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India's Defence Budgeting:Lessons Not Learnt

India

Review Article

India’s Defence Budgeting: Lessons Not Learnt

Defence Budgeting and Planning in India: The Way Forward

by Amiya Kumar Ghosh; United Service Institution of India in association with Knowledge World, New Delhi, 2005;

pp ix+398, Rs 920.

AMARESH BAGCHI

O
f the total expenditure of Rs 5,63,991 crore budgeted for 2006-07 in the union budget, Rs 89,000 crore comes under “defence” (excluding pension for defence personnel). While South Block is busy using up Rs 89,000 crore allotted to it for the year,1 demand for next year’s budget for defence, it is believed, is going to be placed at not less than Rs 1,00,000 crore. While this still would fall short of what our defence establishment has been pressing for all along for the defence budget, namely, 3 per cent of GDP, if the demand is accepted, it will mean that “the Rs 1,00,000 crore Rubicon would no longer look uncrossable” as one commentator on defence matters puts it.2

In 1999, India spent Rs 48,500 crore on defence and that included the cost of the Kargil conflict. Now the defence establishment wants that amount to be more than doubled. Going by the current threat scenario the case for such a hike in the defence budget is not all that obvious. The peace process with Pakistan is under way, the sporadic hiccups notwithstanding; troops on the Indo-China border now play volleyball matches and talks are on with insurgent groups in J and K and Nagaland. Given this background, “Can we not have a peace dividend in terms of lower spending on defence?”, the commentator goes on to ask. But is our defence budget made on the basis of “threat perception”? That brings up the question, “what goes into the making of a defence budget in India?”

While the presentation of the union budget marks a big event in India’s fiscal calendar and most major items of revenue and expenditure come under close scrutiny by analysts, little attention is paid to the largest item of revenue expenditure next to interest payments, namely, “defence”. One reason is that questioning the size of the defence budget is a “no-no” for patriotic Indians. More importantly, literature on how defence budgets are made is extremely scanty. The process of defence budgeting like strategies for the country’s defence remains shrouded in secrecy. The volume under review makes a bold attempt to fill this gap.

Following up his earlier work on the subject (India’s Defence Budget and Expenditure Management, 1996) the author of the volume Amiya Ghosh goes into the nitty-gritty of budget making for defence in India at great length contrasting it with the practices obtaining in the leading military power of the world, the US, and also countries like UK and Australia, drawing extensively on available literature including parliamentary and expert panels’ reports. After identifying the glaring weaknesses of the system, the volume also seeks to show how to remedy them

– “the way forward”.

Basic Issues and Weaknesses

(i) Absence of political judgment: The central theme of the book is laid out in the opening chapter, which focuses on “Budgeting: priorities, resource allocation and control”. The basic issue of defence budgeting is stated succinctly with a quotation from another author in the opening paragraph:

What the budgeting system should ideally do is to ensure that the right amount is spent on defence in the light of the pattern of national priorities and the “right” military capabilities are developed in the light of the structure of security priorities.3

In other words, the defence budget cannot be considered in isolation. No doubt, the size of the defence budget has to be based on an assessment of how the capabilities and intentions of other nations affect our security. But external considerations alone are not enough to determine the size of the defence budget. As another expert in the field put it:

The identification of a threat to security does not automatically require an expenditure in the defence budget to neutralise it. The nation’s total resources being limited, it is necessary to consider what is being given up to meet the threat. Some may feel it more important to invest money in education or health than to provide against what they consider remote contingencies in the national security field. The defence budget, in short, must be seen not only in terms of what we must defend ourselves against but what we have to defend. The more we take from the common wealth for its defence, the lesser it becomes.4

How then does one decide how much of the resources available should go for defence? Going by the principles of economics, if welfare is to be maximised, as Pigou the great economist put it, “Expenditure should be so distributed between a battleship and poor relief that the shilling devoted to each of them yields the same real return”. Ultimately, this involves a political judgment about the social benefit of budgetary allocations to competing heads.

In making this judgment, account has to be taken not only of the demand for alternative uses but also the tasks – the “mission” – envisaged for the armed forces of the country. Obviously the tasks would differ as between a country with hegemonic ambitions and one concerned only with defence against external and internal threats. Once the tasks are defined, next comes the question of building up the capability to perform them, followed by formulation of plans for specific

Economic and Political Weekly December 30, 2006 programmes. If the scarce resources are to be spent efficiently for defence the budget has to be the vehicle for implementing the programmes so planned. Are our defence budgets evolved in this way? This is what the rest of the volume examines at some length – the aim being to see that the scarce resources of the nation devoted to defence are used in way that would maximise welfare.

