March 24, 2008 ☼ budget ☼ defence ☼ defence expenditure ☼ finance ☼ India ☼ military ☼ modernisation ☼ public finance ☼ Security
This is an archived blog post from The Acorn.
That the procurement process is holding back defence modernisation is relatively well-known. In today’s op-ed in Mint, Sushant and I throw more light on another aspect: only a small fraction of India’s defence budget is available for modernisation.
Effective use of money by the Armed Forces needs an overhaul of the budgeting and procurement processes
As expected, the defence budget for 2008-09 has crossed the Rs1 trillion mark. After adjusting for inflation, this constitutes an increase of only 5%. For the first time since the early 1960s, India’s defence outlay has declined to less than 2% of the gross domestic product (GDP)—a sign of the chasm between the rhetoric and reality on national security…
India’s transformation into a middle-income country requires its Armed Forces to be more capital-intensive. Yet only around 10% of the defence budget is actually available for modernization, compared with around 30-40% in developed countries.
…nearly two-thirds of the amount for capital acquisitions from foreign suppliers, too, is pledged for assured and received deliveries. Payments for major defence purchases from foreign vendors are spread over a number of years. This year, India will pay instalments for earlier purchases such as the Sukhoi aircraft, the Gorshkov aircraft carrier, T-90 tanks, Talwar-class frigates, Scorpene submarines and for many other smaller contracts. Thus, only Rs8,000-9,000 crore ($2 billion) is available for new acquisitions this year.
The initial down payment on new acquisitions is generally around one-fourth of the total cost. So, the defence ministry can theoretically sign contracts worth $8 billion for new equipment this year. Capital allocations for coming years will then have to cater for instalments of these acquisitions. Despite returning more than Rs4,200 crore, the ministry will be asking for additional capital allocations this year; it justifiably believes that allocations already made will be largely used up by earlier contracts.
Defence modernization is based on a long-term integrated procurement plan (LTIPP) of the defence services. LTIPP for 2007-22, spanning the 11th, 12th and 13th Plans, is scheduled to be approved by the Defence Acquisition Council by October 2009. Going by the past record, it doesn’t signify much. The 10th defence plan was never approved by the finance ministry, and two years into the 11th Plan, it also hasn’t been approved so far. Instead, the finance minister has agreed to an annual increase of 10% during the 11th Plan. [Mint]
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