COVID-19: Recession will take its toll on defence budget

Updated: April 16, 2020 7:06 PM

The prospect may appear frightening, but it would be expedient to be ready with a ‘Plan B’ also to cope with a probable 8-10 per cent budget cut on the overall defence outlay.

The defence establishment, for its part, has long been used to demanding large sums of money from the MoF.
  • By Amit Cowshish

The ministry of defence (MoD) is among the 31 ministries that have been called upon by the ministry of finance (MoF) to restrict the overall expenditure to 20 per cent of the current year’s total allocation in the first quarter. There is furthermore a sub-limit of 8 per cent on expenditure in April and 6 per cent each for the next two months.

The restriction – imposed to cope with the financial stress created by the spread of novel COVID-19 coronavirus pandemic – is applicable to the capital and revenue budget of the armed forces and, surprisingly, even to defence pensions.

Expenditure on pensions, however, cannot be contained within 8 per cent in April. This is because pensions for March are also paid and debited to the account in April. The following two months of May and June will also pose a similar challenge, as there are no major variations changes in pension disbursement amounts that works out to a little over 8 per cent per month.

The restriction on the overall cash outgo on pensions may, therefore, give rise to unnecessary speculation about timely disbursement for the present and the two subsequent months. The MoF or the MoD must eliminate this confusion immediately in order to allay the pensioners’ fears.

The restriction on expenditure from the MoD (Civil) budget, which caters to the needs of such organisations like the Indian Coast Guard and Border Roads Organisation, is even more severe. These, and other such organisations funded from the civil budget, will now have to keep the expenditure for each of the three months of the first quarter in FY 2020-21 to within 5 per cent of the total annual allocation.

Considering the financial havoc wrecked by COVID-19 pandemic, it will be naïve to believe that these restrictions will be temporary. If anything, the restrictions may be even more stringent later this year and, in fact, continue well into the next many years as the battered economy limps back to some semblance of its former normalcy.

The current restrictions are evidently intended to manage the cash flow during the first quarter, but with the pandemic taking its toll on the government’s financial resources, it will not at all be a surprise if the allocation is slashed to repair the damage caused by what is fast becoming an apocalyptic nightmare.

All individual states, as indeed various sectors of the economy, are demanding massive fiscal packages from an impoverished centre which simply has no means of augmenting its resources in any substantial measure through higher taxation or borrowings from equally stressed taxpayers are also struggling to keep financially afloat.

The defence establishment, for its part, has long been used to demanding large sums of money from the MoF, knowing well enough that there is no way the demand can be met. It has also insisted on making plans on the assumption that the asked-for amount will be made available to it by the MoF. This perennial shadow boxing has been in progress interminably, with no outcome in sight.

Even the current year’s allocation for the services, for instance, is over Rs 1 lakh crore less than what they had demanded. It remains difficult to imagine how this demand could have been met by the finance minister in her budget without adversely impacting other critical sectors.

It is unlikely that unlike last year when the MoD managed to tide over its financial woes due primarily to the infusion of over Rs 17,000 crore at the revised estimate stage, the MoF will be able to provide any additional funds this year. In fact, the military, as indeed other organisations, will be indeed fortunate if no further fiscal cuts are imposed.

The present situation calls for dispassionate, pragmatic and unorthodox celebration on the MoD’s part. Since the expenditure on salaries and pensions cannot be curtailed, unless it is as a part of a larger policy decision of the central government for all its employees, the MoD is left with no option but to focus on curtailing expenditure in other areas.

It needs to cast aside all its long- and medium-term plans and to formulate an emergency expenditure plan with the aim of restricting spending to the current year’s budgetary allocation, even if it means deferring imminent contracts and supply orders.

It will, however, be counterproductive to suspend all ongoing procurements, especially those sourced indigenously as this, in turn, will lead to withholding payments to manufacturing units and service-providers, who too desperately need liquidity. The need of the hour right now is to support all these businesses which will eventually play a crucial role in reviving India’s economy.

The prospect may appear frightening, but it would be expedient to be ready with a ‘Plan B’ also to cope with a probable 8-10 per cent budget cut on the overall defence outlay. And though it sounds harsh, it bears repeating that all inconsequential expenditure- and there is a substantial amount- must be ruthlessly excised.

One cannot help but recall the words of Jon Huntsman, Jr, an American businessman, diplomat, and politician who said of the US defence outlay: If we can’t find cuts in the defence budget, we’re not looking carefully enough.

This is not to underestimate or ignore the external threat or in any way deny the need for higher spending on defence, but merely to plead a financially pragmatic approach to defence planning and spending. Put bluntly, money has always been–and will continue to be–in short supply for years to come and everyone’s estimate of what is enough will always vary.

The choice is fanciful; between continuing to formulate plans, pretending that money is somebody else’s problem on the one hand or alternatively acknowledging the fiscal reality and getting the bang for the buck. The latter, without doubt, appears to be the more rational option and must inform defence planning for the next five years or so, which is about the time it is expected to take to fix the economy.

This will also call for a measure of restraint for those who tend to look upon these complex issues through the prism of civil-military relations or the perceived imperviousness of the bureaucracy to cope with military issues and material requirements.

(The author is Former Financial Advisor (Acquisition), Ministry of Defence. Views expressed are personal.)

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