DEFENCE NOTES

New Delhi, 10 March 2008  

The allocation actually accounts for 14 per cent of the Government's total spending of Rs.7,50,800 crore during the fiscal beginning 1 April 2008. But in actual terms, the hike is 14.16 per cent as the Defence Ministry could only spend Rs. 92,500 crore of last year’s allocation, leaving a sum of Rs 3,500 crore unspent as two major contracts for the Army (155 mm Howitzers gun and the Light Observation helicopters) were cancelled in the final stages.

The defence outlay has set the military experts worrying over the fact that it is for the first time that India’s defence outlay has fallen to less than two per cent of the country’s Gross Domestic Produce (GDP). With both China and Pakistan spending close to 4.5 per cent of their GDP on military affairs, analysts are concerned that India, with a projected spending of 1.98 per cent of its GDP will lag behind in the larger strategic game.

Compared to the booming economic growth of 9 per cent, the country has been spending less and less on the military. The defence spending as a percentage of the GDP has been persistently declining from 3.8 per cent in 1997-88 to 1.98 percent in 2008-09. That too at a time when most nations have increased their budgetary allocation for defence.                        

On all fiscal indicators, China is ahead of India. In terms of expenditure, while New Delhi spent $24 billion on defence last year, Beijing spent $50 billion. In the emerging world order also, China comes next to the US in defence spending while India is stuck at 10. The reason why China is ahead in the vital area of trans-border capabilities like missiles, strategic weapons and space while India is lagging behind.

Needless to say, this will certainly create long-term political-security imbalances for the country with its neighbours resulting in a strategic disadvantage. New Delhi has still not been able to settle its border dispute with both China and Pakistan. Beijing still claims Arunachal Pradesh, notwithstanding that it is integral part of India since Independence.

However, no matter the Finance Minister promise to his counterpart in defence that there would not be shortage of funds for defence modernization and the Ministry could demand an additional outlay as and when military hardware is required to be purchased. The fact remains that the Finance Ministry has not increased the defence outlay to three per cent of the GDP which is a dire requirement. Add to this the problem of unspent funds by the MoD every year.

The conceptual contours of India’s grand defence strategy are still not clear to its decision makers, what to talk of the average citizens. The operational directive of the Defence Minister AK Antony, notwithstanding, a well articulated defense policy still remains a chimera in the public domain.

The Parliamentary Committee on Defence Planning recently criticised the MoD by stating that its laxity in defence planning and taking a long time to conclude defence deals was one of the main reasons for unspent funds. In successive years it could not finalise contracts before the end of the fiscal year and had to surrender the unspent allocation to the exchequer. Scandalously, this has been going on for many years.

Inaugurating the biennial Defexpo India 2008 in New Delhi last month, the Defence Minister said a revised Defence Procurement Policy would “in all probability” be unveiled by April 2008.  It will then be ensured that the allocated funds meant for the purchase of military hardware are completely utilized.

The MoD is taking a hard look at its offset policy applicable to all capital acquisitions valued above Rs 300 crore. Chances are that the revised defence procurement policy of the Government would also modify some provisions of the offset policy to make it less rigid.

The offset clause, in its present shape, makes it mandatory for foreign vendors to create commercial activity in the Indian defence industry equivalent to 30 to 50 per cent of the contract value. In addition, investments cannot be made in non-defence sectors, as ‘indirect’ offsets are not permitted. It is expected that at least $40 billion will flow into the country by the end of 11th Plan period (2007-2012) and $60 billion in the 12th Plan through offset agreements.

The Government appears keen to open wide the gates to the Defence industry and the private sector than it has done earlier. Remember, 30 per cent of the funds are earmarked for indigenous purchases from the industry. The International Land and Naval Defence Expo in Delhi is evidence of some dividends. More auspicious are tie-ups between Indian and foreign firms.

Not too long ago, the US’ Northrop Grumann Corp. teamed up with Satyam Computer Services to provide high-end engineering services to the global aerospace and Defence industry. Now, the Tatas have planned a joint venture set up with Israel Aerospace Industries to cater to the IAL’s Indian customers.

It is amply clear that the budget has focused on continuing upgradation of armaments with the allocation on capital outlay running into Rs 48,007 crore, a hike of almost 23.3 per cent over last year's outlay of Rs 37,705 crore. Capital estimates last year were Rs 41,922 crore of which the Defence Ministry only spent Rs 37,705 crore. This anomaly needs to be corrected.

Undoubtedly, the Defence Minister has welcomed the hike, by asserting that it would aid in the Armed Forces' modernisation drive. Of the total allocation, Rs.48,000 crore has been earmarked for the purchase of hardware and Rs.57,900 crore for the three services and for Research & Development. The Armed Forces are eyeing military hardware worth Rs.15,500 crore over the next five years in a series of big-ticket purchases of combat jets, helicopters, artillery guns and ships.

Of the three services, the 11 lakh-strong Indian Army will expectedly get the lion's share of Rs.36,200 crore, followed by the Indian Air Force (Rs.10,800 crore) and the Indian Navy (Rs.7,400 crore). The Defence Research and Development Organisation (DRDO) have been allocated Rs.3,300 crore. In addition, Chidambaram has earmarked Rs.15,500 crore for pensions and Rs.44 crore for the 22 Sainik Schools in the country. This is to enable them improve their infrastructure and sports facilities so that the physically fit and mentally alert students are available for getting into the Armed Forces.

There are, of course, several big procurements in the pipeline, which range from the Rs 8,000-crore purchase of eight long-range maritime reconnaissance aircraft for the Navy to the Army's Rs 12,000-crore artillery modernisation plan. Besides, India plans to spend a whopping $30 billion or almost Rs 120,000 crore on arms imports by 2012.

The Finance Minister also extended a huge helping hand to the millions of ex-servicemen across the country by opening up employment opportunities in the banking sector. 'I would urge all regional rural banks to open at least 250 new accounts every year. Ex-servicemen and retired bank employees can play a major role in this by serving as facilitators,' Chidambaram said.

Recall, the Parliamentary Committee on National Security and Defence had three years ago, recommended that the Government earmark three per cent of the GDP for defence for its continuous modernization and for suitable deterrence. It is therefore strongly recommended that the Government should provide three per cent of GDP for defence services every year in order to ensure defence modernization, capital acquisition and R&D programmes and fulfills the need-based requirements. --- INFA

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