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Need for a Resource Generation and Management Cell in Defence

Arvind Kadyan was on Deputation to Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • November 05, 2009

    In February 2009, the Government of India presented the interim budget in the background of the uncertainties prevailing in the world economy. Due to the changed security environment after the 26/11 terrorist attacks on Mumbai, higher capital expenditure was proposed for Defence. At that time the assumption was that the impact of the economic slowdown will be marginal on the Indian economy. Subsequently, the Government continued with the policy of increased public spending to boost demand and create infrastructure, and made higher provisions for socio-economic programmes in the regular budget for the year 2009-10 in July 2009. However, after the first quarter performance reports of different sectors of the economy started pouring in, it became evident that it will be difficult to match the GDP growth rate achieved during previous years. As per available indicators GDP is expected to grow at the rate of about 6 per cent during the current financial year, and thus there is likely to be shortage of revenue to meet the Government’s budgeted expenditure. As per Monthly Economic Report for September 2009 published by the Ministry of Finance, Tax Revenue1 (net to centre) during April to August 2009 declined by 14.8 per cent.2 The revenue deficit during the same period was higher by 58.4 per cent over the corresponding period last year. The fiscal deficit3 also increased by 56 per cent over the corresponding period. It is thus clear that the Government is likely to face difficulties in meeting the budgeted expenditure.

    Under these circumstances, the options before the Government in meeting the budgeted expenditure are:
    a) Reduce Expenditure.
    b) Deficit Financing.
    c) Increase Government Receipts and Recoveries.

    The Central Government has already issued instructions for a 10 per cent cut in non-plan expenditure. However, since this may not be sufficient other options also have to be explored. In the budget proposals for the year 2009-10, the option of deficit financing has already been utilized to the extent of 6.8 per cent of GDP and any further increase may lead to a high inflation rate. It is therefore incumbent upon all ministries and departments to see how they can increase non-tax revenue (receipts and recoveries), which is generally not given due attention by expenditure-oriented departments because revenue/receipt collection is considered to be the sole responsibility of departments like excise, customs, income tax, etc.

    In the Union Budget of 2009 -2010, an amount of Rs. 141,703 crores has been allocated for Defence, which is 13.88 per cent of the total budget outlay. The Ministry of Defence is one of the largest spenders of the central Government budget. However, Defence contributes only 0.44 per cent to Government revenue receipts. During 2009-10 the estimated defence receipts and recoveries have been projected as Rs. 3992 crores, which amounts to just 2.82 per cent of defence expenditure.

    The amount of Defence Receipts is very small when compared to expenditure. As a result there is hardly any talk or discussion on this topic. All attention of the authorities responsible for managing the defence budget is concentrated on issues relating to spending the defence budget. However, if one looks at the receipts from the overall point of view of the budget, then it becomes evident that an amount of Rs. 5000 to 10,000 crores actually does matter. In fact, for many Government schemes like National Rural Health Mission (Rs. 12,070 crores), Pradhan Mantri Gram Sadak Yojan (Rs. 12,000 crores), Indira Awas Yojna (Rs. 8,800 crores), Jawaharlal Nehru National Urban Renewal Mission (Rs. 12,887 crores), the budgetary allocation varies between Rs. 8,000 and Rs. 12,000 crores. Thus, if Defence receipts could be increased to between Rs. 7,000 and 8000 crores, it will facilitate funding of some socio-economic development schemes of the Government.

    Under the Defence Budget, there are five Major heads of Revenue Receipts –Army-0076, Navy-0077, Air Force-0078, Ordnance Factories-0079 and DRDO-0080. The broad areas of Receipts under the major heads of accounting have been categorized as under:

    • Army - Miscellaneous Receipts from Army, Auxiliary Forces, Civilians, Receipt from Works, Military Farms’, Receipts from Stores’, Receipts from Services and Supplies, Contributions for ECHS, etc.
    • Navy – Receipts from works, Receipts from Services and Supplies, Stores, Joint Staff and other Receipts.
    • Air Force – Receipts from Works, Receipts states and central, Stores and Other Receipts
    • Defence Ordnance Factories – Sale of Surplus and Obsolete, other Receipts.
    • DRDO- Other Receipts.

