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Weak economics of a strong defence budget

The latest report of the parliamentary standing committee on defence has been in the news for dismissing the controversial Indian Express story about the movement of troops towards Delhi in January this year. But beyond the two pages on the incident, the 121-page report contains a plethora of information about our budgetary outlay and expenditure on defence.

Defence budget, which comes out of the non-plan outlay of the government, consists of revenue expenditure and capital expenditure. While revenue expenditure is for running and operating expenses of the defence services, capital expenditure is incurred on building or acquiring durable assets for India’s defence.The bulk of defence modernisation plans are dependent on the capital expenditure. India spent Rs 55,931.34 crore on capital acquisition last year and the budgeted figure for this year is Rs 66,032.24 crore.


Dilemma: If India’s fiscal situation remains stressed, Finance Minister Pranab Mukherjee may again ask the defence ministry to return Rs 2,000 crore to reduce the deficit

While this looks like a huge amount for the defence ministry to spend on buying new equipment in a year, most of this amount is already committed expenditure. For this year, Rs 54,839.91 crore is already committed towards existing liabilities, leaving only Rs 5,520.82 crore for new modernisation schemes. If India’s fiscal situation remains stressed as it was last year, the finance minister may again ask the defence ministry to return Rs 2,000 crore to reduce the deficit. Because there can be no cuts in operating expenses, this money will have to come from the capital acquisition budget. It would mean that out of a defence budget of Rs 1,93,407.29 crore, the defence ministry will have to spend only Rs 3,500 crore on buying new military equipment this year.

Going by the experience of the last few years, we don’t seem to have the capacity to spend even Rs 3,500 crore in a year. Although it should take 28 to 54 weeks to complete the procurement process, government data shows that the average time taken is not less than 18 months. This points to a larger systemic malaise in defence budgeting, procurement and expenditure.

The current focus in defence budget formulation, in parliamentary approval process, and in post-budget assessment is almost solely on accounting procedures and practices. Even these are outdated as neither outcome nor accrual budgeting, which permits both income-expenditure flows and balance sheet assets and liabilities to be formulated, are utilised.

The capital component of the defence budget involves multi-year expenditures and planning, which annual budget cycles are unable to accommodate effectively.

The current defence budget formulation largely involves incremental budgeting (8-10 per cent increase in nominal terms over the previous year), with usually no separation between inflation-induced and real increase in expenditure. No groups at the planning or strategic levels, whether at the Planning Commission or at the Prime Minister’s Economic Advisory Council, appear to be analysing the defence budget from forward strategic planning perspective incorporating current and prospective threat perceptions. The budget proposals are also not subjected to analysis from the perspective of defence economics as a distinct sub-discipline and profession. This is a serious gap, which needs to be urgently addressed in an era when geopolitics and geo-economics are increasingly inter-related. While this is recognised by other major powers, particularly China, India has been relatively slow in integrating the two to enhance its economic and security space and leverage.

An important step towards integration of the two would be to give greater prominence to the role of defence economists at every level of the defence sector, and encourage their coordination with economists in other sectors. This requires developing a competent group of analysts specialising in defence economics. In the short run, such specialists would need to be trained (or recruited from) abroad; particularly in the US where defence economics is a thriving discipline. But there is no substitute for developing indigenous capacity to train our own defence economists and analysts.

Thankfully, the recent media focus on the defence ministry has spurred it into action. Unlike the Tenth and Eleventh Plans which were never finalised, LTIPP 2012-27 and Twelfth Defence Plan have been finally approved by the defence ministry. But this isn’t enough. Subjecting the defence to greater economic reasoning and analysis would place the country in a better position to face the national security challenges. 

Sushant K Singh is Fellow for National Security at the Takshashila Institution and editor of Pragati-The Indian National Interest Review

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