How far is political judgment brought to bear on our defence budgeting? According to the author, very little. For the prerequisite in the exercise of such judgment in a parliamentary system of government, viz, collective decision of the cabinet in the matter of budget formulation, is absent in India. Budgets are made on the basis of demands made by the ministries mostly incrementally on the existing programmes, with the addition of a few new ones under different heads leaving it to the ministry of finance (MoF) to decide finally how much will go under different heads. The result is what Niskanan in his celebrated thesis predicts, viz, government’s expenditure will expand to maximise the bureaucrats’ utility function, when there are no external constraints. Drawing on this insight the author avers that defence expenditure in India is an area of weak external constraint.

For all the trappings of parliamentary control, the budgetary process in India is essentially a bureaucratic exercise, the author argues, and political priorities hardly get reflected in the budget formulation. This is perhaps not entirely true as otherwise one could not explain the incursion of employment guarantee programme into the union budget despite acute resource constraints. But the fact remains that ministers do not get actively involved in budget formulation. Our budgeting thus gets reduced largely to a book keeping exercise.

(ii) Absence of ‘capability planning’ and managerial accountability: After identifying its basic deficiencies in the first two chapters the author proceeds to elaborate how bureaucratic the process of defence budgeting in India is in the next three chapters (Chapters 3, 4 and 5). Copious use of flow charts is made to provide a clear picture of how the processes operate.

Budgeting for defence involves a decision not only on the aggregate amount to be made available for defence but also on its allocation under different programmes to build up its capability to serve the objectives in view. This again has not been possible in India as defence budgets are drawn up in terms of inputs (amounts spent on acquisition of arms, personnel, etc) and not programmes designed to enable the defence focus to meet the tasks set for them. Equipment is acquired without taking account of the personnel required to use them or their training. Budgets in defence are focused heavily on “acquisition” – “platform building” rather than building capabilities.

A budget serves not only to indicate how much can be spent by the government in a year in the aggregate and under different heads but also to control expenditure in all departments and keep these within the approved limits. The concept of control connotes political, managerial and also legal accountability.

For effective exercise of managerial accountability in defence, the concept of Planning, Programming and Budgeting (PPB) was evolved in US in the 1960s. The aim was to see if the objectives envisaged are achieved in a cost effective manner. UK also followed this practice with PPB. PPB was found inadequate as it failed to link defence strategy to defence budgeting and did not provide an adequate basis for capability based planning. US has since moved beyond PPB to institute a Quadrennial Defence Review (QDR) for a thorough appraisal of defence needs every four years. That provides a blueprint for a strategy-based, balanced and affordable defence programme. QDR makes a comprehensive preview of the force structure, modernisation plans, budget plan and other elements of defence programmes for the next 20 years and provides the strategic guidance as also a framework for PPB to operate. Defence planning cannot take place without such a framework.

An important point made in this context is that PPB requires a number of preconditions most importantly, a decision on the structure of the armed forces which does not exist in India. “No budgeting technique however defined, can help in arriving at force structure decisions. These decisions have to be taken separately on the basis of various considerations including the resource constraint viewed over a long period. The decision on force structure would determine the budgetary allocation on various programmes. Rationality of resource allocation decisions would depend on the rationality of force structure decisions” (p 137). Our defence budgeting does not proceed that way. For these

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Economic and Political Weekly December 30, 2006

reasons, it is argued convincingly, PPB – though apparently attractive – cannot be a useful device for India.

Viewed from the angle of control, defence budgeting in India seems to be gravely deficient. With no approved framework of planning for building necessary military capabilities and with weak institutional support at higher management level, “defence budgeting in India is, in a sense, in a no-man’s land” says the author. “Clearly, the concept of meeting plan objectives, through judicious allocation of resources is missing; the mechanism for control of demands of expenditures in the medium and long term is also missing” (p 21). This is largely because “there is no central decision-making authority in the ministry of defence (MoD) regarding allocation of resources among the services” (p 29).

There seems to be considerable merit in the argument strenuously advanced by the author that since budgeting involves choice among alternatives, persons at the top of the defence hierarchy, e g, chiefs of the three services, the defence secretary, heads of two other departments of defence and above all the defence minister must be involved in the budget formulation and allocative decisions by giving necessary guidance and decisions at appropriate stages. It is very necessary to have institutions like the defence council in the UK headed by the defence minister to take policy decisions regarding strategy and force level required to execute the strategy and to lay down the policy framework within which defence budget can be formulated. In our budgetary process, this does not happen nor are there institutions like the Defence Council and Defence Management Board.

(iii) Absence of link with planning: Apart from serving as an instrument of expenditure control, budgeting has two other functions, one is management, the other is planning. How do defence budgets in India help to perform these functions? The way the defence budget is structured raises doubt on all the scores.

