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Covid-19 and its Impact on Defence Expenditure

The outbreak of the Coronavirus presents an alarming human health crisis and has a significant commercial impact, thus, posing challenges necessitating focus on sectors like health and infrastructure and monetary measures to revive economy. As a fallout Defence Sector may get lower priority and may have to take a backseat for the time being.

The outbreak of the Coronavirus (Covid-19) presents an alarming human health crisis which has a significant commercial impact. In a geopolitically volatile and an uncertain complex world with the business environment defined by constant disruptions; the business leaders need to be confident with making strategic choices in the midst of uncertainty. Countries across the world are grappling to mitigate the unprecedented crisis situation continuously compiling immediate business challenges across multiple sectors for minimizing the fallout on the economy. It is time to focus on macroeconomic management, monetary measures, and ease of doing business for Industry in production and service sectors.

Defence Expenditure

As per the report  on ‘Trends in World Military Expenditure, 2019’ by the SIPRI, the global military expenditure rose to $1917 Billion in 2019, almost 2.2% of the global Gross Domestic Product (GDP) representing an increase of 3.6% in annual growth as compared to 2018.

The top five largest spenders — US - $732 Billion, China - $261 Billion, India - $71.10 Billion, Russia -$65.10 Billon and Saudi Arabia - $61.90 Billion, accounting for 62% of the global defence expenditure. Pakistan’s military expenditure was $10.3 Billion about 4% of the GDP in 2019. The Indian budgetary figures of $71.1 Billion include all aspects of defence spending, including salaries and defence pensions, the civilian establishment of the Ministry Of Defence (MoD), the Coast Guard and the Border Roads Organization.  However, the revised estimates put Indian defence spending for 2019-20 at Rs 448,820 Crores or about $59.4 Billion approx. accounts 2.18 percent of the GDP and considering the revised estimate India is placed at 5th position in Military spending.

India is presently world’s third-largest defence spender, although defence budget accounts for 2.4 percent approx. of the GDP indicating that it spends well below the global average. The Indian defence allocation in the budget for 2020-21 was Rs 3.37 lakh Crores, excluding defence pensions, accounting for about 1.5% of the country’s GDP, the lowest in recent times. The expenditure on military preparedness seems to be inadequate considering geopolitical reasons, cross-border infiltration and hostile neighbours who continually resort to economic and verbal aggression. Thus, India cannot afford to lower its defences which is causing burden at a time of economic stress.

Post Covid-19 crisis the Ministry of Finance (MoF) sent a memorandum listing spending and cash flow management of each Ministry, ordering an expenditure ceiling of 20 percent on the military and a spending limit of 15 percent on Civilian Ministries. This means that only 20 percent of the budget can be spent in the first quarter of 2020-2021 (April to June). The spending limits are not applicable on defence pensions and the veterans’ health scheme. With this year’s salary and pension bill of Rs 276,117 Crores exempted from the 20 percent spending limit, the ceiling is applicable only to the rest of the Defence Budget – or Rs 195,261 Crores out of the overall Rs 471,378 Crores. By the end of the fourth quarter, the 20 percent cut would save Rs 39,052 Crores. Thereby, very little money in hand is left after pays and pensions for Capital procurement.

On top of it, the Capital Budget has committed liabilities which as on date is approx Rs 40000 Crores and that have been budgeted for the Armed Forces for programs like the Rafale fighter jet deal and the S-400 air defence systems. India recently finalized defence deals with US worth more than $3 Billion including $2.6 Billion for 24 MH-60 Romeo helicopters and $800 Million for Apache helicopters. Further, India and Russia have signed 14 contracts worth more than $16 Billion, covering everything from Kamov helicopters to Kalashnikovs rifles. The Government has also signed a contract with US arms maker Sig Sauer for $92 Million, and a $117 Million contract with Israel Weapons Industries. Meanwhile, Hindustan Shipyard Limited (HSL) has signed a $2.1 Billion deal with a Turkish shipbuilding company to design and build five 45,000-tonne vessels for the Indian Navy.

There are chances of delay in delivery of orders placed on Foreign OEMs and it would result in deferred payments or committed liability payments, without invoking the penalty clause. The large ongoing foreign procurement consume 90% of the total defence capital budget, and some of them are likely to see delayed deliveries by three to six months. The potential availability of the resources could channel some of our fast-track indigenous programs such as Rs 39,000 Crores order for 83 Light Combat Aircraft (LCA), seven squadrons of Akash air defence missiles worth over Rs 6,000 Crores, six regiments of Pinaka Multi Barrel Rocket Launchers (MBRL) worth Rs 4500 Crores etc. that hold the key to sustaining Indian industry.

The Indian Government has been proactive in the fight; as economy dips, health and infrastructure will get priority over other sectors. The Government has been allocating only 0.3 percent of the GDP for expenditure on health. It may be long haul as the Government’s priority is to focus on health and other sectors to revive economy. If more has to be spent on health, agriculture and on reviving the economy, lower priority sectors like defence will have to take a backseat. Hence, there is significant insecurity in the Industry as budget priority, policies and strategy focus will change for at least next two years and many on-going capital acquisition plans will be deferred indefinitely. 

