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.

For fiscal year 2008-09, India’s defence allocation has increased by 10 per cent over the previous year’s allocation of Rs. 96, 000 crores, and by little over 14 per cent compared to last year’s revised allocation of Rs. 92,500 cores. In the last five years, the defence budget has increased by nearly 37 per cent from Rs. 77,000 crores in 2004-05, which represents over 8 per cent growth per annum (Figure-1). Notwithstanding the current allocation and growth of the defence budget over the years, the question remains whether India’s defence spending is compatible with its economic and security interests.

Figure-1
India’s Defence Budget, 2004-05 to 2008-09

Source: Union Budget, 2004-05 to 2008-09

A brief survey of the Indian economy reveals its great potential and global reach. The economy registered an average growth of nearly 8 per cent a year during the 10th Plan, and seems set to continue the growth momentum in the 11th Plan period. What is more important is that much of this growth is driven by the external sector, mainly growing trade with the rest of world. India’ total trade (exports plus imports) has increased by more than five times in the last decade and now accounts for over 35 per cent of its gross domestic product (GDP). This testifies to the fact that the economy is much more globalised than, say, 10 years ago when trade accounted for less than 20 per cent of GDP. The growth of the Indian economy and its global character has also infused confidence among international investors who see India as an attractive place for investment. The growing inflow of foreign direct investment is testimony to this fact. This process of greater integration with, and concomitant acquisition of greater stakes in, the international economic system is likely to continue in the coming decades. Military capability is necessary, for instance, to protect the country’s sea lines of communication – 90 per cent India’s trade by volume and 70 per cent in value moves by sea.

A survey of the regional military balance shows India’s unfavourable position vis-à-vis its neighbours. China’s relentless military modernisation, backed by double-digit growth in military expenditure for more than a decade, is a case in point. Its military modernisation, exemplified by the recent demonstration of IT- and space-based capability, has expanded its military reach from the traditional battlefield into the ‘space and cyber-space domains’. This is besides the other ‘anti-access/area denial capabilities’ developed through a range of modern weapons systems that, according to a 2008 Pentagon Report, have left even the United States worried. Given the long-standing India-China border dispute, China’s war preparations for winning “local wars under conditions of informationalization” together with its massive infrastructure development along the border, have certainly given it a definite military advantage.

At the same time, the sharpening of Pakistan’s armoury, especially with the help of US military aid, is no less worrying. Since 9/11, Pakistan has received more than US $10 billion worth of military assistance from the United States. Such assistance, which includes F-16 fighter aircraft, air-to-air missiles, cluster bombs, air defence radars and surveillance technologies, has direct security implications for India, since it narrows the advantage in conventional warfare that has been in India’s favour.

Given the above imperatives and the moderate nature of India’s defence spending, the question arises as to how much India should spend on defence. Though an answer lies in a complex set of issues ranging from the nature of threats, the fiscal health of the government and the kind of diplomacy it chooses to pursue, yet some statistical references can be drawn from other countries that are devoted to building or have attained world-class military capability.

While the United States, with a military budget (for Fiscal Year 2009) of more than $700 billion and a share of nearly 50 per cent of global military expenditure, remains the largest military spender in modern times, India’s defence budget estimated roughly at $26.5 billion for 2008-09 constitutes a mere two per cent of the global total. In terms of proportion of economic resources devoted to defence, India’s latest defence budget, which accounts for 1.99 per cent of expected GDP in the coming Fiscal Year, is less than the global average of around 2.5 per cent, and lags behind America’s 4.1 per cent and Pakistan’s 3.5 per cent (Figure-2). In absolute terms, India’s defence spending, ranked 10th in the list of major spenders in the world, constitutes a fraction of the American military budget and less than half of China’s ‘under-reported’ but official defence budget of $57.22 billion for 2008.