    The Government has been emphasizing on resource generation to supplement budgetary support. As per extant instructions on generation of additional funds/resources, the same can be utilized by the Ministry/Department concerned to finance its important activities. Instructions in this regard were issued long back vide Additional Secretary (Bud.), ID No. S-554/ AS (B)/91 dated October 31, 1991 for the utilization of additional/enhanced receipts/accrual (over and above that assumed in the budget estimates for the financial year) from disposal of surplus/obsolete assets (stores, land, etc.) to finance higher defence expenditure. As per guidelines for resource generation, the unutilized additional funds will lapse to the Government account at the end of the financial year. Consequently, the DRDO took steps to generate some additional funds. But other departments of the Ministry of Defence as well as the Services have not made any significant and planned attempt to generate additional funds.

    Detailed guidelines and timelines have been fixed for the preparation of the Defence Budget. The field units/formations are required to submit their fund requirements to their respective Service Headquarters. The financial planning directorates compile the requirements of revenue and capital budget on the basis of inputs received from the different directorates of the Service Headquarters. However, there are no guidelines for forecasting the receipts. It only shows that this aspect is not getting required attention. And the reason is obvious as already mentioned, namely, the amount of receipts is concerned insignificant when compared to the expenditure budget. Under the present system the field units/formations have no target to collect and deposit receipts. As a result a lot of receipts are not collected to the full extent. On the face of it, the amount of such receipts is small but considering the number and spread of defence installations, the total amount could be significant and these receipts could be collected without any additional cost.

    There has been no dearth of instances of loss of receipts/recoveries highlighted by oversight agencies from time to time. There are a number of areas where defence receipts could be increased, namely, receipts from works - rent and electricity and water charges etc., defence buildings being used for commercial purposes, timely disposal of surplus/obsolete/unserviceable stores through proper assessment of rates/quantity, timely revision of rates of recovery, use of surplus defence land and Military Farms land, cost of training personnel from other departments/Governments, recovery from suppliers against damaged stores and delay in supplying the stores, dock hire charges, recoveries from foreign governments and civil air lines for the use of Air Force airfields, royalty with respect to technologies developed by DRDO, timely action for recovery of dues from other Government departments, and timely action for realization of dues from individuals for utilizing the facilities of Services. In addition, there is a need to have a system to examine the rates of recovery from personnel to ensure that the same have been fixed realistically. The ordnance factories can also generate additional resources by developing products for the civil sector or allowing its excess capacity to be used by the private sector.

    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. It may be useful to create a separate cell in Financial Planning Directorates with the nomenclature ‘Resource Generation and Management Cell’ in headquarters and at the level of lower formations with the responsibility of framing policy guidelines in this regard and monitor receipts and recoveries. These cells may identify specific areas where defence receipts could be increased. Considering the size and spread of the services and given proper planning, it may not be difficult to achieve a target of Rs. 7,000 to 8,000 crores in defence receipts during the next three years, especially given that there are many areas relating to Works and Stores where receipts can be doubled/tripled with little extra effort. Further, there is a need to make suitable changes in the classification of receipts and accounting procedure, which may facilitate the monitoring of performance of each unit/formation in generating additional funds/resources.

    • 1. Tax revenue accounts for about two-thirds of total receipts of the union government budget for the year 2009-10.
    • 2. Revenue deficit refers to the excess of revenue expenditure over revenue receipts
    • 3. Fiscal deficit is the difference between revenue receipts plus certain non-debt capital receipts and total expenditure including loans to Public Enterprises, States and Union Territories, foreign governments, and net of repayments.