Every year as India approaches the Budget session of Parliament, there are debates in various forums about the adequacy of Budget allocation to meet the modernization plan of the Services considering the threat perceptions/scenario. Due to the economic slowdown world-wide which is likely to affect the revenue collection of the national exchequer this year, the Government may face difficulty in meeting the increased demand from the Defence Forces. Further, we should not forget that electoral compulsions are also likely to play an important role in the coming budget.
It has been reported that Russia has demanded US $3.5 billion from India for the aircraft carrier, Gorshkov, which is currently undergoing repairs. This is the second time that Russia has sought a price increase from the original contracted amount of $1.5 billion. Given the hike in its price and the further delay in the date of delivery, the deal has naturally attracted comment, with some people even questioning the very wisdom of having gone for the ship.
What does it take to be ‘a vibrant industry’ or more specifically ‘vibrant defence industry’? Broadly, it would demand that the industry should be innovative in terms of processes and products, its base and structure should have large dimensions horizontally, vertically, and technologically to be responsive enough to keep pace with the changing strategic expectations of the nation. Defence exports and imports should be a matter of deliberate political or commercial policy choices and not a result of security compulsions.
The above question arises in the context of publicly known government plans of arms procurement amounting to over $64 billion1 as part of the modernisation programme of the armed forces. The majority of these acquisitions will obviously be from abroad and will be concluded in the next five years or more.
The Ministry of Defence (MoD) recently issued a new set of rules for the procurement of arms, ammunition and other defence related products and services. The rule book, known as Defence Procurement Procedure 2008 (DPP 2008), has revised, among others, the offset policy that was first promulgated in 2005 and subsequently revised in 2006. The revised offset policy which retains the earlier minimum 30 per cent offset requirements in defence imports of Rs. 300 crore or more has added a provision of offset banking, besides enlisting a number of categories of defence products.
Ordnance Factories constitute a major segment of India’s defence industrial set- up, whose other constituents are the Defence Public Sector Undertakings (DPSUs), the Defence Research and Development Organisation (DRDO) and varied Service-specific workshops, repair and maintenance establishments. The gross production of ordnance factories during the year 2005-06 was Rs. 8811.59 crores. Total sales including issues to armed forces and other agencies and civil trade in the same year was Rs. 6891.68 crores. This constitutes approximately 40 per cent of domestic supplies to the armed forces.
In early May 2008 Tata Group of India and Israel Aerospace Industries Ltd (IAI) signed an agreement to establish a joint venture (JV) in India to develop, produce and support defence products such as missiles, unmanned aerial vehicles (UAVs), radars, electronic warfare (EW) systems and homeland security (HLS) systems. The agreement is in sync with Tata’s broader objective of becoming a “lead system integrator” in the Indian private sector, by consolidating its own resources, diversifying into various fields of production and forging partnerships with major global defence companies.
Recent announcements of major arms acquisition programmes by the Indian government must have given a sense of elation to the armed forces, which have been waiting for long for some of this equipment. These announcements also give greater confidence to the nation about the military’s capability to tackle national security challenges. But there are other long term implications of arms procurement largely through import.
The practice of converting defence plans into publicly known defence budget is essentially a practice of democratic governments. One reason for public disclosure of defence spending could be that tax payers expect to know directly or through their representative how much is being spent on national defence and on other sectors of economy which affects their security and welfare. Disclosing the defence budget even to the domestic audience was rarely done in the past. In fact, even today, some major powers do not disclose their defence spending to the world.
Union Budget 2008-09 has allocated Rs. 105,600 crores for India’s Defence. Crossing the one lakh barrier for the first time, and accounting for nearly 14.1 per cent of total central government expenditure, the Defence Budget looks quite impressive (see Box). But when seen in the context of India’s expanding interests, this allocation remains as moderate as ever. Moreover, an in-depth analysis reveals problems in defence and budgetary management, none of which show signs of abating.
Budget Utilisation and Accountability
Every year as India approaches the Budget session of Parliament, there are debates in various forums about the adequacy of Budget allocation to meet the modernization plan of the Services considering the threat perceptions/scenario. Due to the economic slowdown world-wide which is likely to affect the revenue collection of the national exchequer this year, the Government may face difficulty in meeting the increased demand from the Defence Forces. Further, we should not forget that electoral compulsions are also likely to play an important role in the coming budget.