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SCoD Recommendations on Financial Constraints are Perfunctory

The third report of the Standing Committee on Defence (SCoD) presented to the Parliament in December 2019, makes for a disappointing reading as it simply regurgitates a familiar narrative, demanding increased capital outlay for the Defence Services, offering no fresh insights and repeating old recommendations. The author deliberates on the Committee’s perspectives ........

The third report of the Standing Committee on Defence (SCoD) of the 17th Lok Sabha contains the committee’s perspectives on the capital outlay for the defence services, procurement policy, defence planning, and married accommodation project. The report, presented to the Parliament in December 2019, makes for a disappointing reading as it simply regurgitates a familiar narrative, examines issues perfunctorily, offers no fresh insights, and repeats old recommendations which, apart from being illusory, betray a sense of helplessness.

The basic question, therefore, is how can more funds be allocated for defence, and while considering this issue it has to be kept in mind that the requirement of additional funds would be close to Rs one Lakh Crores if one takes into account the requirement of other departments also which are under the MoD’s administrative control.

The third report of the Standing Committee on Defence (SCoD) of the 17th Lok Sabha contains the committee’s perspectives on the capital outlay for the Defence Services, procurement policy, defence planning, and married accommodation project. The report, presented to the Parliament in December 2019, makes for a disappointing reading as it simply regurgitates a familiar narrative, examines issues perfunctorily, offers no fresh insights, and repeats old recommendations which, apart from being illusory, betray a sense of helplessness.

Capital Outlay

During the current year (2019-20), a sum of Rs 1,03,394.31 Crores has been allocated against the projected requirement of Rs 1,70,936.07 Crores under the capital heads, leaving a gap of Rs 67,541.76 Crores. There is nothing new about it. At Rs 96,905.77 Crores, the gap between the projection and allocation last year (2018-19) was much higher than the gap this year. In fact, shortfall in allocation vis-à-vis the projection, both under the capital and the revenue segments of the budget, has been a regular feature of the defence budget for more than a decade and finds a mention in every report of the committee on defence budget.

While it is good that the report contains all manner of statistics related to service-wise projection and allocation, the usefulness of these statistics can only be judged by the insights offered, and the recommendations made in them. What the report tends to pass off as analysis is nothing more than a fatuous disquisition on the need for allocating more funds for modernisation and the consequences of not doing so. ‘It is a well known fact’, says the committee, ‘that without infusion of new machines, technological upgrades and procurement of Capital intensive platforms, the Armed Forces cannot cope up (sic) with the might of the other country’s armed powers, especially with the inimical neighbours’. Who does not know, or disagree with, this?

Continuing in the same vein, the committee urges the finance and Defence Ministries not to reduce the allocations for the Armed Forces under the capital heads as these ‘are essential for the development of credible deterrence capabilities’. Such didactic observations and inane directives are an affront to not just the officials responsible for preparing the union budget but also to the parliament itself which passes the budget. This gives the impression that those in charge of budget formulation are unaware of the security environment, impervious to the needs of the armed forces, and consciously propose inadequate allocation in the union budget although they have the option of providing more funds.

This superficial pedagogy is accompanied by an equally vacuous prescription to remedy the situation: ‘The Committee hope that at least now the Ministry would leave no stone unturned so as to ensure the Forces, allocations as per the projection at the Supplementary Grants stage’. The report goes on to chastise no one in particular by saying that ‘(i) t should always be borne in mind that expenditure made on capital outlay during peace time is like building block for the Forces which builds a strong Force/organisation in the long run’. Such inanities are of no help.

If someone in the Committee’s secretariat goes through the old reports, he/she would find that the inadequacy of the budget outlay is not for want of efforts on the part of the Ministry of Defence (MoD). The MoD does not reduce the requirement of funds projected by the Armed Forces while conveying the overall requirement to the Ministry of Finance (MoF) and additional funds are routinely sought during the year by way of supplementary grant, etc. The matter is often pursued at the Minister’s level. This has been of little help, though. So, the committee’s exhortation to the MoD to leave no stone unturned to ensure allocation of funds at the supplementary grant stage lacks imagination.