Figure-2
Military Expenditure as percentage of GDP

Source: SIPRI Yearbook 2007 for US, Pakistan and World; CIA for China; and DSE and RBI for India

Given the higher proportion of economic resources being devoted to defence in these countries, should India raise its defence allocation, say, to 3 per cent of GDP? The answer lies in the adequacy of the present budget to meet the country’s security requirements. As the evidence shows, the proportion of financial allocations made available to the defence establishment vis-à-vis its demand has increased to nearly 95 per cent in recent years, even though its share in GDP has decreased significantly in the same period (Figure-3). This indicates that there is hardly any shortage of funds to meet the defence establishment’s financial requirements irrespective of its share in GDP. In any case, the fixing of defence allocation to a certain portion of GDP is not theoretically a sound proposition, given the volatilities in economic growth rates and threat perceptions in the long run. What is more important is that the security requirements, which ultimately get translated into the annual defence budget, need to be adequately financed.

Figure-3
India’s Defence Budget as percentage of GDP

Source: CSO and RBI for GDP figures; DSE for Defence figures.

A close look at the formulation of the Indian defence budget, however, reveals little evidence of the country’s security concerns being properly addressed or financed. The annual defence budget, which follows from the Defence Capability Plan, 15-year Long Term Integrated Perspective Plan, 5-year Services Capital Acquisition Plan and Annual Acquisition Plan, is handicapped in terms of catering to the true security needs of the country because of the poor formulation and execution of, and inordinate delays in, planning. In other words, the security needs of the country are poorly reflected in the budget, and the capability requirements of the Armed Forces either get delayed or come to possess a short shelf-life. As a result, the Armed Forces are under-prepared to meet any worsening in the security scenario as well as technological upgrades by adversaries.

Another major problem in defence management, as reflected time and again in successive budgets, is the inability of the defence establishment to fully utilise the allocated funds, especially those meant for the modernisation of the country’s security infrastructure. Though the modernisation expenditure, credited under the ‘capital expenditure’ of the budget, has increased considerably from nearly 25 per cent in 2000-01 to over 45 per cent in 2008-09, the problem of timely utilisation of allotted resources continues to haunt the defence Services (Figure-4). As the latest budget reveals, out of Rs. 41,922 crores earmarked for ‘capital expenditure’ for 2007-08, Rs. 4412 crores, or over 10 per cent, remained unutilised. These unutilised funds, which mean opportunities lost or delayed in acquiring needed capability, have become a regular feature despite reforms in the acquisition structures/procedures.

Figure-4
Under-utilisation of Capital Expenditure
(In percentage)

Source: DSE and Union Budget, various years

An examination of the capital acquisition structure/procedure reveals several weaknesses in the system: poor planning; deficiency in formulation of qualitative requirements; lack of motivation for indigenisation efforts; single-vendor approach towards selection of weapon systems; poor human resource and information management; ‘large number of submission and approval points’; and ‘multiple agencies with dispersed centres of accountability’. The cumulative effect of all this is a gap in the capabilities sought by the Armed Forces; under-optimisation of the huge resources spent over the years; and a poor self-reliance index.

With the above deficiencies, the Indian acquisition system defies the best international practices prevalent in counties such as France, the UK and Australia. In contrast to the Indian system, the acquisition process in these countries is undertaken by an integrated body encompassing all the stakeholders – Armed Forces, Industry, R&D organisation, quality assurance organisation, civilian bureaucrats and other skilled workforce. This integrated body is responsible for all acquisition functions, right from the planning level to the disposal of equipment, and thus owns the responsibility of the whole life-cycle process of any equipment or system. The advantage of this integrated body lies in its single-point accountability to provide timely solutions to the Armed Forces’ requirements and, in the process, it provides the best value for money and also a thrust towards self-reliance. Keeping the above merits of the integrated acquisition organisation in mind, India could possibly adopt a similar institutional arrangement for expediting its acquisition process.

As regards self-reliance in critical military technology and production of advanced weapons systems, India, despite decades of effort, has remained import-dependent. The poor self-reliance index of 30 to 35 per cent against the target of 70 per cent by the end of 10th Plan testifies to this fact. Inadequate budgetary provision for defence research and development (R&D) is the major reason behind India’s poor defence industrial production and heavy outflow of financial resources to foreign suppliers. Overdependence on foreign suppliers not only has its costs and industrial disadvantages but also provides opportunities for corruption and delays in procurement.

