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Budgetary Reforms: The Forgotten Agenda

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • August 02, 2022

    “Lack of money is the root of all evil”, said Mark Twain. This is certainly true of India’s defence budget and, if one may contextualise it, perennial lack of money for defence is also what often triggers the debate on budgetary reforms. For many analysts, these reforms are a means of addressing the Twainian evil. Somewhere in a corner of their hearts they nurture the hope that appropriate reforms will make more money available for spending. This seems quite unlikely, though.

    Looking at the extent of mismatch between the requirement projected by the Services and the funds allocated every year, the defence outlay will have to be doubled—a virtual impossibility, to meet the armed forces’ expectations. As the American cartoonist, humourist, and journalist, Frank McKinney Hubbard, better known as Kin Hubbard, famously said, “The safe way to double your money is to fold it once and put it in your pocket”. Only magic, and not reforms, can produce that result.

    But reforms are required as the budget can be an effective device to ensure optimum utilisation of the allocated resources for executing financially viable plans. Conceptually, achieving that objective calls for reforms at the intertwined levels: micro and macro.

    At the micro level, the structure of the Demands for Grant (DG) of the Ministry of Defence (MoD) merits a review, primarily to give an outcome-orientation to the defence budget. The term ‘structure’ refers to the way the overall defence budget is divided into four DGs and how the funds are then sub-divided into several ‘Major’, ‘Minor’, ‘Sub’ or ‘Detailed’ Budget Heads.

    Presently, the defence budget is divided into four DGs: Ministry of Defence (Civil), Defence Services (Revenue), Capital Outlay on Defence Services, and Defence Pensions. The Minor and Detailed Budget Heads within each of these DGs, especially the first three, are far too many to be captured here. Broadly speaking, the funds are earmarked for salaries, stores, transportation, maintenance works, miscellaneous expenditure, and various categories of capital expenditure that include acquisition of land and assorted defence equipment, and development of civil infrastructure.

    Thanks to this archaic structure, it is well-nigh impossible to evaluate the outcomes of the budgetary allocation. Consequently, the efficacy of defence outlay is generally evaluated through the prism of allocation and utilisation of funds, with very little institutionalised focus on the outcomes intended to be achieved from the annual budgetary outlay, the actual achievement at the end of the year, identification of the reasons for the mismatch between the goals and the achievement, and remedial or corrective action required to be taken. This needs to change.

    A half-hearted effort was made in the Union Budget for the Financial Year (FY) 2016–17 when the number of MoD’s DGs were reduced from eight to four, as enumerated above. It was claimed at the time that “With a view to provide [sic] a holistic picture of budgetary allocations and effective expenditure monitoring, some Demands for Grants in a Ministry have been merged into other Demand for Grants of the Ministry/Department”.1

    It was also claimed that, “For effective outcome oriented monitoring of implementation of programmes and schemes/projects and to ensure optimum utilization of resources, a comprehensive exercise to rationalize Plan and Non-Plan schemes of all Ministries and Departments has been undertaken. The existing programmes and schemes have been reorganized into outcome-based Umbrella programmes and schemes. This process would be carried forward in the coming years”2 .

    But there was no follow-up of the process, at least not in relation to the defence budget. On the contrary, the limited practice of factorising the Indian Navy’s capital budget into several outcome-oriented budget heads also seems to have been abandoned in the last two–three years. To illustrate, in the DG for Capital Outlay on Defence Services for the FY 2018–19, allocation made for several projects was indicated separately.

    In the said budget, specific allocations were made for Project 1135.6 (Talwar class frigates), Project Varsha, Air Defence Ships, VLF Project, Naval Academy Ezhimalai Project, Missile Technical Positions, Project Sea Bird Phase IIA, Construction of protective retaining Bund/Dry Dock, etc.3 At least in theory, this made it possible for the MoD to assess the outcome of the allocation made for these projects at the end of the year with reference to the targets set for that year.

    Instead of extending this practice to other areas of defence expenditure which lend themselves to outcome-oriented monitoring, even the above-mentioned budget sub-heads entirely vanished from the DG for the FY 2019–20.

    This outcome-oriented approach to structuring of the defence budget needs to be adopted in relation to every segment of the defence budget which lends itself to evaluation of outcomes, such as the allocation made for capital acquisitions. Adoption of this approach will require a relook at the existing scheme of budget heads which is outdated and serves little purpose in so far proper outcome-oriented classification of expenditure is concerned.

    These micro-level ‘reforms’ cannot, however, yield the desired results without an enabling broad framework and hard-nosed guidelines for defence budgeting. This macro-level reform would require the MoD, and more particularly the armed forces, to be more pragmatic, by aligning the process of budget formulation with the fiscal reality. It means that the annual budgetary projections must conform to the likely availability of funds and not be based on some self-serving assumptions about what the defence outlay ought to be.

    A lot of energy has been frittered away over the years in pursuit of fruitless or impractical ideas like pegging the defence budget at 3 per cent of the GDP, creation of a non-lapsable pool of funds for modernisation and taking defence pensions out of the ambit of defence budget. Some half-hearted attempts have also been made at containing the expenditure through outsourcing, manpower rationalisation, and indigenisation of defence production.

    There is some merit in exploring these options but there is no saying how much money can be saved through these means, and more importantly, whether the money so saved will be good enough to exorcise the Twainian evil of paucity of funds. According to the Fifteenth Finance Commission’s report, the defence outlay for the next three financial years is likely to fall short of the requirement by Rs 9,87,470 crore, of which Rs 5,27,491 crore will be under the capital segment that caters for the expenditure on modernisation.4 This gap cannot be bridged by any realistic hike in the defence budget or through the proposed Defence Modernisation Fund of Rs 1,38,354 crore.5

    Financially viable defence planning is required based on zero-based budgeting approach to estimate budgetary requirements. This will cut wasteful expenditure and compel the planners to look at more efficient ways of spending money, monitoring the expenditure, evaluating the outcomes, and taking corrective action. Sadly, this has not been the case with defence planning so far.

    Views expressed are of the author and do not necessarily reflect the views of the Manohar Parrrikar IDSA or of the Government of India.