Rahul Bhonsle
India’s Finance Minister Mr P Chidambaram is a man known to set and achieve targets. With his Harvard background, Chidambaram set a hectic pace at the Ministry of Home Affairs, when he headed the same immediately after the terror attacks on 26 November 2008 in Mumbai and professionalised functioning results of which are evident now.
In the Finance Ministry however Chidambaram is facing an uphill task in meeting targets of fiscal and current account deficit. Currency depreciation and declining GDP growth despite the recent rush of optimism after Raghuram Rajan took over as Governor of the Reserve Bank of India are flickers of brightness in an otherwise dark tunnel.
With Food Security and related Acts having got the nod of the parliament, government subsidy is likely to increase, while impending elections implies cuts which will impact the Aam Admi will remain off course. This in turn implies reduction in government expenditure in so called non essential areas and large budget heads such as Defence.
The Defence Budget, with an annual outlay of Rs 203672.12 Crore (US $ 37.70 Billion @Rs 54 per US $ in February 2013at the time of announcement of the Budget) for 2013-14 is likely to be one of the main heads which will see a cut back. Traditionally the Ministry of Defence (MOD) is known to surrender approximately 6- 8 percent of the capital budget, which for 2013-14 is Rs 86740.71 Crore (US $ 16.06 Billion in February at the time of announcement of the Budget) which accounts for roughly Rs 5000 to 8000 Crore or so. In recent years, the MOD has succeeded in streamlining the processes with timely adjustment within the services to avoid surrender.
At the same time in the Revised Estimates stage of the budget for 2012-13, the finance ministry had cut the defence budget by a whopping Rs 14,903.77 Crore. This included Rs 4903.77 Crore (US $ 908 Million) under the Revenue segment and 10,000.00 Crore (US $ 1.85 Billion) under Capital account.
Given that the Revenue budget generally comprises of fixed costs such as pay and allowances including maintenance there is limited scope for reduction thus the cut generally falls on the Capital budget as is evident from the RE budget for 2012-13. Austerity drives from the revenue budget generally include cut backs on transportation and training which affects operational readiness however given other heads are fixed and the government is bound to announce a hike in the Dearness Allowance in the coming election year, these seem unavoidable. More over the cost of fuel having gone up the budget for transportation which is one of the major heads of the revenue is also likely to go up.
Seeing the overall trend Defence Budget for 2013-14 could expect a slash of Rs 20,000 Crore or so most of it likely to be taken up by the Capital account to the tune of 12-14,000 Crore.
All these figures may seem unverified but signs of a cut are ominous not just from a survey of the economy and legacy data as above but also statements attributed to the Defence Minister in the parliament vide a PTI report of 22 August 2013. Mr Antony reportedly said, "In view of the present economic situation, we are not getting adequate funds as per our expectations”. He also claimed that “The entire budget of the Ministry is being spent. There are many proposals in the pipeline. We are not returning a single paisa. But, we are not getting the expected fund," referring to past trend when the MOD used to return unspent amount from the capital budget each year. This year (2013-14) the PTI report states that the MOD has been shortshrifted by Rs 40,000 Crore from the projected demand for the capital account.
The reduction is also accompanied by devaluation of the Indian Rupee by as much as 18 - 20 percent from the value in February 2013 when the budget was announced. Thus the capital budget in dollar terms with the value of dollar at Rs 64 shrinks to $ 13.56 billion from $ 16.06 billion, a fall in value of $2.5 billion or 15 percent plus by a conservative estimate. Given that a large quantum of the capital budget for acquisitions is allocated for imports, this will certainly affect the Armed Forces acquisition plans and in turn modernization.
The irony is that the MOD had issued a forward looking Defence Procurement Procedure 2013 (DPP 2013) on 1 June which has sought greater indigenization while making it incumbent on the services to process their procurements in a timely manner. Assuming that the services adhere to the schedules laid down in DPP 2013, funding the new acquisitions will now be a problem.
In immediate terms, the net result is to restrict the Annual Acquisition Plan 2013-14 to committed liabilities. These are substantial as payments are due for programmes as the Gorshkov aircraft carrier being delivered by end of the year, C 17 heavy lift transport and P 8i Poseidon long range maritime reconnaissance aircraft, Mirage 2000 upgrade, Pilatus Basic Trainer, 155 mm light artillery guns and critical missile requirements of the Indian Army. Finalisation of the MMRCA Rafale deal would imply part payment for the same. Evidently those companies who have been able to ensure timely delivery as Boeing and Pilatus have benefited.
In all probability there is likely to be a delay in new acquisitions, with some items as a repeat order for C 17, contracting of attack and heavy lift helicopters, submarine and stealth frigate programmes which are on the drawing board likely to be offset for subsequent years. By default plans for procurement which have been put on hold due to CBI enquiries such as VVIP helicopter deal and the Indian Army’s light utility helicopters (LUH) will be delayed. Allotments for the mountain strike corps (MSC) are also likely to be spread over a longer period and the formation may not be effective in seven years as envisaged but could be spread beyond ten years.
Given that there is no scope for the Finance Minister to provide additional money during the current financial year the MOD will do well to carry out a major exercise of prioritization particularly in the capital account and review acquisitions so that overall modernization process is not impacted. Armaments and munitions will have to be given top priority as these impact the combat potential particularly with reports of hollowness due to deficiencies. Some risks can be taken on the logistics side as these can be offset with greater efficiency in supply chain management in case of an emergency.
The role of Headquarter Integrated Defence Staff will assume importance to arbitrate between the services as during times of resource constraint internal competitive bargaining is normally the practice and jointness is normally the first casualty.
Russia which is a major recipient of money from the capital account due to large imports could provide some relief by accepting deferred payments and rupee ruble swap. This could be a major agenda for the annual summit in December and the MOD must work out norms with the Russian government before that.
How long the curbs last is still a matter of speculation with economists differing widely. The MOD could do well to plan for a slump of three to five years while continuing the planning process to facilitate speedy acquisitions once the economy rebounds.
This Article first appeared on Security Risks and is reposted here under a Creative Commons license.