A Fresh Look at India’s Defence Expenditure
Analysed by Air Chief Marshal S.Krishnaswamy (Former CAS)

Defence Budget as a subject does not trigger interest any longer other than to those who are directly concerned. Public opinion is quite simple and noble. They believe that the Defence Services must have quality systems and must be able to fend off threats to our nation effectively which demands substantial resources. They also believe that modernization is essential but is not keeping in pace with the requirements and feel that the military is not getting adequate funds. The malady is generally attributed to bureaucratic and inefficient processes. The government quite strongly articulates its strong support to military modernization and its ‘will’ to support which in effect has translated in evolving new procedures that promises desired efficiency and greater transparency. Could the new solve the problems? Will the Defence allocations ever be adequate? Will the government get better value for every Rupee being spent on defence? Will our military have quality equipment and good operational standard with reasonable assurance? In the author’s opinion, we are unlikely to see dramatic improvement the near future for very many reasons. Primarily, the problem is not adequacy of budget but the efficiency with which we spend. It is not the efficiency of spending alone that matters but how and on what the Defence Forces are spending on. Practically every military operation that India has undertaken since Independence has exposed a number of inadequacies in inventory and capabilities. The solution is to address the issues comprehensively that call for a thorough overhaul, not just the acquisition procedure but the entire gamut of planning, Supply Chain Management, maintenance and training. Money alone will not solve problems.

It is relatively simple to resolve budget related issue. Revised Estimates are prepared around October and the expenditure over the next four-five months leads on to the next year budget preperation. The last four months of the financial year witness feverish spending spree and churning of PSUs entire annual production. Every Service races to spend the budget allocation by 31st March. Unspent resources are promptly surrendered after that date. End of the year, there is dissatisfaction all around! Defence services continually under-utilize budget allocation. Year on year, under-utilization had been increasing that has reached over four-and-a-half times from 2004-05, to Rs 7,000 Crores for 2009-10, - 15% of the allocation for modernization. Last year, Rs 1,561 Crores revenue expenditure was adjusted from unspent capital expenditure which has high-lighted a new trend. Besides an unorthodox way of adjusting expenditure, it indicates unanticipated increase in supporting the military which is disturbing. From the figures, it appears that Defence Services get as much as they can spend. Hence, adequate allocation cannot be a complaint.

The difficulties in managing Defence are certainly known to the government but lack means to enforce accountability. The Standing Committee on Defence in its report on Demand for Grants (2009-10) placed in the Lok Sabha in December 2009 recommended that there is an urgent need to curb wasteful expenditure. The Thirteenth Finance Commission has observed that there exists considerable scope to improve the quality and efficiency of defence expenditure through increased private sector engagement, import substitution and indigenization, improvements in procedures and practices and better project management, within the parameters of Government of India’s policy. Efforts in this direction would help in expanding the fiscal space available for defence spending. CAG, the government watch-dog in their reports bring out regularly weaknesses in defence management and in exercising cost control. Serious flaws in decision-making process, Supply Chain, contracting, project management and upkeep have been reported by the CAG. However, Services cannot be totally held responsible for the failures. If the Navy got its aircraft and not the aircraft-carrier or the Air Force for 20 year delay in acquiring suitable aircraft or the Army in deciding the right type of artillery, the individual service cannot be blamed but the fault lies somewhere deeper, in the ways of managing defence.

