Military upgrade beset by fiscal opacity

The Union government’s recent announcement of domestically sourcing a major proportion of its defence equipment requirements to achieve Atmanirbharta or self-reliance appears disingenuous as it’s neither new nor exceptional. It’s merely a continuation of a prevailing trend that has been progressively in play, albeit with a minuscule real increase in financial allocations by the Ministry of Defence (MoD) to help attain this long-awaited goal.

Last month, the MoD had declared its intent to expend Rs 70,221 crore, or some 63 per cent of its overall Capital Acquisition Budget (CAB) for Financial Year 2021-22 (FY2021-22), on locally procuring varied defence equipment for all three services to boost the government’s Make in India initiative aimed at reducing imports.

At Rs 1,11,714 crore, CAB is a fictional sub-set of the capital outlay of Rs 1,35,061 crore for FY2021-22 — Rs 2,551 crore less than the current year’s revised CAB — which caters exclusively to the purchase of aircraft and aero-engines, heavy and medium vehicles, and other equipment for all three defence services. Varied naval platforms and associated programmes and other assorted Indian Air Force (IAF) special projects too are financed from the CAB.

It’s not unusual or exceptional for a substantial proportion of the CAB being spent on domestic procurement. For instance, between FY 2014-15 and FY2018-19 (up to December 2019), the expenditure on this count averaged around 60 per cent of the CAB, merely 3 per cent less than what was announced by Defence Minister Rajnath Singh for this year at a webinar in New Delhi recently.

Rajnath Singh also stated that this allocation would have a ‘multiplier impact’ on enhancing India’s Defence Industrial Base, boosting Medium, Small and Micro Enterprises (MSMEs) and ‘start-ups’ and augmenting domestic employment opportunities. As objectives go, Rajnath Singh’s declarations cannot be faulted; but, as always, a yawning gap between intent and reality remains.

And the reality is that the bulk allotment of Rs 70,221 crore for domestic purchases will, in all likelihood, service ‘committed liabilities’ or outstanding payments for past platform and equipment buys. According to reliable estimates, these obligated liabilities account for 80-90 per cent of the entire CAB, leaving little or, at best, scarce monies for fresh purchases. Therefore, it is certainly not as if the entire amount of Rs 70,221 crore would be awarded to local military vendors and materiel suppliers for new contracts.

The services are more than conscious of this drawback. In March 2018, then Vice Chief of Army Staff Lt Gen Sarath Chand had informed the Parliamentary Standing Committee on Defence (SCoD) that the marginal increase in the CAB for his service for FY 2018-19 had dashed all expectations to pursue its long-delayed modernisation drive.

He declared that the prevailing financial enhancement was barely enough to neutralise inflation and rise in taxes, much less cover the Army’s committed liabilities, ‘Make in India’ projects, bankroll infrastructural development and more importantly, acquire badly needed ammunition and varied ordnance for operational efficiency in a turbulent neighbourhood.

Lt Gen Chand also revealed that 68 per cent of the Army’s equipment was in the ‘vintage category’, with just about 24 per cent in the current, and merely 8 per cent in the ‘state of the art’ classification, hinting that with declining CAB allocations, it would be challenging to modernise the force.

The extent of committed liabilities for FY2012-22 was not disclosed at the webinar, though the MoD has this information and conveys it to SCoD, whenever asked. This is significant because in a recent report, the SCoD had even cautioned the MoD that inadequate allocations for committed liabilities in successive defence outlays would ‘definitely lead to a default situation’ on this count. Consequently, it will take far more than just the fiction of committing 63 per cent of CAB to the domestic defence industry to promote Atmanirbharta.

Indian and foreign defence industry executives, too, are aware of the MoD’s budgetary realities. And if the announcement evoked contrived enthusiasm at the webinar, it was only because these expectant vendors, operating in a depleting global market for military equipment, have to exist in the Indian MoD’s perpetual ‘twilight zone’; for them, it’s similar to being drowned in liquid oxygen, where paradoxically, the liquid will not let them live, and the oxygen will not let them die, as they wait endlessly on tenders being issued and contracts awarded.

Apart from the opacity surrounding the amounts available for new contracts, vendors also face the perennial apprehension of tenders either languishing interminably, or worse, being arbitrarily scrapped. Underlying this entire tenuous process is their deadline uncertainty. Understandably, they tend to clutch on to all and any affirmative assurances emanating from the MoD regarding purchases, like at the webinar, and hope against hope that this time round, their fortunes might change for the better.

Over the decades, there has been no dearth of well-meaning efforts to improve the system, but they seem to have remained just that — mere endeavours. Many have largely been disjointed and un-holistic, creating fresh complications and adversity and further pushing the MoD’s itinerant bureaucracy — civil and military — into greater nebulousness. Continually moving the goal posts and flawed financial planning and procedures have only added to all-round uncertainty.

To try and overcome these problems, the MoD attempted in 2017 to create a semi-autonomous and overarching Defence Acquisition Organisation (DAO) to oversee development and acquisition of military capabilities. Four years later, it has abandoned the idea, opting instead to render the Defence Acquisition Procedure denser. The fundamental need for financial planning, too, has been left largely unaddressed, rendering the entire process of military modernisation unrealistic and overambitious.