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Defence Budget 2016-17 Caught In The Low Capital, High Revenue Trap

A week from today [22 February] the Finance Minister of India Mr Arun Jaitley will be presenting the Annual Budget 2016-17 his third and the second full-fledged one. With the burden of implementing recommendations of the Seventh Pay Commission, management of public debt and an eternal flow of subsidies, Mr Jaitley may not have much to provide for defence capital acquisitions and modernisation of the three services.

With varying pressures including the statutory requirement to absorb recommendations of the 14th Finance Commission raising share of the States in the central taxes to 42 percent and larger pension outlays, Mr Jaitley will have to go beyond jugglery of figures to provide more for defence acquisitions.

Not that there is likely to be pressure from the military for boosting the capital budget. The inefficient acquisition system implies that despite many bombastic announcements of crores of rupees of approvals, the Ministry of Defence as per a report in the Economic Times is likely to surrender Rs 12,400 crore, or 16% of the Rs 77,406 crore allocated for capital acquisitions in the Budget Estimates for 2015-16. 

Indian Viewpoint

This was not unexpected for as per the Mid-Year Economic Analysis 2015-2016, while services have been able to consume the revenue allocations at 45 to 53 percent, the capital expenditure is lagging far behind at 35 percent. Of the total Rs 94588.00 Crore allocated in the Budget Rs 33052.73 Crore or 35% has been reported to have been spend which includes acquisitions as well as the creation of fixed assets.

Thus, the possibility of the Ministry of Defence being able to expend 65 percent in the second half of the year was slim, particularly when big ticket contracts as the Rafale MMRCA continue to be in the negotiating stage.

That the surrendered amount is 14 percent would imply that there will be an outlay of 50 percent plus in the capital account in the remainder part of the year October 2015-April 2016. The quality of the expenditure needs to be examined and may come up for review by relevant authorities as the Comptroller General in the future.

The year on year phenomenon of surrender indicates that overall problem of low capitalisation of the armed forces is not addressed. This despite the Defence Minister Mr Manohar Parikkar claiming most recently that the Ministry of Defence  signed about 50 MoUs (Memorandum of Understanding) during Make in India week in Mumbai on 15 February 2016.

Without a corresponding improvement in efficiency in the services and Ministry of Defence acquisition bureaucracy, however, there is unlikely to be any increase in capital acquisitions and thus modernisation despite the allocations in the budget.

Budget Estimates of 2016-17 also has to cater for the 23.55 % increase recommended by the 7th Pay Commission. Thus, the pay and allowances of the Army alone can go up from Rs 60548.18 Crore allocated in Budget 2015-16 to Rs 74807.28 Crore in 2016-17. This almost equals the overall capital budget for acquisitions of the previous year. The other two services pay and allowances bill though lower due to a smaller number of personnel is also likely to go up in a similar ratio.

The high revenue budget will add to low capital trap arising due to inefficiency in the management of acquisitions.

India’s expenditure per soldier is one of the most inferior in the large armed forces across the World. Indexed to the United States at 100, India spends 6.12 percent per soldier which is lower than that of China at 13.35 percent. All modern armed forces spend over 50% in comparative terms to the United States. The situation for India may worsen once all elements of 17 Mountain Strike Corps are in place by 2022. The prospects of defence modernisation in real terms for Indian armed forces thus remain dismal. What then should be done?

Efficiency in defence acquisitions is the first step. Despite all the MOUs and approval of Acceptance of Necessity, not much is transpiring on the ground. The situation is not likely to change with the issue of the new Defence Procurement Procedure 2016.

The main problem may be the cartels and lobbies that do not allow materialisation of even relatively simple contracts such as the Tata-Airbus contract for replacement of 56 Avro transport aircraft of the IAF which has failed to move beyond the Technical Evaluation stage. While the submarine strength of the Indian Navy is dwindling the Rs 60,000 Crore 75 I project is in a permanent state of limbo as it appears.

Are wheels within wheels delaying these projects one wonders for years?

Prioritisation of acquisitions and project-based approach with special teams should be formed so that the contract stage can be reached within the span of two to three years at best. Monitoring committee has to be set up for these projects directly under the Minister of Defence.

More over the acquisitions have to focus on what is required for the near future such as armed drones which can target terrorist camps and leaders across the borders. Once these assets are available political decision for use will be facilitated acting a deterrence to proxy operations by adversaries.

The practice of lengthy contract negotiations has to be done away with; a classic case is the Rafale.  The deal spans two governments now and there is no end in sight. As Ajai Shukla of the Business Standard has stated that there is a huge differential in the price quoted by Dassault of  Rs 91,548 crore and sought by Indian negotiators at Rs 68,499 crore.

Contract negotiation has to commence from a benchmark price where this is not within a 10 percent margin; negotiations are not likely to fructify and should be abandoned taking on the next lowest bid if any or commercial stage rebid. For lower revenue budget thereby releasing money for modernisation, cutting back manpower remains the basic answer.

The Indian Army has become a bloated fighting machine with justification for more soldiers based on the commitment in counter-insurgency operations even though in fact these have come down despite recent terrorist incidents.

Raising the 17 Mountain Strike Corps from within the present strength should be undertaken and the dictate has to come from the Defence Minister or if necessary, the Prime Minister as no internal review is likely to take place in the Army.

These and other structural adjustments would be necessary if the Defence allocations can be fruitfully utilised else the Finance Minister will have the last laugh each year, assured of a Rs 10,000 to Rs 15,000 Crore bounty of the surrender of funds by the services in March 2017.

[Courtesy: Security-Risks.com]