Reform defence budgeting

Both defence capital allocations as well as expenditure flows need urgent attention

By Ajai Shukla

Business Standard (unsigned editorial comment)

14th Jan 19

Recent reports that Hindustan Aeronautics Ltd (HAL) was forced to take a bank loan of Rs 781 crore to pay its employees’ December salaries reflect the government’s strange approach to defence budgeting and spending. As this newspaper reported, the government currently owes HAL Rs 15,700 crore for products and services already delivered, of which Rs 7,000 crore is outstanding from the preceding year. With more bills likely to arise over the coming three months and no money to pay them, outstanding dues will swell to Rs 20,000 crore by the end of the financial year. HAL has asked the defence ministry to make some payments so that ongoing development projects, manufacture and the maintenance of the Indian Air Force’s (IAF’s) aircraft fleet are not severely impacted. But, given the government’s financial pressure with an election looming, HAL does not expect relief in the revised budget estimates.

Nor is HAL the only defence public sector undertaking (DPSU) that finds itself in these straits. It is understood the military also owes Bharat Electronics Ltd (BEL) thousands of crores in unpaid bills. It was one thing to and defer payments when HAL and BEL were wholly owned defence ministry enterprises. But, after their part-disinvestment, there are also interests of private shareholders, which will be adversely affected by non-payment of bills.

Things have come to this pass for a simple reason: the government has not allocated the capital budget needed for payments that were falling due this year. The navy projected to the defence ministry a capital requirement of Rs 30,358 crore, but was allocated only 19,083 crore, a shortfall of 37 per cent. The army asked for Rs 37,122 crore, but was given Rs 21,338 crore, short by 43 per cent. The IAF, with instalments due for the Rafale fighter and Apache and Chinook helicopters, asked for a whopping Rs 72,482 crore but was allocated Rs 33,100 crore, short by 54 per cent. Further, of the amount allocated for capital expenditure, about 90 per cent was pre-committed towards instalments on previous years’ purchases. It was almost inevitable the military would be left short of money.

Framing any budget is a competitive exercise in resource allocation. It is for the union cabinet to decide how much it can spare for defence from pressing competitive requirements like education and healthcare. This year, 16.6 per cent of central government expenditure went to defence. Next, this amount must be divided between the three services. Overseeing realistic budgeting is one task of the Defence Planning Committee (DPC), established in April with fanfare under the National Security Advisor. It is not clear how the DPC could fail to anticipate the current crisis in HAL.

Beyond allocation,, there are other issues as well. In several previous years, including twice in the first three years of this government, thousands of crores of military capital budget alloocationo lapsed because it could not be spent in time. This needs to change, given the feast-or-famine nature of procurement spending, where one year could see little expenditure because of hitches in finalising some contracts, while the subsequent year sees a glut of contracts, with multiple payments falling due. Successive governments have promised to institute a “roll-on capital fund” to insulate against the lumpy nature of defence capital expenditure and smoothen the cash flows, but none has done so.