Some reports in the past have castigated the MoF for being indifferent to the need of the Armed Forces. This perspective is questionable, not least because it disregards the state of economy, generation of inadequate revenues and competing demands from other sectors, including health, education, infrastructure development, internal security, and agriculture. The basic question, therefore, is how can more funds be allocated for defence, and while considering this issue it has to be kept in mind that the requirement of additional funds would be close to Rs one lakh Crores if one takes into account the requirement of other departments also which are under the MoD’s administrative control.

One expectation that everyone has from the union budget is that the taxes would come down, or at least no new taxes and duties will be levied. There are serious social and political constraints in expanding the tax base. Some money can be – and is – raised through disinvestment, but it is a tedious process. In any case, it cannot be argued that the entire proceeds of disinvestment should be earmarked for the armed forces. The only other way is to borrow money, but indiscriminate borrowing can be disastrous for the economy. Even otherwise, the need for containing the fiscal and revenue deficits in accordance with the Fiscal Responsibility and Budget Management Act, 2003 does not allow the government to resort to indiscriminate borrowing.

It is issues like this that one expects the committee to consider while analysing the defence budget and making recommendations. Berating the ministries for inadequate allocation will not change anything. If the committee felt that, other things remaining the same, it was possible for the MoF to meet the requirement projected by the armed forces in full, it was incumbent upon it to present this analysis in the report, rather than asking the MoD to seek additional allocation by way of supplementary grant, knowing full well that while the MoD will anyway do it, there are close to nil chances of any substantial sum being allocated during the remaining three months of the financial year after submission of the report.

Committed Liabilities

The committee’s treatment of the crisis of honouring the committed liabilities because of shortage of funds is equally risible. Terming the shortage of funds as baffling, ‘as these are payments towards procurements already done in the previous years’, the ‘Committee (felt) that making the country defaulter in payment will not go down well in the international markets’ and, therefore, ‘allocation as promised should be disbursed for Committed Liabilities’. It is difficult to imagine what was in the committee’s mind when it made that recommendation.

Additional money will not become available because the committee wants it to be done, especially given the current state of economy. This must have been known to the committee when it submitted the report in December 2019. The spectre of likely default on contractual payments – or committed liabilities, if you please – has been looming large for the past two years or so. The loss of face in the international market is undoubtedly a serious issue, but it is equally debilitating for the Indian industry. There were reports last year of a huge amount of payment to the state-owned Hindustan Aeronautics Limited (HAL) being held up.

The Committee does not seem to have asked the MoD, much less analysed, how this situation has come to pass, how the default was avoided last year (assuming that it was) and what is being done to prevent this from happening in future. Such an examination would have probably revealed that the system of monitoring of the committed liabilities is flawed, forcing the MoD to strengthen the monitoring system. This crisis may well be on way to becoming a regular feature of the capital budget. The committee could play a crucial role in making the MoD and the services bring about systemic changes to monitor and prevent such crises in future.

Modernisation of the Defence Forces

The Committee seems to be somewhat satisfied by the steps taken by the Government for modernisation of the defence forces. Three specific steps are mentioned in the report: opening of the defence industry sector to the private sector, allowing of Foreign Direct Investment (FDI) up to 49 per cent under the automatic route and beyond that through the government route, and seeking technology through the Strategic Partnership Model (SPM). What the report does not mention is that the defence sector was opened to private sector participation in 2001, the FDI regime was liberalised a few years back and the SPM was adopted in 2017.

This warranted an appraisal of the outcome of these measures and not just a passing reference in the report. That would have been more useful. Instead, what the committee has done is to merely recommend that there should be a regular interaction with the foreign defence industry to make India a lucrative place for investing and making it a defence industry hub. To this recommendation, the committee has added for good measure its desire that the government initiative should be monitored regularly so that ‘any bottlenecks can be checked at the beginning only’.

Since these steps are not new, it would be reasonable to expect that the MoD is already monitoring its implementation, assessing its impact regularly, knows what problems are being faced, and is already coping with those problems. It is inexplicable why the committee did not seek all this information, analyse it and make a more concrete recommendation than to say that the MoD should interact regularly with the foreign defence industry to make them invest in India. They will, only if there is a business case, and since they are not, the only conclusion that can be drawn is that there is no persuasive case for investing.