The present allocation of Rs. 6,486.35 crores for defence R&D constitutes a mere 6.1 per cent of the defence budget. In contrast, major military powers spend a much higher proportion of their budgets on military R&D. For instance, the United States spends around 16 per cent of its defence budget on R&D. American dominance in military technology and production of sophisticated weapons systems is the result of higher allocation, concerted efforts in the right direction and involvement of industries in research activities. In India, almost the entire defence R&D activity is undertaken by the DRDO (Defence Research and Development Organisation), with little budgetary or technological support from the defence industry, which largely comprises of state-owned Ordnance Factories and Defence Public Sector Undertakings (DPSUs). The private sector, which is a key contributor to civilian technology and a key driver of economic growth since liberalisation began in the early nineties, is still kept out from contributing to military technological advancement.

The absence of R&D efforts by the defence industry has forced the DRDO to concentrate on every aspect of military technology, many of which could be undertaken by the industry itself. As a result, a very small proportion – 8 to 10 per cent of R&D budget – is percolated down for fundamental research. If India wants to be self-reliant in critical military technology and defence production, it needs to enhance its R&D spending. At the same time, increased allocations need to be channelled in the proper direction, and industry, including in the private sector, needs to be engaged in R&D activities so as to make DRDO focus on key and critical technologies.

Considering its economic and security imperatives, India’s defence spending is not only moderate but also fails to capture the true security needs of the nation. The defence budget, because of the problems in the acquisition system, is constrained to translate budgetary resources into required military capability in the given time and at optimal cost. To augment defence spending, what India needs is an efficient defence planning mechanism, backed by an integrated acquisition organisation. Also, given its poor self-reliance index, India needs to enhance R&D spending. Enhanced budgetary allocations should be channelled in the right direction, with the industry (including private sector) taking a lead in technology development.

Ongoing protests in Tibet, coinciding with the commemoration of the 49th anniversary of the 1959 March Uprising, was not unexpected given that China is only a few months away from the Beijing Olympics. The hosting of the Olympics is looked upon as China’s formal arrival as a great power and as an event that heralds its potential emergence as a superpower in the years to come. Consequently, the Chinese government has been well prepared to confront any untoward developments that could tarnish its image as a responsible global power. But what makes the Tibetan protests, the biggest in twenty years, quite startling is that it could be organised under the repressive communist regime with its well-established coercive mechanisms to curb resistance, or what it calls anti-China activities. The protests indeed indicate the failure of China’s economic policy in Tibet, which has focused primarily on creating prosperity in order to mitigate separatism. In other words, the protest exposes the ‘colonising’ nature of China’s Westward Development Project’ and validates the Tibetan claim that economic policies and projects introduced in Tibet were not meant for the development of the 85 per cent of rural Tibetans but to facilitate China’s strategic and defence requirements. Nonetheless, the ongoing protests are not going to pose any significant challenge to China, not only because of its enormous economic and military strength, but more so because the Tibetan movement is fragmented.

The Tibetan movement, which started in the 1950s with the goal of independence and self-determination, got diluted in the 1980s when the Dalai Lama scaled down his demands to ‘genuine autonomy’. Genuine autonomy, according to the Dalai Lama, is the ‘Middle-Way Approach’ and it actually meant accepting Tibet to be a part of China. The Middle-Way Approach, as defined by the Dalai Lama, is “a non-partisan and moderate position that safeguards the vital interests of all concerned parties — for Tibetans: the protection and preservation of their culture, religion and national identity; for the Chinese: the security and territorial integrity of the motherland; and for neighbours and other third parties: peaceful borders and international relations.” His call for ‘genuine autonomy’ and not independence has, in fact, weakened the movement from 1988 onwards, when officially in the Strasbourg Proposal autonomy replaced independence as the goal of the Tibetan movement. The Dalai Lama’s conciliatory stand has emboldened China’s Tibet policy, which is based on its nationalistic project of greater Hanisation of all minority provinces and submergence of all minority identities within the larger Han identity.