Way Forward

The Defence Ministry (MoD) has to initiate optimization measures to avoid wastage in view of the economic burden imposed by Covid-19 to limit its first quarter (April-June) spending to 15-20 percent of the entire year’s budget. In view of the above, need to strategize defence expenditure beside re-jig the priorities to optimize the expenditure and advisory issued without undermining the combat  capability due to impairment of the military’s equipment and functioning. Some of the immediate measures which can result in curtailing the procurement expenditures are:-

  • Procurement of new equipment from the capital budget to put on hold for the time being.
  • The previously signed import contracts can be discharged, but new contracts must be with domestic producers. The procurement of foreign weaponry would have to make way for indigenous equipment to boost the local defence industry.
  • Rather than Defence International procurement focus should now shift on domestic procurement. Defence Capital acquisition from domestic industry will have a force multiplier, contributing to the GDP.
  • Include the provision of "Life Cycle Cost" in major platforms procurement and domestic industry be involved in spares and maintenance activities.
  • Push exports in defence sector. It should not be only left to DPSUs and OFs but with participation of Private industries.
  • Put on the unnecessary revenue expenditure plan on backburner. Measures such as no concrete garages, rationalization of administrative facilities in a Military station, reviewing the existing contract due to force measures, review of inventory to dispose off the obsolete items etc. has to be taken care so that the fighting units and formations are structurally self-contained, incorporating all the administrative elements needed to operate independently in wartime.
  • Jointness need to be looked in to avoid duplication of non operational expenditures. The need to cut expenditure by prioritisation and by synergizing between the three services.
  • Avoid duplication of resources and activities such as multiple Messes in station. The CDS has already made out and disseminated expenditure reduction proposals and has asked the three service chiefs to revert to him with their own proposals.

There is need to initiate expenditure optimization measures to re-jig the priorities without undermining  the combat  capability  due to  impairment of  the military’s equipment and their operational functioning.

To reduce the procurement time and cost, as a long term cost saving measure, the MoD need to adapt some of the measures to improve the procurement process are:-

  • The policy, procedure and processes in practically each stage of the procurement cycle, especially those that are most vulnerable, such as formulation of the Services Qualitative Requirements, evaluation of technical offers and field evaluation.
  • Rationalise numerous stages of Procurement Process. Procurement Process and also the Trial and Evaluations to be time bound as this will reduce OEMs expenses which are inbuilt in contract price.
  • The efficacy of decision-making, redressal of grievances of the vendors will reduce the procurement cost.
  • To have a detailed costing methodology, specific to defence acquisitions, for determination of a reasonable price before opening of the commercial bids, and a drill for conducting contract negotiations.
  • All procurement to be subjected to zero-based review. Is it really required? If not procured what are the implications?
  • Remove involvement of Design and Production agencies (DRDO and DDP) in any stage of procurement process.
  • Recent example of prolonged cost negotiations for over three years between the MoD and HAL and resultant slashing of by nearly Rs 18,000 Crores on the offer price. Service HQ have insisted on amendment to the Defence Procurement Procedure (DPP) to enable review by a ‘costing committee’ of bids submitted by joint ventures of Defence Public Sector Undertakings (DPSUs)/Ordnance Factory Board/Defence Research and Development Organisation (DRDO) from whom purchases are made on a nomination basis. As of now, the proposal has been approved by DAC.
  • Involve private industry in manufacturing and R&D.
  • There is need to focus on developing Homogenise Inventory. All Service to have standard equipment as this will result in reduced Logistics and Life Cycle Cost. Recent example is each Service asking for selecting different AD Guns, different variants of even basic weapons such as Rifles.
  • Rationalise the voluminous procurement procedures.
  • Professionally trained Teams at all stages of Procurement and should have reasonable tenure.
  • The Standardisation of certain clauses of Contract can promote Ease of Doing Business such as inclusion of clause on severability, rationalization of Taxes & Duties, reduction of Bank Guarantee; EMD, Warranty, Validity etc and addressing issues like:
  • Requirement of Export License;
  • Absence of relevant definitions such as Acceptance and Deliverables;
  • Stringency of Quality related issues restricted only in specific scenarios (for certain deliverables and/or under certain situations, as specified by the Buyer in the tender/Request for Proposal).
  • The LCC model be used for determination and selection of most economical procurement source.

This Covid-19 crisis also presents an opportunity to give emphasis on domestic procurement and if possible create new capacities to the satisfaction of our Armed Forces. Fortunately, the Industry is fairly well equipped to take up such responsibility. It is important to set the fundamentals for industry selection on strong - technical ability, investments in technology, track record, bandwidth from conceptualization to realization, successes in past programmes, financial strength, indigenous solutions provided in the past. The MoD should have trust in private industries and consider them as equal stakeholders at par with DPSUs and OFB and accountable with adhering to delivery schedule and quality.

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