Need for Reforming the Defence Budgeting Regime

Need for Reforming the Defence Budgeting Regime

(DSA Feb 2015)

Major General Mrinal Suman

Budget time is crystal gazing time. Every expectation is based more on hope than ground realities. For the services, budgetary allocation has three major connotations. One, it sets the pace of modernisation of the armed forces. As is well known, India’s defence modernisation plans are lagging behind by more than a decade with close to 50 percent of the inventory having outlived its useful service life. Two, it demonstrates government’s commitment to national security through the allocation of necessary resources. Finally and most importantly, budget has a profound effect on the morale of the soldiers. It conveys to the services that necessary wherewithal will be made available to them to defend the country, and that, they will not be made to fight another Kargil War with ‘whatever we have’.  

For the Ministry of Defence (MoD), the Finance Division prepares the defence budget and estimates for the defence services, civil estimates and defence pensions. The defence budget consists of two heads – revenue and capital heads.

According to Rule 91 of General Financial Rules 2005, all charges for maintenance and working expenses (including pay and allowances), expenditure on working and upkeep of the projects, renewals/replacements and additions/improvements/extensions should be debited to the revenue account. Thus, revenue procurement implies procurement of items and equipments to maintain and operate already sanctioned assets. The Defence Procurement Manual contains policy guidelines for revenue procurements.

By virtue of the fact that India has a large standing military, nearly 65 percent of the revenue budget is consumed by pay and allowances. This expenditure is likely to rise further with the raising of a mountain strike corps, resulting in an accretion of 80,000 soldiers. After catering for expenditure on other essentials like rations, clothing, fuel, transportation and critical spares; limited funds remain available for ammunition, spares, stores and maintenance of assets.

On the other hand, capital head covers all significant expenditures incurred with the object of acquiring tangible assets of a permanent nature or enhancing the utility of the existing assets. Further, as per Rule 91 (a) of General Financial Rules 2005, all charges for the first construction and equipment of a project as well as charges for intermediate maintenance of the work while not yet opened for service shall also be dealt with as capital expenditure. Capital procurement would, therefore, mean procurement of all goods and services that fit the description of capital expenditure. The procedure for capital procurement is laid down in the Defence Procurement Procedure. As all modernization plans are dependent on the quantum of resources available under the capital head, it is of critical importance and has been discussed in detail here.

Convoluted Budgetary Exercise

Preparation of the defence budget is a highly disjointed and cavalier exercise. Once the capabilities required by the services to achieve the objectives set-out in the Defence Planning Guidelines are spelt out, a Defence Capability Plan covering 15-years time span for attaining the desired capability is prepared. The 15-year Long Term Integrated Perspective Plan (LTIPP) flows out of the Defence Capability Plan and covers systems required by the services to meet each of the stated defence capability.

LTIPP is further broken down into five year plans called Services Capital Acquisition Plan (SCAP). It must be mentioned here that both LTIPP and SCAP are prepared without taking into account the funds likely to be made available to MoD. In other words, these plans are mere wish lists with no assured financial support.

Annual Acquisition Plan (AAP) of each service is a two year roll on plan for capital acquisitions and consists of the schemes included in SCAP. The draft AAP is prepared in two parts. Part A comprises carry over schemes from AAP of the previous year and approved schemes.  All new proposals are included in Part B. Requirement of funds for capital expenditure is accordingly worked out service-wise. More than 90 percent of the capital budget goes on committed liabilities, leaving little for fresh acquisitions. It is the most worrisome aspect of the whole exercise.

Proposals submitted by the services are aggregated at Headquarters Integrated Defence Staff (HQ IDS). MoD merely compiles the lists and forwards them to the Ministry of Finance (MoF) for incorporation in the union budget. As stated earlier, in the absence of assured funds support, the lists prepared by the services are highly ambitious. They are based more on aspirations than realistic estimations.

On receipt of allocations from MoF, MoD sub-allots funds to the services and other departments. As funds allocated are always far less than the demands, the services get forced to prioritise their requirements for different budget heads. All fresh procurement proposals of AAP get re-examined and scrutinised for determining their inter se operational urgency and likely cash out-flow during the current financial year.

One of the oddities of the Indian dispensation is that closer to the end of a financial year, efforts are made by MoF to withdraw unspent funds from all ministries to reduce fiscal deficit. As the Finance Division of MoD functions under the fiscal directions of MoF, it does not clear/concur any major expenditure unless given a green signal by MoF, thereby forcing MoD to surrender funds. Worse, MoD gets blamed for not spending the allotted funds. The environment fails to notice the ploy of MoF. 

    

Another aspect that deserves mention here is the fact that there is no system of carrying forward the unspent funds to the next financial year. Surrendered funds lapse and go to the kitty of MoF. Such a policy has strange fallout; every ministry tries to expend all allotted funds. Closer to the end of a financial year, it is always a race against time. Many times funds are spent imprudently on lesser requirements, only to avoid their surrender.

