After the budget for 2007-08 was presented last year, defence minister A.K. Antony confessed that India’s defence modernization was 15 years behind schedule. He promised that “we will make sure that not a single rupee is left unspent” from the budget this year. More than Rs4,200 crore of the defence budget has been returned unused this year;?the?complete?unused?amount coming from the capital expenditure. It was not an aberration. In no year in the past decade has the defence ministry been able to spend 100% of the budget allocated to it. The shortfalls have been up to 10% of the allocation.
Illustration: Malay Karmakar/Mint
As expected, the defence budget for 2008-09 has crossed the Rs1 trillion mark. After adjusting for inflation, this constitutes an increase of only 5%. For the first time since the early 1960s, India’s defence outlay has declined to less than 2% of the gross domestic product (GDP)—a sign of the chasm between the rhetoric and reality on national security.
Inefficient budgeting and Byzantine procurement procedures are largely responsible for the annual surrender of funds by the defence ministry. An appreciation of defence capital expenditure is fundamental to understanding the persistent inability of the defence ministry to spend the entire amount allocated to it.
The capital outlay on defence services caters to the expenditure incurred on building or acquiring durable assets. Items—such as infrastructure, major weapon systems and platforms—that cost at least Rs10 lakh and have a life span of seven years or more are debited to the capital head.
In addition, a part of revenue expenditure covers capital items contributing to replacement or modernization. A significant part of defence production by public sector units (PSUs) and research and development (R&D) expenditure, which assist in modernization, is also reflected under the revenue head.
India’s transformation into a middle-income country requires its Armed Forces to be more capital-intensive. Yet only around 10% of the defence budget is actually available for modernization, compared with around 30-40% in developed countries.
This is because, firstly, almost three-fourths of annual capital allocation goes towards instalments for items acquired in previous years. Indigenous acquisitions— from PSUs and some private firms—account for 40-45% of the capital budget, leaving around Rs28,000 crore ($7 billion) for foreign acquisitions this year.
Secondly, nearly two-thirds of the amount for capital acquisitions from foreign suppliers, too, is pledged for assured and received deliveries. Payments for major defence purchases from foreign vendors are spread over a number of years. This year, India will pay instalments for earlier purchases such as the Sukhoi aircraft, the Gorshkov aircraft carrier, T-90 tanks, Talwar-class frigates, Scorpene submarines and for many other smaller contracts. Thus, only Rs8,000-9,000 crore ($2 billion) is available for new acquisitions this year.
The initial down payment on new acquisitions is generally around one-fourth of the total cost. So, the defence ministry can theoretically sign contracts worth $8 billion for new equipment this year. Capital allocations for coming years will then have to cater for instalments of these acquisitions. Despite returning more than Rs4,200 crore, the ministry will be asking for additional capital allocations this year; it justifiably believes that allocations already made will be largely used up by earlier contracts.
Defence modernization is based on a long-term integrated procurement plan (LTIPP) of the defence services. LTIPP for 2007-22, spanning the 11th, 12th and 13th Plans, is scheduled to be approved by the Defence Acquisition Council by October 2009. Going by the past record, it doesn’t signify much. The 10th defence plan was never approved by the finance ministry, and two years into the 11th Plan, it also hasn’t been approved so far. Instead, the finance minister has agreed to an annual increase of 10% during the 11th Plan.
The defence ministry is exempt from the fiscal discipline applicable to other ministries. In in 2006, financial powers up to Rs10 crore for capital procurement were delegated to the three services. This was expected to cover nearly one-third of the procurement cases and expedite acquisitions. Even this has failed to prevent the annual surrender of unspent funds.
Clearly defence modernization is not suffering from a lack of outlays, but rather a lack of outcomes. After the Kargil conflict, the K. Subrahmanyam committee had admitted that most items needed for that war “were affordable within the available outlays”. Since then, a strong rupee has made foreign purchases less vulnerable to foreign exchange risks and capital budgets have increased. But procurement and prioritization have held up acquisitions. The lack of an integrated defence headquarters prevents rigorous prioritization and the order of charge on the budget.
Outcomes can match outlays only if greater emphasis and attention is given to the process of budget formulation and implementation, including forecasting, monitoring and control. Zero-based budgeting needs to be introduced for all ongoing schemes. Capital schemes should be included in the budgets of the services only if there is reasonable certainty of concluding the contract and making an initial payment within the year. The services should include only those schemes in LTIPP and annual procurement plans where technical and commercial evaluation, leading to contracting and initial payment, can be completed in the relevant fiscal year. Eventually, the form and content of budgetary classification has to expand to promote programme-based budgeting.
Unlike current focus on outlays for big-ticket purchases, a clear and coherent national policy has to underpin security outcomes.
Sushant K. Singh and Nitin Pai are associated with Pragati—The Indian National Interest Review, a publication on strategic affairs, public policy and governance. Comments are welcome at firstname.lastname@example.org