July 12, 2009budgetdefence budgetdiplomatsEconomyfiscal policyForeign Affairsforeign aidmilitary modernisationSecurity

My op-ed in Outlook: The buck yes, but where’s the bang

Union Budget 2009 and what it means for foreign affairs and defence

This is an archived blog post from The Acorn.

In the July 20th issue of Outlook magazine I point out that the Budget has the good, the bad and the ugly for strategic affairs. An edited version of the following appeared in print.

First the good: the UPA government used the Union Budget to strengthen India’s leverage in Sri Lanka by setting aside Rs 500 crore for the rehabilitation of the Tamils displaced by war. It has increased the foreign aid outlay for Nepal to Rs 238 crore, set aside Rs 125 crores for Mongolia and increased outlays for African and Eurasian countries by various amounts. This is in addition to sustaining the massive assistance to Bhutan (Rs 961 crore) and Afghanistan (Rs 442 crore). The foreign ministry’s overall budget has been increase by 24%, which should help Indian missions raise the game in foreign capitals.

Similarly, the increased outlays in several areas under broad rubric of national security—including defence, police, paramilitary forces, space and atomic energy—should be useful in securing the nation in an increasingly volatile geopolitical environment. The allocation of between 2% to 3% of GDP (depending on how defence expenditure is defined) even while massively expanding social sector expenditure programmes assigns substantial resources for defence while sending a signal of the size and strength of the Indian economy.

India, in its own conservative way, appears to be strengthening its diplomatic and military capacity in line with its status as an emerging power.

But only partly, because there is the bad.

Merely increasing the foreign ministry’s budget cannot substitute for the relatively puny size of the Indian diplomatic corps. In a recent study on India’s foreign policy software”, American scholar Daniel Markey notes that India has only around 670 professional diplomats. Brazil, in comparison, has around twice that number, as does China. Western countries have several times that many. Yet, profound changes in the global environment and India’s own expanding interests have placed an ever increasing number of items on the foreign ministry’s agenda. It is unclear whether the government realises that it urgently needs to strengthen the capacity of the foreign service.

The budget does, however, project huge fiscal deficits—going up to 6.8% of GDP in 2010-11. Mukul Asher points out that the lack of focus on fiscal consolidation will severely constrain future fiscal flexibility” and affect India’s urgent external and internal security needs as a rising power.” After interest payments, salaries, pensions and other statutory expenditures, Asher argues, very little will be left to meet changing priorities.” In other words, the UPA government has chosen to over-stretch itself fiscally at a time of unprecedented geopolitical and geoeconomic risks.

The truly ugly part lies in the core defence budget. The defence ministry’s outlays have, no doubt, increased by 34% to Rs 1,41,703 crore. However, this represents an auto-pilot” increase rather than any conscious, determined attempt at military modernisation. Last year, like every year in the last decade, the defence ministry was unable to fully spend the capital budget allocated to it—surrendering Rs 7000 crore, or almost 15% of the capital outlay back to the treasury. India’s defence outlays, in any case, are skewed towards revenue expenditure, a bulk of which is paid on higher salaries. This is all very well, but budget does not offer any indication that the armed forces will improve their teeth-to-tail ratios.

Meanwhile there is more scandal than there is serious procurement. For instance, the last time the Indian army bought purchased howitzers was during the Rajiv Gandhi government in the 1980s. Its recent attempt to procure 400 new ones has run aground due to, well, another scandal. The byzantine procurement procedures that lie at the root of these scandals could have been simplified: the UPA government must understand that the more complex the procurement process, the more the need for middlemen.

There has been a tendency to confuse procurement of big ticket items with the modernisation of the armed forces. There has been no long-term strategic review of India’s security environment and no overall defence strategy has been articulated. The process of modernisation can only start with a fundamental review of the structure, composition, role, service conditions and pay structure in the light of the twenty-first century strategic environment.

Now, the Union budget cannot take the place of a Blue Ribbon Commission that is necessary to set the ball rolling on modernisation. But it can be used as an instrument to improve transparency, change incentives and bring about a greater efficiency in the way the defence rupee is spent. By encouraging a faster shift to accrual budgeting, the finance ministry can galvanise the defence ministry into preparing the balance sheet.

For the good outlays to translate into good outcomes, the bad and the ugly have to be urgently confronted. The budget does not suggest that the UPA government has committed itself to the task.

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