Indian Naval Expenditure in the 1990s

Rahul Roy-Chaudhury,Research Fellow,IDSA

 

India's first post-Pokhran II budget provides the Navy its highest share of defence expenditure since Independence; the sum of Rs. 5,976.07 crore allocated to it for 1998-99 accounts for 14.51 per cent of the defence budget.1 This represents an increase of 25 per cent from its Revised Expenditure (RE) of 1997-98, and a massive 44 per cent from the Budgetary Expenditure (BE) of the previous year (1997-98) (Table 1). Additional funds in the supplementary budget, if necessary, have also been promised by both the Finance Minister and the Defence Minister. Although such a substantial rise appears to be coincidental, rather than an attempt, to date, of providing the service a role in the country's nuclear doctrine, it does indicate important financial trends for the Navy into the 21st century. Nonetheless, naval expenditure needs to be seen in the wider context of the country's defence expenditure, its varied assessments, and the complexities of naval budgetting.

India's defence expenditure can be perceived in a number of ways, some more accurate than others. In terms of current prices, defence expenditure in the past nine years clearly rose more than 150 per cent, from Rs. 15,426.48 crore in 1990-91 to Rs. 41,200 crore in 1998-99 (Table 1). While this appears to be a huge increase, these figures alone do not reveal a true picture of defence spending, for the simple reason that they do not take into account factors such as the annual rate of inflation, the depreciation of the Indian rupee in the international market, and the increasing technological costs of modern weapon systems (produced either indigenously or sourced from abroad).

Whereas the annual rate of inflation averaged highs of 10.1 per cent in 1992-93, and 10.9 per cent in 1994-95, it dropped to below an average 5 per cent only in 1997-98. However, this is expected to increase to 8-10 per cent during the current financial year (1998-99). Moreover, the Indian rupee has fallen to an unprecedented low in the past few weeks. Following devaluation of the rupee to deal with the national financial crisis in 1991-92, the foreign exchange rate was Rs. 25.89 to one US dollar. By March 1998, this had fallen to Rs. 39.50 to one US dollar, only to cross the Rs. 40 mark two months later.2 In addition, technological advances over a decade-long period necessitate increases in the costs of modern weapon systems. In effect, the decrease in the purchasing power of the rupee is simply not taken into account in an assessment of defence spending in current terms.

Table 1: Naval Expenditure in Crores of Rupees (Current Prices)

Year Naval Naval Total Naval Total TNE as % of

Revenue Capital Expenditure Defence TDE

Expenditure Expenditure (TNE) Expenditure

(TDE)

1990-91 836.53 1,126.80 1,963.33 15,426.48 12.73

1991-9 2965.83 1,155.30 2,121.13 16,347.04 12.98

1992-93 999.63 1,021.58 2,021.21 17,581.79 11.50

1993-94 1,313.55 1,382.32 2,695.87 21,844.73 12.34

1994-95 1,445.17 1,553.63 2,998.80 23,245.23 12.90

1995-96 1,819.89 1,977.58 3,797.47 26,856.29 14.14

1996-9 72,045.59 1,930.66 3,976.25 29,505.08 13.48

1997-98 (RE) 2,436.61 2,336.27 4,772.88 36,099.00 13.22

1998-99 (BE) 2,924.22 3,051.85 5,976.07 41,200.00 14.51

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are actuals, unless stated otherwise.

As a result, an assessment of expenditure in constant terms provides more accurate analyses of defence spending over the years, as it takes into account annual rates of inflation, although not the depreciation of the Indian rupee in the international market, nor inflation in defence-related equipment procurement prices.3 According to an assessment of this nature, India's defence expenditure rose just over 20 per cent in a nine-year period, from Rs. 6,787.65 crore in 1990-91 to Rs. 8,240.00 crore in 1998-99 (Table 2).

Moreover, as a percentage of Gross Domestic Product (GDP), India's defence expenditure has been declining since the late 1980s. The Institute of Defence Studies and Analyses' (IDSA) annual publication, Asian Strategic Review, for example, states that defence expenditure decreased from 3.59 per cent of GDP in 1987-88 to 2.45 per cent of GDP in 1997-98.4 This was largely the result of the severe national financial crisis in 1991, and the consequent influence of the World Bank in reducing Indian defence spending.5 Moreover, in view of the international sanctions imposed on the country in the wake of the five nuclear tests of May 11 and May 13, the economy is expected to grow at a rate of only 5-6 per cent during the current financial year.6

Of the total defence budget, the vast majority, approximately 75 per cent (1998-99), is allocated to the revenue sector, and only approximately 25 per cent (1998-99) to the capital sector. Although capital expenditure is often simply equated with the "modernisation" of the armed forces, and revenue expenditure with their "maintenance", this is strictly not correct. The term "modernisation" has a larger connotation than expenditure on the capital sector, as its components can also be found in revenue expenditure.7 In terms of the Navy, for example, this relates to the acquisition, albeit minimal, of arms and equipment from the Ordnance Factories.