  

Expectations from the Forthcoming Budget

Unquestionably, the first issue of concern relates to the size of the defence pie in the forthcoming budget. It is fervently hoped that the defence allotment gets close to 3 percent of GDP. Presently, the state of operational preparedness of the armed forces is alarming. The current profile of equipment held is dismal. Instead of 30 percent state of the art equipment, the holding is mere 15 percent. More worrisomely, 50 percent of the inventory needs emergent replacement. Therefore, funds allotted under the capital head will be the main concern of all those who are concerned with the current ‘hollow’ state of the armed forces.

Modernisation of the armed forces is going to be a herculean task, requiring commitment of over USD 100 billion. In addition to regular upgradation plans, India will need to make up the existing deficit of 15 percent of the state of the art equipment. India is implementing many ambitious projects like Future Infantry Soldier as a System; Network Centric Warfare; Tactical Communication System; aerospace capability systems; night-fighting equipment; and simulators. These force multipliers are highly cost-intensive. 

   

As the entire dated inventory cannot be replaced in a short period, upgradation of equipment to increase its useful service life is a commonly exercised option. Some of the major upgradation programmes involve tanks, artillery guns, anti-aircraft weapons, helicopters, fighter aircraft, fire control radars and submarines. The list is indicative and not exhaustive. These projects are likely to entail an expenditure of up to USD 10 billion.

Concurrently, the government needs to rationalise and streamline the whole budgetary planning process as well. A public version of the perspective document, outlining the Technology Perspective and Capability Roadmap (TPCR) covering a period of 15 years was issued by HQ IDS in April 2013. TPCR is a derivative of LTIPP and delineates the envisaged capability roadmap for all components of the armed forces. In the absence of assured financial support, preparation of LTIPP and TPCR is considered to be an academic, speculative and conjectural exercise, without any credibility.

The sole objective of issuing TPCR is to give adequate advance notice of impending procurement proposals to the industry to facilitate considered investment decisions and explore avenues for the development/acquisition of required technologies. However, industrialists do not base their investment decisions on the projections that lack assured commitment of funds and are prone to frequent changes.

Therefore, it is essential that MoF indicates likely budgetary support to MoD for the plan periods. Such a step would ensure that the perspective plans are not made in a vacuum.  It will also help the services in fixing priorities ab-initio, as per the likely availability of funds.

As was done at the end of the last financial year, MoF has ordered a cut of Rs 13,000 crore in the capital outlay for the three services in the current fiscal (2014-15). Such a cut impacts the modernisation plans adversely with cascading effect. As it is, the capital budget is always grossly inadequate and the bulk goes into meeting the committed liabilities, leaving limited funds for new acquisitions. Therefore, funds allotted for capital procurements should never be withdrawn.

The provision of unspent funds lapsing is responsible for the present tendency of expending maximum funds before the end of a financial year. In the case of MoD, the thrust shifts to booking of expenditure rather than spending funds on operationally emergent requirements. To prevent injudicious spending, it will be far more prudent to allow the unspent funds to be carried forward to the next financial year and added to the fresh allotment of the next year.

Considering that the small and medium enterprises (SMEs) constitute the backbone of the defence industry the world over and are at the heart of technology innovation, the government must hold their hand and extend fiscal incentives (including tax breaks) to them. Both the Defence Production Policy of January 2011 and DPP promise a fund to assist SMEs engaged in defence manufacturing. It must be operationalised at the earliest.

As is done by all developed nations, tax and duty structures should be rationalised to facilitate growth of the indigenous defence industry. Select defence projects can be accorded the status of deemed exports.

Financial powers of the functionaries must be commensurate with the responsibility assigned to them. They should have full authority to spend the funds required to achieve the specified targets. For capital procurements, financial powers of the service chiefs should be further enhanced. For revenue expenditure, powers should be increased at all echelons, both with and without financial concurrence.

Conclusion

Budgetary allocation by itself means little. It must be administered and overseen by an effective regime for obtaining optimum returns. Unfortunately, the current dispensation is grossly inefficient, bureaucratic and sluggish.

In addition to preparing the defence budget, the Finance Division exercises total financial control over its expenditure as well. It includes according financial concurrence to all expenditure proposals, account keeping and auditing. Unfortunately, performing of the above functions is totally beyond the competence of the Finance Division. There is a total mismatch – most Defence Finance officials are incapable of grasping minutiae of financial imperatives and are ill-equipped to perform defence economic advisory functions.

There is an urgent need for India to have a specialist cadre of experts who are proficient in various disciplines concerning defence economic imperatives. They should be fully conversant with rational application of economic tools to help evolve contours of dynamic linkages between well spelt-out strategic objectives and allotted resources for most advantageous results. They should also be capable of developing indigenous models for performance evaluation criteria, duly supported by methodological research support. The role of the present cadre of the Indian Defence Accounts Service should be restricted to the provision of accounting cover and audit, as hitherto fore.

To sum up, the forthcoming budget must adopt a three-pronged strategy to initiate reforms to impart professionalism and objectivity to the defence budgeting process. One, likely availability of funds must be made known to MoD well in advance to facilitate formulation of realistic plans. Two, adequate funds must be allotted to the capital head to expedite modernisation plans. No funds should be withdrawn after allotment. Carry forward of unspent funds to the next financial year should be allowed. Finally, counsel of defence economic advisors must be made available to MoD, both for the preparation of defence budget and to ensure that resources committed are applied optimally to achieve national security objectives.*****