The Indian Economy Blog

June 15, 2007

The Indian Army Part 2

Filed under: Business,Economic History,Fiscal policy,Miscellaneous,Politics — Pragmatic @ 12:18 pm

Budgeting- ‘Guns versus Butter’

The Indian budgeted defence expenditure (DE) for the current year (2007-08) is Rs. 96,000 crore and the Indian Army’s share of this pie is approximately 47%. The DE is 2.07% of the GDP; the corresponding figures for Pakistan and China are 3.4% and 2.8 % respectively. But there is a caveat – Pakistan military is purportedly controlling more than 20% of Pakistan’s economy (for the myriad details, read ‘Military Inc: Inside Pakistan’s Military Economy’ by Ayesha Siddiqa, Pluto Press, 2007) and China is widely believed to be underplaying its budget. For USA and Australia, these figures are above 4% and less than 2% respectively. Singapore, smaller by far but determined to be prepared against all contingencies, allocates about 6% of its GDP as DE.

India’s DE as % of GDP

Year DE as % of GDP Year DE as % of GDP
1991-92

2.50

2000-2001

2.35

1992-93

2.35

2001-2002

2.38

1993-94

2.54

2002-2003

2.27

1994-95

2.30

2003-2004

2.18

1995-96

2.26

2004-2005

2.43

1996-97

2.16

2005-2006

2.26

1997-98

2.32

2006-2007

2.10

1998-99

2.29

2007-2008

2.07

1999-2000

2.40

Many in the defence establishment lament these constantly declining figures of India’s DE as a % of GDP and consider it as a sign of Indian government’s low priority towards national defence and a lack of strategic thinking at the highest political levels. The recommendation of the parliamentary standing committee on defence in its 16th report (April 2007) states this requirement in unambiguous terms.

The Committee therefore, strongly recommend that the Ministry of Defence should take up the matter with the Ministry of Finance for providing a minimum 3% of GDP for Defence Services every year in order to ensure a fixed amount to carry out their modernisation, Capital acquisition and R&D Programme and fulfil the need based requirements of the Defence Forces.

This recommendation was made in response to a statement of the representative of the finance ministry. On being asked by the committee, whether it would be possible to fix a specific percentage of GDP for defence, this representative stated:

“There are many arguments in this regard. This is a matter which has been debated over several years. The argument is that what is the relationship of defence expenditure with the external parameter like the GDP? GDP shows you the rate of growth. The defence expenditure is related to your threat perception, essentially. This debate has not settled. I am only putting the pros and cons of the situation. It can be argued that, in a country like India which has a large segments of disadvantaged, not included in the growth process, as the GDP grows a larger amount should be allocated to the welfare of those people rather than spending it more on arms and ammunitions. That is the argument. It may not go well with the Armed Forces. It is a political choice. It is a guns versus butter choice. With this perspective in mind, this debate remains unresolved as to whether the defence expenditure should be fixed as a percentage of the GDP. This argument can be extended to other sectors. But this is a political choice. It is a matter not really left to bureaucrats like us.”

The often heard argument in defence circles is that unlike the West (read US), our politicians and bureaucrats have no exposure to the military and thus they lack a strategic insight. On the other hand, the defence services in India have been historically insulated from the civil society and the only way to be exposed to the defence services in India at a younger age is by joining them. However, it is puerile to assume that a tenure as an NCO or a flying officer or a young major could actually prepare anyone for strategic defence thinking. In the end, it is up to the individuals concerned and the systems in place that determine the upshot. There are numerous examples of successful and not so successful leaders, with or without defence experience, the world over. As far as the systems and processes are concerned, it needs a microscopic examination to reveal the correct picture of the actual defence expenditure.

By convention, certain defence components in India are budgeted under the civil estimates and not included in the calculations of the DE. Among these, defence pensions alone (nearly 14,650 crores) would hike the cost of defence by 15%. Incidentally, India started excluding defence pensions from DE in 1985 and Pakistan has followed suit since 2000. The other major provisions not included in the DE are construction of National Highways by Border Roads Development Board (390 crore), Indo-Bangladesh border works (560 crore) and Indo-Pak Border Works (25 crore). In addition, over 2000 crore is budgeted for the defence ministry that includes the Coast Guard, the Rashtriya Rifles, JAKLI and other expenses. These costs should ideally form part of aggregate DE even if paid from other heads, to better reflect their true character. This budgeting is presumably done for the purpose of under-valuation, but seems futile as the information is easily available in the public domain.

If we also surmise the expenditure on nuclear defence and the defence component of rupee debt on rouble account payable to Russia, at least 25,000 crore being spent on defence is not being budgeted as DE. The aggregate defence expenditure by the Indian government can thus be conservatively estimated at 1,22,000 crore, i.e, approximately 2.8% of the GDP. This excludes about 14,000 crore budgeted for the central police and para military forces, which is rightly budgeted under the home ministry.

If we examine the defence budget closely, a major portion (56%) of it is revenue expenditure. This is despite the sudden increase in the capital budget by nearly one and a half times in 2004-05. (The ‘running’ or ‘operating’ expenditure of the three Services and other departments viz. DRDO, DGOF, DGQA etc., are the revenue expenditure, while the capital outlay on defence Services caters to the expenditure incurred on building or acquiring durable assets.) In the revenue side of the budget, pay and allowances account for over 21,000 crore, which is nearly 40 per cent of the revenue budget and 22 per cent of the total DE. When the recommendations of the 6th Pay Commission get implemented, the revenue budget will inflate significantly by at least eight to nine thousand crore, only on account of increases in pay and allowances for the defence employees.

