The Hindu Business Line : Defence budget: More power to the arsenal

The creation of a non-lapsable modernisation fund will go a long way in solving the problem of Defence purchases not being completed in the budgeted period.

THE Finance Minister, Mr Jaswant Singh, has, as part of the Interim Budget, announced the creation of a non-lapsable Rs 25,000-crore Defence Modernisation Fund. This is an innovative measure that is expected to go a long way in solving the woes of the Defence services, especially in modernising itself.

The fund is to be built up over the years from the portion of the allocation in the Budget to the Defence services that is surrendered as it cannot be spent during the financial year concerned. The proposed arrangement will not only help the armed forces undertake procurements efficiently, but also prove a great asset to the Finance Ministry.

The budgetary allocations for Defence will be utilised through this fund rather than crores of rupees being surrendered unspent. Under the existing procedure, the Finance Ministry has not been able to accurately forecast expenditure, or control the deficit effectively.

For instance, last year Defence allocations were Rs 65,300crore, of which Rs 500 crore had to be slashed in the Revised Estimates. This is more than 1 per cent of the total receipts for the year and around 4 per cent of the government's fiscal deficit. The other merit of the proposed fund is that it will result in the Defence Budget being not increased unduly. The allocation in the Interim Budget for 2004-05 is Rs 66,000 crore — just Rs 700 crore more than the last year's allocations.

Providing a large sum of Rs 25,000 crore would have taken the Defence Budget to noticeable levels. At present, Defence allocations are merely 2.5 per cent of GDP. This is fully compatible with the nation's status as a peace-loving, developing country, diverting more funds to agriculture, health, education, and so on.

India's neighbours Pakistan and China spend 4 per cent and 6 per cent of their GDP respectively on Defence. Adding Rs 25,000 crore of the Modernisation Fund to the Defence budget would have taken the Defence allocations to almost 3.5 per cent of GDP. How have the Defence services been helped by this move? First, the concept recognises that the system of annual budgetary allocations and mid-term review is not suitable for Defence purchases. Modernisation of Defence equipment is a long-drawn-out procedure.

The requirements are quantified, circulated among possible vendors, the equipment has to be evaluated through comprehensive trials and, finally, negotiations have to be conducted with the short-listed vendors. Finalisation of suppliers, placing of orders, delivery of the equipment and payment to the supplier follow.

In the best circumstances, this can rarely, if ever, be done during the budget period. Further delays happen because of the cautious attitude of the officials/decision-makers following the various scams associated with Defence purchases. The planned Defence Acquisition Council and the Defence Procurement Board will help, but only to a limited extent.

Second, developments in weapon technology have been rapid in recent years. There is also a greater appreciation among Defence planners of the effect of technology on warfare. It is conceded that the side with better equipment and the latest technology has better chances of a winning a conflict rather than an army with older technology and devices.

Each Service, therefore, wants the best and the latest available technology in the equipment being purchased for its forces. The latest technology-based systems have high price tags and are often not available for sale to all nations.

All these factors complicate the purchase process, thereby lengthening the purchase period. The creation of a non-lapsable modernisation fund will go a long way in solving this problem of the purchases not being completed in the budgeted period.

Third, India imports a large portion of its Defence equipment. Defence deals involve large sums of money and it is natural to expect political pressures (government to government) in these deals. The purchasers have also to assess whether the seller will maintain the supply of spares during the useful life of the equipment. All this further complicates Defence purchases and lengthens the purchase period.

The demand for such a non-lapsable modernisation fund had been voiced for some time now. It required the understanding of a former Army major to give the idea concrete shape, and the problems of both the Defence and the Finance Ministries have been solved in one stroke.

There are many things in the Interim Budget to attract votes this election year. It is, however, unfair to club the Defence Modernisation Fund with these sops. Some media commentators have tried to term this measure a move to win the votes of Defence personnel. This is unfortunate.

(The author is a former Group Captain, Indian Air Force.)