While the Dalai Lama has been advocating ‘genuine autonomy’, there is quite a large section of Tibetans, particularly Tibetan non-governmental organisations (NGOs) who are clearly dismayed with his conciliatory stand and instead advocate the goal of complete independence for Tibet. Among NGOs, the only exception in this regard is the Tibetan Women Association (TWA), which supports the ‘middle path approach’. The rest, including the most radical and the largest among the Tibetan diaspora – the Tibetan Youth Congress (TYC) – has laid down clear aims, with the primary objective being total independence of Tibet even at the cost of one’s life. The TYC, founded in 1970, has 83 regional branches in India, Nepal, Bhutan, Norway, Canada, France, Japan, Taiwan, Australia and Switzerland. India alone has 52 branches. In keeping with the tradition of non-violence, it launches campaigns from time to time, such as the ‘Boycott Made in China’ campaign launched in December 2002. The TYC runs a journal called Rangzen, which means independence.

Yet another significant NGO is the Gu-Chu-Sum Movement, an ex-political prisoners’ association. Gu, chu and sum are Tibetan numbers 9, 10, 3, which stand for the three months of massive pro-independence uprisings crushed in Lhasa, i.e. September 1987 (9), October 1987 (10) and March 1988 (3). It publishes an annual called Tibetan Envoy and co-ordinates events such as peace marches and publicity campaigns with other NGOs such as the National Democratic Party of Tibet (NDPT) and Students for a Free Tibet (SFT). These NGOs have a tendency to adopt violent methods if required. While they do not abide by the Dalai Lama’s middle-way approach, they also do not command leadership of the Tibetan movement, since all Tibetans rally behind the Dalai Lama who is the spiritual leader as well as the face of Tibetan resistance and Tibetan identity. Tibetans know that without the Dalai Lama their movement would fizzle out or alternately become violent leading to loss of international support. Therefore, even those Tibetan officials who are part of the Tibetan Exiled government based in Dharamsala and who are quite disillusioned with the Dalai Lama’s demand ‘genuine autonomy’, stand by the Dalai Lama.

Tibetans themselves are thus divided in the goal they seek. If the goal of independence had remained steadfast, it would have sufficed to challenge China’s might. But today’s Tibetan resistance movement is merely a matter of internal dissent for authoritarian China, and it has adequate coercive structures to muzzle the movement.

While the Dalai Lama has stuck to his conciliatory gesture of genuine autonomy, his latest position of not boycotting the Olympics is even more perplexing. Of course, the Dalai Lama would not achieve anything significant by calling for a boycott that is unlikely to yield any significant result, given China’s economic might and international standing. Nevertheless, a boycott call would have a symbolic value from the perspective of human rights. In fact, the Tibetan movement has for a long time latched onto the human rights dimension, which, though, has weakened the movement by diverting it from the goal of independence. Nonetheless, it has indeed helped in gaining considerable international attention and has given a degree of legitimacy to the Tibetan movement. We should note here that China was denied the 2000 Olympics on grounds of poor human rights record. From this perspective, the Dalai Lama’s refusal to boycott the Beijing Olympics goes against the long-standing struggle for human rights in Tibet. Even though he has condemned violent acts by Tibetans, the Dalai Lama is still disparaged as a “splittist” and a “liar” by Chinese authorities. Beijing’s long term strategy is to simply bide time till the Dalai Lama is alive, after which it knows that Tibetan resistance would suffer without the stature of, and the respect commanded by, the Dalai Lama. And it would further hamper the movement by planting its own Dalai Lama, as it has done in the case of the Panchen Lama.

The ongoing uprising is thus likely to go down in the annals of history as yet another failed Tibetan resistance movement that only fuelled a further exodus of Tibetans. In coming years, the cause of Tibet is likely to survive only among the Tibetan Diaspora, even as the roof of the world is slowly and inexorably transformed into Chinese land.

In a statement on February 28, 2008, the Financial Action Task Force (FATF) voiced concern about the existing deficiencies in Pakistan’s counter terrorist financing and anti-money laundering system. While acknowledging some progress, the FATF noted that the shortcomings in Pakistan’s national legal framework constituted a money laundering/terrorist financing vulnerability in the international financial system. The statement also urged Pakistan to continue its efforts to improve its anti-money laundering/counter terrorist financing laws to come into closer compliance with international standards and to work closely with the Asia Pacific Group to achieve this. This castigation of Pakistan’s role as the fountain head of terrorism has gone largely unreported in the Indian media.