Reflecting the concern for speeding up “modernisation” the defence budget for 2004-05 hiked the allocation under capital expenditure to Rs 31,994 crore from Rs 16,861 crore in the preceding year. This changed the proportion of revenue and capital in the defence budget sharply 29 per cent to 42 per cent. This was maintained in the next two years. There is nothing to indicate that thought was given to the need for complementary revenue expenditure that would be needed to use and maintain the equipment proposed to be acquired. There is no evidence of integrated defence planning.

It comes about that because there is no decision-making authority in the ministry of defence (MoD) to indicate the allocation of resources among the services, the financial adviser (defence services) draws up the budget on the basis of projections put forward by the services in isolation after modifications on the basis of bilateral discussion between each of the service headquarters and the finance division. Allocation between revenue and capital is decided routinely on the basis of obligational (committed) expenditure, past expenditure trends and ongoing programmes. No review is made of the rationale of the existing ones or the case for the new ones. As budget allocation does not go by programmes, choice among programmes cannot be made at the budget formulation stage by decision-makers.

Some Recent Initiatives

The volume also contains a fairly detailed account of the steps initiated in India in recent years towards budgetary control in defence with reference to the preparation of Defence Service Estimates in 2003-04. The initiatives had come from within the MoD. The recommendations of a task force set up in 1991 led to the concept of accountability in the navy budget relating to stores by restructuring the code head of accounts. However, this was not a substitute for accountability. That called for a “basic change in attitude towards budget management” (p 148). And that required defence policy to be clearly articulated with reference to objectives.

The attempt by the navy to introduce a Need Management Strategy (NMS)-based on the task force report, however, may not be replicable elsewhere. Attempts in UK to improve budgeting for better resource use and accountability led to Public Expenditure Surveys (PES) and later Next Steps Reforms. An important lesson to be drawn from all these is that the “front end” of planning involves the most difficult exercise and requires firm directives from the top. A critical precondition for proper planning is “the five-year fiscal guidance without which proper planning cannot take place” (p 189). That in turn requires a tight control over budget commitments through multiyear budgeting which is absent in India.

Case for multiyear budgeting and a longer term perspective: The idea of multiyear budgeting was put forward first by the Plowden Committee of UK which is now adopted in many countries of the world with remarkable results. The evolution of the Comprehensive Speeding Review from the Public Expenditure Surveys in UK is traceable is to the ideas contained in the Plowden report. In India reform efforts in defence budgeting have encountered problems mainly because attempts have been made to “introduce the concepts of the New Management Strategy on the basis of UK’s experience, without bringing in the concept of multiyear expenditure planning and long-term defence planning on a rollon basis like the Long-Term Costing (LTC)” (pp 216-17).

The volume then moves on to a discussion of Five-Year Plan for the defence budget. Not many even among those dabbling in planning and budgeting in India would perhaps be aware that the Eighth Defence Plan (1992-97) could not be finalised and approved even after prolonged discussions. The bone of contention was, should the size of the defence plan be Rs 1,40,000 crore as the director general, defence planning, wanted or no more than Rs 1,07,000 crore that the MoF was prepared to allot. The programmes content of the Plan – which programme would suffer if the Plan was trimmed was not asked.

Many of the shortcomings of defence planning were noted by K Subramanyan, the noted defence analyst in his Perspective in Defence Planning, published in 1972. One of the major shortcomings pointed out by him was the absence of a “perspective view”. The concern of all the three services has been short-term rather than long-term planning. Apart from lack of required facilities, there was no organisation available to deal with inter-service plans and intra-service priorties. Clearly there was need for an integrated perspective plan based on operational needs.

Recognising the need in 2001, a group of ministers (GoM) had drawn attention to the need for such a plan. Taking note of the induction of the chief of defence services (CDS), the GoM and other related structures, the GoM recommended a “holistic and integrated defence perspective plan for 15-20 years “through a rigorous process of inter-service and intra-service priorities”. Following the

Economic and Political Weekly December 30, 2006 report, an integrated defence staff (IDS) structure was set up by merging the directorate general of defence planning staff and the military wing. The IDS has since evolved a Long-Term Integrated Perspective Plan (LTPP) (2002-2017) after collaring the perspective plans of the three services. It seems this has led to some prioritisation in the LTPP. But “It continues to be largely a sum of the perspective plans of the three services”, compelling one observer to remark that “the more things change the more they remain the same”.5

While emphasising the need for a Defence Review like the Quadrennial Defence Review of US, the author makes the following observation: “It is one of the unexplained phenomena that in India, during the last five decades, in spite of significant increase in defence expenditure, and changes in the security scenario and technological changes, there has been not even one Defence Review, aiming to put together a coherent policy framework for defence planning and budgeting, and providing a rational basis for the force structure on that basis” (p 319). Chapter 15 suggests ways for “Developing a Strategic Vision”. Finally, in Chapter 16, the author asks “Can We Not Have a Five-Year Defence Budget Plan?”