Defence Procurement Policy and Procedure

The Committee has uncharacteristically lauded the MoD for taking various steps to streamline the defence procurement policy and procedure. Specific mention has been made of introduction of the Industry-Funded Make II procedure, creation of a new procurement category (Buy – IDDM), liberalisation of the FDI regime which has resulted in inflow of Rs 3,134 Crores over an unspecified period, simplification of the process of granting NOC for exports which has led to a seven-fold increase in exports between 2016-17 and 2018-19, adoption of the SPM, and 22 changes made in the Defence Procurement Procedure 2016.

The committee has also noted with apparent satisfaction that over the last five years (2014-15 to 2018-19), Acceptance of Necessity (AoN) has been accorded in 204 proposals worth Rs 4,04,880 Crores approximately under the Buy (IDDM), Buy (Indian), Buy and Make (Indian), Buy and Make, Strategic Partnership and Make categories, in which the Indian industry would be engaged in defence manufacturing either as the direct recipient of the Request for Proposal or in collaboration with the foreign Original Equipment Manufacturers (OEMs).

These statistics are impressive, but the fact remains that the pace at which the procurement proposals move from the AoN stage till the stage of contract conclusion is painfully slow and many of these proposals fall through along this arduous journey. Considering that the entire process is expected to be completed within 126 weeks from the time the AoN is accorded, at least those cases in which AoN was accorded in 2014-15 and 2015-16 should have fructified by now. It is surprising that the committee never asked the MoD to give an account of those cases and did not examine whether the proposals are being finalised within the expected timeframe and, if not, why.

Offsets

An interesting recommendation made by the Committee is that ‘while granting and allowing offsets, participation of companies of repute should be encouraged and it should be ensured that companies offer servicing of the products for at least twenty years after the sale of the product’. This is not only against the Government’s policy of ‘minimum Government maximum Governance’ but is not in consonance with the letter and the spirit of the offset policy.

Under the current offset policy, the OEMs are free to select their Indian Offset Partners (IOPs) from the public or private sectors, which is also mentioned in the report itself. How is then the MoD to encourage participation of companies of repute in the offset programmes? What will make a company qualify as a company of repute would always be contentious and promotion of any company considered as reputed by the MoD is bound to be questioned. Intervention by the MoD in selection of the IOPs by the OEMs would also amount to playing with fire as the recent developments have amply demonstrated. As for ensuring that the companies offer servicing for twenty years, this too goes against the freedom the OEMs presently enjoy in choosing one or more of the several avenues available to them for discharging the offset obligation.

Defence Planning

The Committee has gone into the details of the existing system of three-tiered defence planning; 15-year Long Term Integrated Defence Plan (LTIPP), Five Year Plans (FYP) and the Annual Acquisition Plan (AAP). Some FYPs were sent to the Cabinet Committee on Political Affairs/Cabinet Committee on Security for approval in the past. Realising the difficulty in obtaining such approval because of the irreconcilable differences between the MoD and MoF on the financial outlay of the plans and the limited, if any, utility of obtaining the approval, it was decided by the MoD several years back to discontinue the practice and to only keep the MoF informed about the plan.

The Committee says in its report that it ‘cannot comprehend the reason for non-approval of the Defence Plans by the Finance Ministry and indifference of the Ministry of Defence towards it. There is a long history behind it, most of which is captured in the past reports of the committee. Rather than delving into the past history, the committee concludes its examination of defence planning by asking the MoD that it ‘should consider afresh and invariably try to take some sort of consent from the Ministry of Finance so that the Plans get a teeth at the time of implementation’. This is as perfunctory as it gets for it ignores the basic question regarding financial viability of the defence plans.

Financial constraints are the fundamental problem besetting modernisation and other capital projects, including the married accommodation project. This issue has been referred by the Government to the thirteenth finance commission. It would be good to see the committee come up with a report based on the recommendations of the finance commission concerning funding of the defence needs which would hopefully be more substantive than the recommendations made by the committee in its third report.

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