The FATF was established in 1989 at the Paris Summit of leaders of the Group of Seven Nations and the President of the European Commission. Its original mandate was to co-ordinate and spearhead an international campaign against criminal money laundering. In October 2001, its responsibilities were widened to include the fight against terrorist financing. It adopted Eight Special Recommendations to this end, which set out the key legislative and regulatory steps that countries need to put in place to stop the financing of terrorism. Since then, the FATF has become the world’s most important standard setter in the fight against terrorist financing, and has worked to promote international awareness and co-operation in this regard. Later, realising that cash smuggling was one of the major tools of terrorist financing, Special Recommendation IX on cash couriers was issued in October 2004. In addition, action was taken to amend the 1996 version of the Forty Recommendations on money laundering, which was adopted in June 2003 after a protracted process of consultation. The FATF’s Special Recommendations on Terrorist Financing, combined with its 40 Recommendations on money laundering, set out the basic framework for detecting, preventing and suppressing the financing of terrorism and terrorist acts.

The FATF is currently made up of 32 countries and territories, and two regional organisations. It also works in close co-operation with a number of international and regional bodies involved in combating money laundering and terrorist financing. The criterion for membership in FATF is fairly stringent. To qualify, a country must be strategically important, be a full and active member of a relevant FATF-style Regional Body and effectively criminalise money laundering and terrorist financing. It should also make it mandatory for financial institutions to identify their customers, to keep customer records and to report suspicious transactions and establish an effective Financial Intelligence Unit, so that the country is assessed to be compliant with international standards. For many years, membership was restricted to the 26 principal industrialised countries. However, in line with its new strategy for increasing the effectiveness of international anti-money laundering efforts, the FATF decided in 1999 to expand its membership to a limited number of strategically important countries who can play a major role. Argentina, Brazil and Mexico were admitted as members in 2000, followed by South Africa and Russia in 2003. China was inducted as a member recently. India presently has an observer status, though the FATF wants India to be an active member as is evident from the statement of the British Prime Minister during his recent visit to India.

It will be in India’s interest to become a full member of FATF at the earliest so as to be able to bring into focus terrorist financing issues that are of concern and relevance to it. One such issue is declining attention to state sponsored terrorism and its funding. In the 1970s and 1980s, most terrorist groups were sponsored by sympathetic governments. The US government issued its first list of “State-Sponsors of Terrorism” in 1979, and since 1993 seven countries were listed every year as state sponsors of terrorism. At present this list has shrunk to five countries, namely Cuba, Iran, North Korea, Sudan and Syria.

While the list may have largely remained unchanged over the years, it does not represent an accurate representation of the problem due to the non-inclusion of some other countries for various reasons. For example, Kashmiri terrorist groups and the Taliban fighting in Afghanistan are largely funded by the ISI. But Pakistan has never been added to the list.

The FATF is operating on the valid premise that there has been a decrease in the number of countries supporting terrorist groups because of the changed geo-strategic environment and the emergence of global terrorist groups that no longer rely on states for support. Accordingly, the response of the international community to countering terrorist financing is based on the premise that a majority of terrorist organisations are non-state actors. Thus the onus of choking their finances has been placed on the countries where they operate from.

This response does not address the problem of state sponsorship, wherein terrorism is used as an instrument of state policy. India should endeavour to re-focus the attention of the international community on this issue and work towards developing more comprehensive counter measures that take into account the problems posed by state-sponsored terrorism

The recent Chinese Foreign Ministry statement expressing ‘unhappiness’ about Prime Minister Dr. Manmohan Singh’s visit to Arunachal Pradesh has generated a debate in India as to whether China is serious about resolving the disputed border. The statement has set back any possibility for an early and realistic settlement of the border dispute. A week after the verbal protest to the Indian mission in Beijing, Chinese Foreign Ministry spokesman Liu Jianchao stated in an official briefing on February 14: “regarding Mr. Singh’s visit to that area, we have expressed our concern. Our position (on the issue) is clear.”