Services initiate cases for procurement that go through an elaborate process. Usually, if a contract is not finalized in about a year, uncertainty and vagaries in the business world make it very difficult to conclude the contract as per the technical package and cost visualized. We are faced with other maladies. The System does not recognize the importance of a comprehensive package to arrive in a timely manner. It is not unusual that contracted equipment arrive but contract for spares not concluded. Aircraft may arrive but not the Carrier. Operational systems may arrive but contents of integration package may remain undecided. Equipment may arrive but deficiencies remain. Contract obligations are missed out for lack of efficient Project Management. Equipment may arrive but training package may still be pending for approval. Equipment arrives but the Service concerned is undecided where to commission it. Service may decide but work-services may not start and the equipment loses warranty period in storage. At times, technical support contract are kept pending and negotiations break-down. At times, we become ‘captive’ to the supplier and have to put up with their unfair demands when supporting contracts are incomplete. While MOD may negotiate very hard, but become helpless and compelled to approve if the vendor has an advantage. When it comes to indigenously developed systems, the problems are even greater. Most of indigenous designs have high percentage imported material and subsystems. PSU contracts with vendors are rarely transparent to the Services. No equipment ever designed and developed in India has remained within reasonable cost escalation. Invariably, technical and spares support are found seriously wanting. The Military or the MOD do not have specialists on Project Management, Costing/pricing, and Contracting. The military that deal with thousands of Crores does not have CA or Cost-accountant or Contract specialist. ‘Costing’ an operation or activity is quite impossible or at best inaccurate lacking expertise and data-base. There is no balance sheet indicating ‘top’ or the ‘bottom line’. Revised procurement process does not address any of the issues stated.

The military faces another challenge that is quality financial and inventory management specialists to the level desirable. Signs are evident that Revenue Expenditure could runaway if serious efforts are not taken to control. Defence revenue expenditure has grown from Rs. 10,194 cores in 1989-90 to Rs. 87,344 Crore in 2010-11, i.e. an increase of almost nine times during the last two decades. In the years ahead, this could rise beyond all expectations. The quality of support to man-power has improved substantially over the last few years, right from quality of accommodation, allowances, cost of upkeep, cost of ration and travel entitlements. Also, there has been significant escalation of rank structure as an incentive that has added to man-power costs. Not only increase of pay, but significant additional manpower and infrastructure are anticipated to support additional offices of higher ranks. The ‘ballooning’ effect on manpower would be known only after the new establishments are filled. There is no sign of Services reducing manpower or the cost of manpower. Inflation adds up further costs on fuel, transportation, spares and other essentials. The finance commission estimates increase in Revenue expenditure to be 7% per annum and capital equipment cost to increase at 10%. But in practical terms, there could be a run-away in both areas unless carefully evaluated and means are adapted to control. In the author’s opinion, there is an urgent need to upgrade Defence accounting and inventory management process and P&L audit as practiced in private sector.

It is well known that India is the largest weapons buyer among emerging countries. India imported military hardware worth 28 billion dollars since 2000 mainly from Russia, Israel, France and Britain. There is a lot said about participation of private sector in supplying operational systems to our Defence Forces. Practically, current process makes it extremely difficult to put this idea in practice. Firstly, any process for indigenous development takes 5-10 years starting from design, prototyping, proving and production. R&D infrastructure within the country is inadequate and DRDO has serious limitations in supporting the private sector in this regard unless major policy changes are made. Equally importantly, DRDO must make commitment on cost and time to make such a venture viable. Our Defence establishments decide on what operational systems they should have based on trends abroad which means that such countries already have lead in technology terms and on time. This method must undergo change. It is necessary to come up with a viable process to commit to private sector. It is vital for national security to develop indigenous capability. In Indian public sector there are many other players besides those institutions under MOD. For example, NAL under CSIR developed the SARAS aircraft. The prototype crashed killing the crew. As yet, the causes and actions to be taken have not been completed despite a year has passed. One of the reasons is too many players such as DGCA, NAL, CSIR, MOD and IAF under different ministries and bosses, thus accountability is diluted. Such an environment is not conducive to design and develop systems within the country though we may have the potential. The government would need to find ways of ‘bridling’ large number of institutions that are functioning under different ministries to serve a common purpose and to be made accountable.

In summary, the country has the potential but a thorough overhauling is required and means established to evolve a total system that would be accountable, cost-effective and professional that can harmonize and integrate potentials across disciplines and ownership.