, corporate czars, industry associations, politicians and even ministers queue up outside the office of the Union finance minister as he finalises the annual budget for the next year. Statistical evidence is presented, stories highlighted in the media, interviews broadcast on business channels and influence brought upon the finance minister by these persuaders to garner some sop for their sectors in the union budget. In contrast, the single largest item of expenditure—nearly 2.4 percent of GDP—gets relatively little attention. This comprises of six budgetary demands of non-plan expenditure amounting to nearly Rs 150,000 crore ($32.5 billion)—Demand Numbers 22 to 27—popularly known as the defence budget.

The finance ministry, in its representation to the parliamentary standing committee on defence in 2007, has acknowledged that an 8-10 percent de rigueur increase over the previous year’s allocation delivers the next year’s allocation for defence. The budgeting therefore does not get linked to any plan for the financial year, but is merely incremental. This approach to defence budgeting is not based on future threats, does not set priorities and does not deal with today’s fiscal realities.

Policy-makers tend to make only very broad and general statements on national defence goals that avoid future commitments. This is best illustrated in the ritualistic assurance by the finance minister during his budget speech every year that “there will be no shortage of funds for defence, if the need arises.” Defence budget is merely an allocation of funds with no relation to any national plan or strategy: an exercise in isolation by the finance ministry. There is little rigorous analysis or informed debate about the defence budget, inside or outside the parliament, at the formulation, adoption and monitoring stage.

Myopic and mechanical

Impressive GDP growth rates of last two decades have meant that the budgetary allocations for defence—although modestly declining as a percent of GDP during this period—have increased substantively in real terms. The defence budget—though 2.4 percent of GDP during both the years—rose from around Rs 54,265 crore in 2001-02 to Rs 141,703 crore in 2009-10. On the evidence of visibly better-equipped and better-paid armed forces, the dynamic of exchanging numbers for capability has become the dominant narrative in any debate on defence budgeting. While this contention may have been valid till a few years ago, nothing could be farther from the truth today. After the inventory of military hardware crosses a particular threshold and the numerical strength of the armed forces reaches an optimum number, higher defence spending, though resulting in acquisition of more military equipment and more people bearing arms, will not automatically translate into enhanced national security—unless the level and composition of the defence budget is planned and allocated to correspond to the changes in the geopolitical and security contexts.

Defence allocations are intricately linked to the defence plan, which is formulated by the defence ministry. Defence planning largely focuses on threat assessments. Considering the varied nature of future threats—from sub-conventional to cyber warfare—such an assessment demands an integrated approach involving many departments, ministries and agencies of the government. Now, this lack of co-ordination does not affect the assessment of conventional military threats which are capably assessed by the armed forces. What is more critical is the long-term assessment of human, technology or financial resources. Resource assessment beyond the current year is rarely carried out in defence planning, and even this is undertaken in the last days of a financial year. Revision of the budget, usually downwards, halfway through the year has become routine. In 2008-09, the capital budget was slashed by Rs 7,000 crore at the revised estimates stage, which meant a sudden reduction of 38 percent in funds earmarked for new acquisitions.

The finance ministry is supposed to base its annual defence allocations on the five-year defence plans, which in turn are supposed to flow from the 15-year Long Term Integrated Perspective Plan (LTIPP) of the defence ministry. In reality, the LTIPP has ended up as a collection of the wish-lists of the three defence services. In the absence of an approved integrated plan—the LTIPP for 2007-2022 has still not been approved by the defence ministry—the finance ministry does not recognise the five-year defence plans. It is evident that the defence ministry has lost its capacity for resource planning. Thus, against a planned defence budget of Rs 154,156 crore demanded by the defence ministry, only Rs 141,703 crore was allocated by the finance ministry for the current year at the budgetary stage. Going by past experience, this would have been further whittled down at the revised estimates stage. Air Commodore Jasjit Singh (retd), director of the Centre for Air Power Studies, has thus recommended that a strategic planning division be set up in the defence ministry to undertake the task of long-term planning in a coherent manner, which commits the requisite resources after examining alternative choices of policy and their costs.

