Whatever the final outcome of the dialogue between the defence ministry and the finance ministry on how much money the government can spare for defex this fiscal, Mr Sinha must get away from the standard formulation of not shying away from providing funding as and when required. Mr Sinha has been quoted as saying that all defence requirements would be taken care of in the budget. Presenting his budget after the Kargil war he had said that he would be willing to spare more funds for defence when needed.
This ad hocism in defence spending must end. The armed forces can acquire an insatiable appetite for funds and given the extant security scenario, a legitimate case can be made for a steep hike. Quite understandably, countries exporting arms would encourage us to buy more weapons. Increased arms sales can help revive economies like the United States or Russia. However, there is no such direct relationship between increased defence spending and industrial growth in India given the current import-dependency in armaments.
If increased defex goes to generate demand for domestic defence industries and services then surely this would be one way of pump priming. However, if much of the expenditure is to go on imported defence equipment, which India can certainly afford at this point given our forex reserves, its multiplier effect on national income will be insignificant. The challenge for the finance minister, indeed for national security and economic planners, is to be able to address this demand within the framework of a macroeconomic strategy wherein defex acts as a growth stimulant rather than a growth retarder.
Last year Mr Sinha made provisions for a significant increase in defence spending but the Tehelka expose and the musical chairs in Raksha Mantralaya meant that what was budgeted for also remains unspent. Once again this year, with heightened tension between India and Pakistan and the full mobilisation of the armed forces after the December 13 attack on the Indian Parliament, the defence ministry will make fresh demands for a hike in the defence budget.
There is undoubtedly a case for an increase in Indias defence budget. The armed forces are in desperate need of modern equipment and increased firepower. The case has been made convincingly by several defence experts in the past five years. However, almost every single specialist and informed analyst has linked the need to hike the defence budget to the prior requirement of a fundamental reform in defence expenditure planning and procedures. The bigger problem facing the defence budget is not one of fiscal resources but of the management of those resources.
First and foremost, there is a need for a three to five year defence plan, with at least a three-year armaments procurement plan and a rolling budget. Second, there is a need for a reform and modernisation strategy that will underpin the increased spending. Experts have suggested that the structure of defence spending has to be rationalised, diverting funds from salaries to equipment and modernisation. A defence modernisation plan, based on a medium term security threat perception, is also required.
Third, procedures for arms procurement have to be made more transparent and efficient. Sound ideas on this have been put forth both by various experts, most recently the Kargil Review Committee, and by the forces themselves. After the Tehelka expose, defence minister Jaswant Singh took an important and positive initiative in recruiting the services of Mr Arun Singh to oversee arms procurement. Regrettably, Mr Singh was allowed to once again withdraw from public life and return to his self re-imposed exile in the hills.
A medium term plan, a reform of procedures, a re-ordering of expenditure priorities and, above all, a strategic defence review that provides the framework for spending decisions, are all needed and must precede any major step-up in defence expenditure. In the absence of such a strategy, mere fiscal enhancement will not address the long term challenge Indias armed forces face. Indeed, cynics may well say that defence minister George Fernandes is trying to mop up funds to pay for the burgeoning bill of keeping the troops on high alert along the western border, on the one hand, and to pay for the shopping list provided by various governments, including Israel, France, Germany, Britain, the United States and Russia.
There would be the added temptation of stepping up defex at a time when Pakistan is doubly constrained from doing so first, on account of its parlous fiscal situation and second, on account of aid conditionality imposed by the International Monetary Fund and the World Bank. India was under similar conditionality-induced fiscal discipline in defence spending in the period 1991-94, but is now better placed to make big time purchases, with a forex kitty of nearly $50 billion.
Notwithstanding the hike in defence spending after Kargil, India is not a big time spender on defence. However, prudent economic management requires that the defence budget should not exceed 3 per cent of national income. India has been well within this limit, with the exception of the early 1960s and the mid-1980s, and should remain so even if one were to account for the cost of credible, minimum nuclear deterrent.
The National Security Council, to which the chiefs of staff are invitees, must take a holistic view on defence spending and the finance ministry should link an increased allocation of funds to a reform programme. It has been reported that the finance ministry would like to link financial assistance to state governments and funding of infrastructure development to state-level fiscal performance indicators. A kind of conditionality-linked assistance of the IMF variety. This model should be adopted in the case of the defence budget also.