A basic limitation of defence planning in India emphasised in the volume is the lack of “financial commitment” beyond one year. Even when a defence Five-Year Plan is approved there is no assurance of budgetary provision for the five-year period. These plans are of no help in developing defence capability in a purposive and coherent manner” (p 377). The estimates committee (1992-93) which went into the defence budgeting process at length drew pointed attention to this weakness. The committee noted that defence plans were not framed on a realistic basis and did not proceed on the basis of “a clear national security objective and military aims”. Given this background, defence planning was of little help, the committee observed.

Though this was clearly an indictment of the defence planning system, things do not seem to have changed much all these years. The Tenth Defence Plan was not approved even after four years of the Plan period had elapsed. It should be a matter of concern to all involved in public policymaking in India that nearly Rs 1,00,000 crore of public money is spent without any approved plan of action. Planning even on an annual basis proves difficult as budgeting starts with projections of the service headquarters and often end up with large cuts by the MoF at the final stage. The budgets not being programme based, final allocations are made inputwise without any decision on reallocation of funds programme-wise which the “cuts” entail. Motivation for budgeting is undermined also by the “soft budget constraint”.

The Way Forward

The volume ends with several suggestions to cure the glaring deficiencies that merit attention. First, there should be a plan for five years, not necessarily a commitment of funds since such commitment cannot be given in our system. However, it should be possible to have a Medium-Term Expenditure Framework and multiyear expenditure programme, as is being done now in many countries. Drawing on the celebrated Plowden Committee’s recommendations, it is suggested, planning in defence can be instituted with a “firm” budget plan for the first year, “firm” also for the second year, subject to major changes in the economic scenario, “provisional” for the third year and “tentative” for the fourth and the fifth years. The budget plan should be rolled forward every year so that the next year, the provisional budget for the third year becomes the firm budget for the second year and the tentative budget for the fourth year becomes the “provisional” budget for the third year and so on. Many countries in the world routinely prepare the investment plan on a “roll-on” basis as an integral part of annual budget-making. Forward budgets are made for a period longer than the next finance year.6 The Fiscal Responsibility and Budget Management Act 2003 requires the finance minister to lay before Parliament along with the budget papers a Medium-Term Fiscal Policy Statement. But that does not presage any kind of multiyear budgeting. The statement furnished with 2006-07 budget for example contains only one short para on “Defence Services” merely noting the percentage increase in defence expenditure under “revenue” and “capital”.

While a five-year horizon for budgeting may not be feasible, the UK pattern of a multiyear budget with a three-yearly “departmental expenditure limits” deserves serious consideration. Bold initiatives have been taken in recent years in many countries to improve budgeting in general and defence budgeting in particular. A recent example is the reform of government budget by law by French parliament in 2001. The reform implemented by the French ministry of defence has brought up an important military planning law covering the years 2003-08, with the objective of a more efficient use of defence spending. The reform was used as an instrument of departmental modernisation by ending the subdivision of the budget between the services. The financial autonomy of each service inherited from the past was not found to be “in line with the growing demand for joint actions in the areas of operations and training as well as in the building up of future military capabilities”.7 These refrains have apparently been driven by the revolution in military affairs, triggered by the revolution in technology. The refrain of the volume under view has also been to move reforms in a similar direction.

The volume contains many ideas for improving the system of defence budgeting, which if implemented would go a long way to bring rationality in budgeting for a big chunk of the union government’s expenditure. It merits to be read by all concerned with budget making in India – not merely those concerned with the defence budget.

EPW

Email: amaresh_23@yahoo.com

Notes

1 Actually the amount comes close to Rs 1,00,000 crore as the figure of Rs 89,000 crore is derived after netting out receipts under defence.

2 ‘The Rs 1,00,000 Crore Rubicon’ by Ajay Shukla, Business Standard, November 21, 2006.

3 ‘Budgeting for Defence” by David Greenwood, Royal United Services Institute, London, 1972, p 8.

4 ‘The Defence Budget: Perspectives and Priorities’, Casper W Weinberger’s speech in a Town Hall Meeting, American Enterprise Institute for Public Policy Research, Washington DC, 1972.

5 ‘Of Integration and Jointness: A Review of Defence Reform’ by Brig Vinod Anand in Pinacle, October 2005 quoted in ‘Challenges in Defence Planning’ by Amiya Kumar Ghosh, paper presented at International Seminar on Defence Finance and Economics, New Delhi, November 13-15, 2006.

6 Budgeting for Economic Development by Prem Chand, OUP, 2001, p 221.

7 ‘Budget and Accounting Reform and Financial Management Concern in France’ by Jean-Baptste Gillect, paper presented at International Seminar on Defence Finance and Economics, New Delhi, November 13-15, 2006.

Economic and Political Weekly December 30, 2006

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