The failure to commit to a long-term allocation of resources has been detrimental to India’s defence readiness. Weapon systems and military equipment normally have a life of 15-25 years. Similarly, human resources are deployed for 17-30 years. But defence allocations carried out on an annual basis, with a mid-year revisions, has often resulted in a dizzying set of changing assessments. It implies that commitments for the future, arising out of a deal or a contract in a particular financial year are made without reference to the likely availability of funds in future years.

Where are the defence economists?

The large amounts left unspent by the defence ministry have grabbed headlines in the recent years, compelling the government to undertake some reforms to address the issue. These, however, have been timid and half-hearted. While the questions about efficient use of resources for defence are important, the questions about effective allocation of those resources are equally, if not more important. Significant improvements to defence outcomes are possible if the process of preparing the defence budget is reformed. One reason for the poor state of defence budgeting is the absence of defence economics as an academic and professional discipline in the country. There is little expertise in defence economics available at the highest levels of economic design and planning in this country. This means that there exists no in-house mechanism at the Planning Commission, the prime minister’s Economic Advisory Council and the finance ministry to debate and evaluate the proposals for defence allocation, from a forward strategic planning perspective incorporating current and prospective threat perceptions. The situation is no different with the parliamentary standing committees on finance and defence where the budgetary proposals are also not subjected to any analysis from the perspective of defence economics as a distinct sub-discipline and profession.

No major university in India offers a defence economics programme, which means that no expertise on the subject, relevant to the Indian context, is available even outside the government. What commonly passes off as defence economics in the government and think-tanks in India is only a portion of the subject—defence spending and its accounting. Defence economics, in contrast, uses the tools of economics to holistically study the defence sector and its domestic and international implications—including formulation of defence policy—examining causes and processes, in addition to outcomes. There are three critical aspects of defence economics: first, projecting national resources available now and in the future; second, the proportion of these resources to be allocated for internal and external security and within each of the two areas; and third, the efficiency with which the resources are used.

This is a serious gap which needs to be urgently addressed in an era when geo-politics and geo-economics are increasingly inter-related. While this is recognised by other major powers, particularly China, India has been relatively slow in integrating the two to enhance its strategic leverage. An important step in beginning the process of integrating the two would be to give greater prominence to the role of defence economists at every level of the defence sector, and encourage their co-ordination with economists in other sectors. The impending restructuring of the office of the National Security Adviser  (NSA) provides an opportune moment to institutionalise the role of defence economists in requisite positions there.

A competent group of analysts specialising in defence economics must be brought together. In the short-run, such specialists would need to be trained or recruited from outside India. But there is no substitute for India to developing indigenous capacity to train its own defence economists and analysts. Media reports suggest that plans are afoot to restructure the Planning Commission. Although defence expenditure is currently classified as Non-Plan expenditure, the restructuring plan must include the induction of defence economists into the commission as these artificial classifications need to be cast aside. Ahead of that, the Planning Commission, along with the prime minister’s Economic Advisory Council and the finance ministry, should consider employing retired defence officers, diplomats and other national security experts as independent consultants to review the budgetary allocation for defence on a long-term basis. Similar to the consultation with various industry groups and associations prior to finalisation of the Union budget, the finance ministry should not restrict itself to the defence ministry but hold widespread consultation with various stake-holders in the business of national security before finalising the defence budget: defence services, intelligence agencies, the NSA and the external affairs ministry.

Purchasing power

In 2001, the Group of Ministers in their report on the review of national security had presciently observed that “Optimal utilisation of resources cannot be achieved unless greater emphasis and attention is given to the process of budget formulation and implementation, including forecasting, monitoring and control.”

There is a need for synergy between national security and the economy. Given the fiscal stringency—it is essential that the country reverts to pursuing fiscal management targets in letter and in spirit—the government will have to husband its resources to meet the strategic challenges of a dangerous neighbourhood and the changing geopolitical environment.

It is imperative that India construct a resource allocation mechanism that enables its defence establishment to convert efficiently the raw materials of military power— personnel, equipment and monies—into programmes that further national goals and strategy. The current fiscal situation provides us a unique opportunity to turn the corner and institutionalise robust mechanisms for planning and allocation of resources for defence. It is an opportunity we can scarcely afford to miss.