India spends a significant amount of resources on its national defence. Efficiency in utilisation of resources is not only an economic imperative but vital for defence preparedness. In view of this, the Defence Economics and Industry Centre was created in 2006 to promote research on various economic aspects of India’s defence. Since its inception, the Centre has undertaken a number of policy relevant studies besides constantly engaging vital stakeholders (Ministry of Defence, Armed Forces and Industry) on a range of issues. The major focus areas of the Centre are:
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If the Finance Ministry’s emphasis on fiscal prudence and inclusive growth has resulted in a smaller increase in the latest defence budget, the Report of the Thirteenth Finance Commission does not paint a very optimistic scenario for India’s future defence spending.
Given that allocations for revenue expenditure are likely to become lesser in coming years, defence managers need to initiate immediate measures to control the rising revenue expenditure.
While Mahindra’s foray into defence production and the acquisition of foreign companies demonstrates the private sector’s initiative, the government needs to introduce further reforms to promote the role of private companies in Indian defence industry.
The BRO could consider constituting a high level monitoring committee both at headquarters and on site to co-ordinate with the contractor, the consultant and other agencies to sort out issues that may have the potential to cause delay.
The effectiveness of the procurement process needs to be viewed in context of the operational and structural readiness of the armed forces. If the existing framework proves to be weak and unable to deliver required levels of military preparedness, the framework may have to be re-laid for its effectiveness and deliverability.
With the growth of the public sector in Defence Production a large number of industrial units in the Private Sector has also grown with varied scales of operation in areas like outsourcing of raw materials, components, sub-systems, assemblies and sub-assemblies.
If India does not modernize in an evenly spread out manner, it will be faced either with the prospect of its armed forces not being prepared, or rushing to make purchases amidst crises, or creating needless hysteria when frenzied modernization occurs.
Even as the new amendments incentivise domestic companies to enter defence production, the government has made it clear that it wants a competitive environment in defence industry.
The orientation of the existing administrative set up in Service Headquarters and in departments under the Ministry of Defence is to plan for the utilization of defence budget allocation. They are not in a position to pay attention to the aspect of defence receipts.
The present global economic crisis has slowed down the growth of the Indian economy, affecting among others, the fiscal situation and the revenue mobilisation potential of the central government. Defence being one of the largest recipients of central government expenditure, the present crisis casts a doubt on the adequacy of future resources. This commentary discusses some major options that India’s Ministry of Defence needs to consider in order to withstand the likely resource constraints in the coming years.
