Scaling Up the Defence Budget Will Not Make India Combat Ready or Fix Systemic Inefficiencies

The Shekatkar committee report represents a starting point and makes a valuable suggestion – non-combat organisations must be reviewed and restructured.

Capital expenditure utilisation doesn't always translate to capital acquisition. Credit: Reuters

Capital expenditure utilisation doesn’t always translate to capital acquisition. Credit: Reuters

The recommendations of the Shekatkar committee, constituted in May by the defence ministry, were presented in a report to defence minister Manohar Parrikar on December 21, 2016. The report is said to be voluminous, clocking in at over 500 pages and has supposedly made 120 recommendations.

The 11-member committee, headed by Lt. Gen. D.B. Shekatkar, was meant to provide recommendations for rebalancing the revenue and capital expenditure allocations for defence, for the current budget cycle, and while it is certainly in time for the penultimate Budget of the current government, it may come perhaps a tad too late for implementation in this Budget.

The committee was set up with the objective of making India’s armed forces combat ready and to specifically “cut the flab” in the revenue expenditure so that more money can be spent on capital expenditure and capital acquisition.

Some of the key recommendations of the committee are:

  • to assess the need for redeployment of manpower in the army,
  • to increase the defence budget to 2.5-3% of the GDP while simultaneously reviewing the definition of ‘capital’ and ‘revenue’ budget heads for funds allocated to all three armed forces,
  • to introduce ‘roll on’ plans for fresh acquisitions to counter the ‘surrender’ of funds at the end of the financial year,
  • to appoint a chief of defence staff for better coordination between the three wings of the armed forces and between the armed forces and the ministry of defence and,
  • to review the financial management system of the ministry of defence along with other organisations like the Defence Estates Organisation, Defence Accounts Department, Directorate General of Quality Assurance, Ordnance Factory Board (OFB), Defence Research and Development Organisation and the National Cadet Corp.

Crucially, one of the conditions of the report is that the recommendations should be implemented in their entirety and not in piecemeal.

This is the first time that a committee has been set up under the defence ministry to examine the economic decision-making of the armed forces. This is also the first time that the connection between economic decision-making and combat readiness of the armed forces has been discussed in detail. This, we believe, is significant as an increasing revenue expenditure has adversely affected India’s war preparedness. Similarly, the authors have also discussed the lack of integrated defence acquisition planning. The solution to this, as the committee quite rightly notes, is not in redeploying manpower; there will always be an imbalance in manpower between the forces since the army’s operations will always be more manpower-intensive than the navy or the air force, on account of the two fronts (Pakistan and China) on which it is deployed.

Given the importance of their operations, maintaining the combat strength of the army in terms of manpower is crucial. This means that the revenue expenditure of the army is always likely to be higher than that of the navy or the air force. However, it is imperative that this does not happen at the cost of capital expenditure or capital acquisition, but we know that this has often been the case. Hence, the suggestion that the defence budget be increased to 2.5-3% of the GDP, which by no means is a new suggestion, is redundant especially if systemic inefficiencies of spending are not dealt with. There is no reason why the finance ministry should increase its defence spend in this Budget.

Similarly, the suggestion of the committee to introduce the concept of ‘roll on’ in the budget of the armed forces is not a new one. It has been tried in the past at an organisational level with the OFB, where it did not work on account of similar systemic inefficiencies. The concept of ‘roll on’ is one where a particular target, fiscal or production, is rolled over to the next year in order to evade lapses in meeting these targets. The army had provided ‘roll on’ indents to the OFB since the latter could not manufacture enough to meet ammunition requirements. The OFB – which incidentally is also one of the organisations that the committee has recommended for review – despite the revised indents, was unable to deliver, for a lack of capacity.

The ‘roll on’ concept failed at the level of the OFB in manufacturing. When it comes to spending, the lack of planning – integrated or otherwise – especially in budgeting and estimating, are the causes for haphazard spending, rather than any paucity for funds. The Standing Committee on Defence in its report on the capital outlay for defence services noted a trend of underspending of funds allocated for capital acquisition.

Year Budget Estimate (in Rs crore) Actual (in Rs crore) Underspending (in Rs crore) Underspending (%)
2012-13 66,032 58,769 7,263 11
2013-14 73,445 66,850 6,594 9
2014-15 75,148 65,582 9,566 13
2015-16 77,407 65,742 11,665 15

Source: Standing committee on Defence, Report No. 22

Despite an increase in budget estimate allocations for capital acquisitions, the fact that the percentage of underspent funds over the years has gone up is indicative of the inefficient use. This is the result of systemic or institutional inefficiencies. Roll on targets would make sense if the shortfall in acquisition in one year is compensated by excess spending in the subsequent years. However, data suggests the contrary. An increase in defence estimates has only resulted in an increase in underspending and no significant increase in capital acquisition. Ironically, the defence ministry in its response to the committee’s suggestion of introducing a “non-lapsable roll on” capital allocation and expenditure rejected the need for it.

The reason cited was that underspending by one force was always compensated by over-spending by another and hence all money is always utilised. The suggested review of “capital” and “revenue” heads by the committee may throw some interesting light on this front. In the context of the response of the defence ministry, it is worthwhile to examine how the forces “share” their resources and whether this is a sign of planned capital expenditure or mere convenience. This we know for sure that even if capital expenditure stands at 100% utilisation, it is not because capital acquisition has gone up. In fact, there is no reason to believe that either a mere scaling up of the defence budget or introducing a ‘roll on’ will help much in restructuring capital acquisitions or in making India combat ready.

So what then? It is the last recommendation in which the solution begins. The committee has rightly pointed out that performance reviews are due for several non-combat organisations under the defence ministry (listed previously). This recommendation is, in fact, the mainstay of this report. Non-combat organisations play a crucial role in defence acquisition and in defence production. Unless these organisations are reviewed and restructured so that systemic inefficiencies are wormed out, no amount of ‘rebalancing’ in a Budget will help fill the bottomless pit of the opportunity costs of structural and institutional inefficiencies.

Comprehensive, research-based reviews of these organisations for institutional reform will be the first step towards injecting efficiency into the defence ministry and the entire defence establishment. This must be the first recommendation that the defence ministry implements in a time-bound manner.

Last year’s Budget speech by the finance minister woefully lacked even a single mention of defence. Since the entire nation is talking about economic reforms, it is time we spoke equally enthusiastically of the much required structural reforms in the armed forces and defence ministry, and the Shekatkar committee report is a good place to begin. This is the first step towards managing finances and making budget allocations much better.

One thing the defence ministry must bear in mind while undertaking the arduous yet compelling task – it would be good judgement to consult all stakeholders, especially private sector participants. Involving the private sector in the reforms process may also be the first step towards creating an ethos of trust in the sector.

Nirupama Soundararajan is Senior Fellow and Dnyanada Palkar is Senior Research Associate at the Pahle India Foundation.