This latest Chinese claim on Arunachal Pradesh clearly indicates that China is slowly hardening its negotiating position on the boundary dispute. It also highlights the fact that China no longer holds sacrosanct the settled principles for boundary demarcation agreed upon in 2005 – that “in reaching the boundary settlement, the two sides shall safeguard due interests of their settled populations in the border areas.” By this principle, the least that was expected of China is to accept Indian control over Arunachal Pradesh till both sides reach a final settlement. However, this provision was renounced as early as June 6, 2007 by Chinese Foreign Minister Yang Jiechi who stated that “mere presence” in populated areas would not affect China’s claims. In effect, Yang’s statement was a renunciation of the provision under Article VII of the April 2005 Agreement on the Political Parameters and Guiding Principles for the Settlement of the India-China Boundary Question.

The first of a series of hard line Chinese statements on Arunachal Pradesh was articulated at the official level as early as 1986 when Vice-Foreign Minister Liu Shuquing said that “some 90,000 square kilometres of Chinese territory” was under Indian occupation and that unless India “resolves this key to the overall situation” it would be impossible to reach a settlement. This was followed by Chinese incursions into the Sumdorong Chu Valley in Arunachal Pradesh, which overshadowed the 7th round of border talks in July 1986. Twenty years later, on November 20, 2006, this stance was reiterated by China’s Ambassador to India Sun Yuxi, when he said that “the whole of the state of Arunachal Pradesh is Chinese territory. And Tawang is only one of the places in it. We are claiming all of that. That is our position.”

It can be recalled that China did not disclose its official views openly either on the McMahon Line or on the frontier issue till it attacked India in 1962. An official briefing of India’s Ministry of External Affairs dated December 22, 1959 has suggested that “the Chinese representatives at the Simla Conference [1914] had been fully conscious of the boundary that had been settled between India and Tibet, and the Chinese government had not then or later raised any objection on McMahon line.” For instance, there was no official reaction from the Chinese authorities when Prime Minister Nehru declared on November 20, 1950 in the Indian Parliament that “the McMahon Line is our boundary…we will not allow anybody to come across that boundary.” Further, the Chinese government did not express its reservations about the frontiers during negotiations between the two countries on various occasions in 1951, 1952 and 1953 on trade and intercourse between Tibet and India. It was only during his visit to India in late 1956 that Chinese Premier Chou En-lai raised the issue of the McMahon Line and frontier areas at some length with Nehru. Expressing his unhappiness that “this line, established by British Imperialism, was not fair,” Chou said that “because of the friendly relations which existed between China and the countries, namely, India and Burma, the Chinese government should give recognition of this McMahon line…” Today, of course, this approach has been completely overturned and China says that it neither recognises Arunachal Pradesh as Indian territory nor the McMahon Line as the border.

During the 1962 War, China forcefully took control of Aksai Chin. Now, it treats Aksai Chin as history but has begun to assert claims over Arunachal Pradesh. Chinese today feel that the Eastern sector is the “most disputed area” of the three sectors of the Sino-Indian border.

Till not long ago, it appeared that China’s interest in Arunachal Pradesh was limited to Tawang, given the spiritual and cultural links between Tibetans and the people of this area. China has constantly reiterated that the sixth Dalai Lama hailed from Monyul area and that three parts of Tawang – Monyul, Loyul and lower Tsayul – were under Tibetan administrative and jurisdictional control. But from these select places the Chinese claim has gradually expanded to encompass the whole state today. Experts feel that this expansive Chinese interest may stem from a number of geo-political factors. Arunachal can serve as an “eastern gateway” from the Brahmaputra valley to China’s Yunnan province. Arunachal also offers a lot on the tourism and agricultural fronts. A further attraction is the state’s purportedly huge mineral deposits and its very real hydro-electric power potential. In addition, Arunachal also offers strategic advantages in terms of providing a base to gain contiguity with Bhutan along its eastern flank as well as permit access to the entire Southeast Asian market.

It has been argued that given these attractions the Chinese strategy is to include Arunachal Pradesh – or what they refer to as ‘Southern Tibet’ – within the framework of a “comprehensive border settlement programme”. Sujit Dutta, Senior Fellow at IDSA, notes that China has started making veiled references to the idea of a swap between Arunachal Pradesh and concessions in other undisclosed areas. This has resulted in a number of vague Chinese terms like “mutual understanding” “mutual accommodation and concessions” and “mutually acceptable adjustments”. China’s eventual goal thus appears to be one of territorial expansion with respect to Arunachal Pradesh. The protest over Dr. Manmohan Singh’s visit stems from this design.