For the army, the figures are even more glaring – almost three-quarters of the army budget goes towards revenue expenditure – 34086.76 crore out of 45,684.51 crore.

Revenue and capital ratios (2007-08)

Revenue Capital
Army

74

26

Navy

40

60

Air force

38

62

Total

56

44

The breakdown of defence pensions for the three services is not available and if taken into account, it would certainly make the revenue to capital expenditure ratio for the army look even worse. Unlike the other two services, there is limited capital expenditure by the army. The air force and the navy have their big ticket purchases – the AJTs and the fighters and aircraft carriers, which go towards capital acquisition. It is a well propagated myth that the Praetorian bureaucracy in the defence ministry is to blame for the low capital acquisition in army. Actually, it is directly related to the difference in the strength of the three services – the army’s strength constitutes 90% of the defence services. The army started expanding after the Chinese debacle and continues to do so even today. Its manpower intensive nature hasn’t been dented by any of the modernisation plans or tectonic shifts in strategic and geopolitical considerations. When asked by the standing committee about the area in which revenue expenditure is going down, the defence secretary confessed that -

It is not on account of manpower. There are inventory control mechanisms and various other mechanisms by which revenue expenditure can be brought under control. All those mechanisms have been done. But beyond a certain point, we cannot lower down the revenue expenditure.

The capital acquisition for the army can thus improve only in two ways. Either increase the budget for the army or alternatively, reduce the numbers in the army. The first option is unlikely. The bogey of adversaries, their budgets and security requirements of the country (from Siachen to the Indian Ocean) are raised again and again to preclude the second option. This option, however, needs a closer and more critical examination.

To be continued…

6 Comments »

  1. Pragmatic,

    There’s also a question of effectiveness of current allocations. I’ve written about it earlier—the ghost of Bofors (and Tehelka) prevents the allocations from being spent effectively. It’s worse with the paramilitaries…recall reading somewhere that the CAG(?) report found that they didn’t spend a significant chunk of their allocations.

    Comment by Nitin — June 17, 2007 @ 3:08 pm

  2. Nitin,

    I agree. The situation is much better in the defence ministry and other ministries and departments are hit much harder, due to the government’s budgeting, accounting and auditing processes.

    One of the clearest indicators of effectiveness of current allocations(despite the amounts being surrendered every year)is the capital to revenue ratio. The only option is to have a much leaner army – every thing else shall flow from there.

    Comment by Pragmatic — June 17, 2007 @ 9:49 pm

  3. The economy of the country is booming and India is moving forward very fast to become a super power. The government machinery has to create an atmosphere conducive to this. Special, very attractive and at par with the best in private sector, package is needed for the officers of concerned regulators, departments and ministries. Officers of Ministry of Corporate Affairs, SEBI, and Department of Foreign Trade should be given the best pay and perks. Otherwise the jobs would not attract talented youths, and the economic growth of the country would be adversely affected as a result of that. At present many of the officers of such departments/ regulators are considering quitting. Take the example of M/O. Corporate Affairs. The officers of that ministry are appointed from a cadre called ‘Indian Company Law Service’ (ICLS). The pre requisite qualification for applying foe selection to ICLS is to be a CA, CS, Cost Accountant or Advocate with specified years of experience in company law matters. Many of the presently serving officers are having more than two of the required professional qualifications. In the present scenario where they get huge pay outside how many experienced professionals would opt to apply, for the cadre, at the present salary levels.

    Comment by deepak — June 27, 2007 @ 11:33 am

  4. [...] The subject of resources for the military is very close to Pragmatic’s heart and has been covered earlier (here, here and here). It is heartening to observe that the government is waking up now and taking some cautious baby steps to redeem the situation. [...]

    Pingback by » Indian military trims its flab | Pragmatic Euphony — October 12, 2007 @ 1:03 pm

  5. [...] security. It is about cutting wasteful expenditure – get more bang for the buck [related posts here, here and [...]

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  6. The US went for force reduction to improve quality, and it has been in a complete, total, unbelievable mess since the start of the Global War On Terror. The lack of manpower has resulted in the hiring of 150,000+ contractors for all the war theatres. Not only are the contractors very costly, key support jobs like convoy protection are being done by civilians with the results all too evident, as in Afghanistan.

    The US Army can field only a total of 40 brigades – and the brigades are equal to 2 1/2 battalions each, the force is really akin to 30 real brigades; in the seven years since the invasion of Afghanistan US target has been to add six brigades between 2001-2011!

    We are finding out the US way of war – small ground forces backed by by very high technology – does not work. See Afghanistan, where the war is being lost big time. See Somalia, Sudan, Indonesia, Southern Philippines going down the tubes. See Congo etc etc etc.

    In 1939-45 the Germans had top quality. It took 10 American Shermans to bring down a single Tiger tank – of course, the German quality of manpower was also the highest. But the US could produce 20 Shermans for every Tiger, and the major allies had 20-million men under arms (US ~12, USSR ~5, British Empire ~3). again of course, the US/UK had to fight on two fronts, and on sea and in the air as well, so it wasn’t Allies 20-million vs Germany’s ~4 million or so, but the Germans were outnumbered 3-1 in manpower as well as 10-1 in equipment.

    All that quality did nothing to save them from defeat. And by the way, the stuff they had under development for use in 1945-1946 had the war continued was truly astonishing in quality terms.

    India needs quality AND quantity.

    Comment by Ravi Rikhye — December 24, 2008 @ 12:57 am

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