February 25, 2008armybudgetdefenceEconomyfiscal disciplineIndialiberalisationmilitaryMintnational securityop-edPublic PolicySecurity

My op-ed in Mint: Clarity in defence expenditure

Time to stop putting the defence rupee in so many different pigeonholes

This is an archived blog post from The Acorn.

In our op-ed in Mint, Sushant and I argue that to convert defence outlays into outcomes, it is necessary to consolidate defence expenditure under one head.

Read on…

The guns and butter trade-off

It’s time for India to review its outdated practice of obfuscating the true defence expenditure

Finance minister P. Chidambaram’s Budget speech on 29 February will be more than two hours long, but an expense item of more than Rs1 trillion will be covered in a couple of minutes. Defence expenditure is the second largest item of non-planned expenditure. It was covered in 34 words last year.

The budgeted defence expenditure for the fiscal year 2007-08 was Rs96,000 crore. The defence minister has asked for more in the coming year’s Budget. Going by the finance ministry’s estimate for an 8-10% annual increase in the defence budget during the 11th Plan, the Rs1 trillion mark is certain to be crossed in the coming Budget. However, this would merely be a statistical landmark.

In fact, the Rs1 trillion mark had already been crossed much earlier, as defence-related expenses are budgeted under other heads. Among these, defence pensions alone (Rs14,650 crore) amount to 15% of the official defence budget. In addition, more than Rs2,000 crore is budgeted for the Coast Guard, a defence-affiliated unit; and regular combat units such as the Jammu and Kashmir Light Infantry which, the budget notes, categorized as a full-fledged Regiment of Indian Army having 15 battalions apart from a Regimental Centre”.

Also excluded are Rs975 crore for construction of border roads and works; Rs3,186 crore on defence research and development; part of the Rs4,500 crore budget of the department of atomic energy and Rs4,000 crore for the department of space; and various other heads which are not so evident. Then there is the defence component of the rupee debt on rouble account payable to Russia, at least Rs25,000 crore of which is not budgeted as defence expenditure.

The aggregate defence expenditure in 2007-08 can, thus, be estimated at being more than Rs1.25 trillion, approximately 2.8% of the gross domestic product (GDP) and around 17% of total government spending.

The trend of under-representing true defence spending began in the 1970s and gathered pace in the 1980s. From independence till 1969, finance ministers began their enumeration of government expenditures by dividing these into defence and civil. This transparency was dispensed with in 1970, when prime minister Indira Gandhi, presenting the budget as finance minister, avoided any mention of defence expenditure. In the 1980s, the external conditions—a worsening foreign exchange position and the need for external borrowing—forced the government to disguise defence spending in order to create the correct optics.

But circumstances have changed much since then. India is already a $1 trillion economy and is today a net foreign aid giver. It has also made remarkable strides in setting up institutions that ensure transparency and good governance in various sectors. It is, therefore, timely for India to review its outdated practice of obfuscating the true defence expenditure.

Correct categorization and transparency are essential in the context of aggregate fiscal discipline and accountability. They are also necessary for informed defence planning. For instance, if the true defence expenditure is taken into account, the capital: revenue expenditure ratio would be much lower than the official figure of 44%. In other words, less is being spent on the modernization of the Armed Forces than initially meets the eye.

After the last budget, the parliamentary standing committee on defence asked the defence ministry to take up the matter” with the finance ministry for providing a minimum 3% of GDP for defence services every year. While pegging it to GDP provides a convenient gauge, it is important to note that defence expenditure is linked to the military balance vis-á-vis key adversaries and geopolitical considerations beyond that. On the one hand, the need for India to improve its power projection capacity in the region suggests an open-ended” approach to defence allocations. On the other, there is a plausible argument that the magic figure of 3% represents an affordable balance in the trade-off between guns and butter.

There are merits to either argument; but the lack of clarity in how the defence rupee is spent, and whether it is optimized in its total context, makes it impossible for outside analysts to make informed conclusions. It may well be that India needs to increase its defence expenditure, or as is more likely, increase the fraction spent on modernization. Without transparency, however, it is hard to tell.

Military issues, by their nature, suffer from considerable information asymmetries. Good budgeting practices can help reduce them. Further, the singular challenge of contemporary governance in India is to translate outlays into outcomes. In the case of defence, when outlays themselves are unclear and are channelled through multiple bureaucracies, outcomes will invariably suffer.

The defence budget is a signalling device, a statement of intent and a tool of public diplomacy. It not only assures citizens of their security but also deters potential adversaries through a show of strength. The anomalous defence budgeting, though, is as much a legacy of our weak economic past as it is of an outdated style of governance. It is time to make way for transparency.

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