Cost management challenge for defence forces

Any analysis of the defence budget has to commence with some number-crunching. On February 1, the Finance Minister, while presenting the Union Budget for 2022-23, spelt out an overall allocation of Rs 5.25 lakh crore for defence, which will account for 13.3 per cent of the government’s planned annual expenditure. This amounts to a little less than 10 per cent increase from the initial figures of the previous year and a mere increase of 4.4 per cent from the revised estimates, barely adequate to cater for inflation.

The revenue component is a whopping 68 per cent, including the burgeoning pension bill. The capital outlay at Rs 1.52 lakh crore, is up by 12 per cent from last year, with the Air Force getting an increase of 4.5 per cent at Rs 56,851 crore, the Navy having a major jump of 44.5 per cent at Rs 46,323 crore, while the Army’s capital budget sees a drop of 12.2 per cent with an allocation of Rs 32,102 crore. Budgetary allocation for the Border Roads Organisation, responsible for infrastructure development, has witnessed a notable increase of over 40 per cent.

Out of the planned capital expenditure, 68 per cent is earmarked for domestic production, in line with the ‘Make in India’ policy and to give impetus to production by the Indian defence companies. A very encouraging step has been the earmarking of 25 per cent of the total Defence Research & Development (R&D) allocation for start-ups and private entities. The Defence Research and Development Organisation has also received a 5.3 per cent jump in its annual allotment.

The security situation on the northern borders, the continuing inimical relationship with our western neighbour and the increased deployment in the Indian Ocean to ensure maritime security, are being highlighted as the factors leading to a robust financial outlay for defence. However, a cursory look at these figures indicates a largely “business as usual” approach, with a dexterous touch in sharing the kitty in the best possible manner. The percentage increase in terms of purchasing power parity would be just adequate to meet the immediate needs, with a large portion of the capital outlay being consumed by committed liabilities.

Building capacities and developing capabilities need time, while intentions can change rapidly. There is no end in sight to the standoff on the Line of Actual Control (LAC) in eastern Ladakh that began in mid-2020, with the latest round of India-China talks achieving little progress and the Indian Army committed to being in for the long haul in the bleak and hostile terrain. Not only were we mostly reactive militarily in dealing with this situation, even the monetary requirements were met as in an emergency mode. What seems to be lacking is a clear perception of desired capabilities, linked to timelines, to meet the security challenges that may confront the nation, in at least a medium time-frame of 7-10 years. The defence budget has to be capability-driven and not intention-driven. To safeguard against slippages due to procedural tardiness in procurements, it would be worthwhile to consider a non-lapsable roll-on financial allocation for defence, with a three-to-five-year time span.

An issue of concern is the lapsing of the capital budget of the Army for the previous year by almost 60 per cent, which has further led to a reduced allocation in the present budget. While the Navy and Air Force are platform-centric in their capital inventory, with big budget systems, the Army has a huge inventory of small and medium-level weapons and equipment. The fault lies primarily in procedural delays, over shooting trial timelines and contractual issues, most of which are beyond the control of the Army HQ directorates dealing with procurement. The acquisition vertical of the Ministry of Defence should be fully accountable for this and reasons need to be ascertained for missing the expenditure targets by such a large margin. An added issue is internal cadre management by the Army to ensure mid-level officers get longer tenures of posting in billets dealing with acquisitions, akin to the other two services.

Setting aside 25 per cent of the R&D allocation for the private sector is laudable but nothing novel as the Make I category in Defence Procurement Procedure of 2016 also provided for it. However, not a single project has started under this head till date due to the labyrinthine red tape which effectively stymies the concept. There has to be a concerted effort for encouraging start-ups and private players in defence production by an underwritten assurance of firm orders for viable products, within a clear timeline, failing which the project could be foreclosed and accepted as a sunk cost to the government.

The setting up of a nodal body for testing and certification requirements of defence systems and platforms will definitely help the domestic industry in terms of faster processes and cost efficiency. Such announcements may sound good but an independent party needs to audit the fruition of these initiatives to bring in accountability.

At this stage, 68 per cent of capital outlay has been earmarked for domestic production, which is buttressed by the negative import lists of items and equipment that have to be manufactured within the country. That may be all very well but an examination of this inventory shows that most of these are non-critical, low budget and basic items. For cutting-edge niche technology systems and sub-systems, the armed forces remain largely import dependent. This anomaly can only be addressed by developing capabilities in the domestic private sector, making investment in defence worthwhile.

An area of major concern is the skewed division between the revenue and capital heads of the defence budget. While endeavours are being made to rein in the revenue costs, manpower reduction may appear as the only way forward. Due to the peculiarity of terrain, deployment and type of challenges on un-demarcated borders, the Army combat components remain human resource-intensive. It would, therefore, be prudent and practicable to focus increasingly on outsourcing of logistics and services where ever possible, to cut down on the revenue bill.

The defence budget is often seen as a necessary drain on the exchequer. With an emphasis on high-quality indigenous defence production, both by private players and efficiently managed defence public sector undertakings, it can be transformed into an engine of economic growth.