Total Naval Expenditure

During the first nine years of the 1990s, total naval expenditure in current rupees rose 200 per cent, from Rs. 1,963.33 crore in 1990-91 to Rs. 5,976.07 crore in 1998-99. As this increase was slightly larger than the corresponding increase in defence expenditure for this period, it acquired a slightly larger share of funds in relation to the other armed services towards the end of the decade: 14.51 per cent in 1998-99, as opposed to 12.73 per cent in 1990-91. However, this continued to constitute the least share of funding among the three armed services; in 1998-99, the Army was allocated 52.96 per cent of the defence budget, by far the largest, followed by the Air Force's 22.82 per cent. Meanwhile, the Defence Research and Development Organisation (DRDO) and the Defence Ordnance Factories received 6.01 per cent and 3.7 per cent of the 1998-99 defence budget, respectively.8

Clearly, the worst year for the Navy was 1992-93, when its budget decreased by nearly 5 per cent in current rupees, from Rs. 2,121.13 crore in 1991-92 to Rs. 2,021.21 crore in 1992-93 (Table 1). This had happened only twice before (since Independence) in 1960-61 and 1961-62, in view of an abrupt halt in the Navy's acquisition programme since the mid-1950s, due primarily to the "deficiencies of the additional warships to be purchased".9 Moreover, the annual rate of increase of the naval budget for the remaining eight years fluctuated considerably, from a low of 0.68 per cent in 1990-91 to highs of 33 per cent (a third of the budget!) and 25 per cent in 1993-94 and 1998-99, respectively, clearly indicating the absence of long-term budgetary planning for the service.

Meanwhile, total naval expenditure in constant terms rose by only 38 per cent, from Rs. 863.86 crore in 1990-91 to Rs. 1,195.22 crore in 1998-99 (Table 2). Also, total naval expenditure declined substantially in both 1991-92 and 1992-93. The highest budgetary increase took place the following year, in 1993-94 (22 per cent). Moreover, total naval expenditure constituted only some 0.33 per cent of the country's GDP (1997-98).

Table 2: Naval Expenditure in Constant Terms in Crores of Rupees (1980-81 prices)

Year Naval Naval TNE TDE TNE as % of

Revenue Capital TDE

Expenditure Expenditure

1990-91 368.07 495.79 863.86 6,787.65 12.73

1991-92 376.67 450.57 827.24 6,375.35 12.98

1992-93 359.87 367.77 727.64 6,329.44 11.50

1993-94 433.47 456.17 889.64 7,208.76 12.34

1994-95 433.55 466.09 899.64 6,973.57 12.90

1995-96 491.37 533.95 1,025.32 7,251.20 14.14

1996-97 531.85 501.97 1,033.82 7,671.32 13.48

1997-98 (RE) 560.42 537.34 1,097.76 8,302.77 13.22

1998-99 (BE) 584.85 610.37 1,195.22 8,240.00 14.51

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are actuals, unless stated otherwise.

GDP deflator used, where 1990-91 is 0.44, and 1998-99 is estimated at 0.20; see Government of India, Economic Survey 1997-98 (1998), p. S-1.

In effect, naval expenditure in the 1990s is marked by three important characteristics: (a) consolidation of naval forces and assets, rather than expansion; (b) higher capital, rather than revenue, expenditures for most of the period; and (c) rise in naval budgets towards the end of the decade, in appreciation of the increasingly complex and challenging tasks of ensuring the security of India's maritime interests into the 21st century.

In contrast, the naval budgets in the previous decade (the 1980s) were characterised by: (a) being above the 10 per cent mark for most of the ten-year period (previously this had never taken place); (b) accounting for the largest percentage of increase in defence expenditure among the three services; and (c) receiving the largest share of Capital Expenditure (CE) for most of the period.10

Revenue Expenditure (RE)

During the 1990s, naval RE rose nearly 250 per cent in terms of current rupees, from Rs. 836.53 crore in 1990-91 to Rs. 2,924.22 crore in 1998-99 (Table 3). Nonetheless, for most of the 1990s it was less than naval CE, constituting, on average, some 47.34 per cent of total naval expenditure; the only exceptions were 1996-97 and 1997-98, when RE constituted a higher proportion of naval expenditure than CE (51.45 per cent and 51.05 per cent, respectively). While the former was due largely to a decrease in CE (see below), the latter was the result of additional expenditure on Pay and Allowances (P&A), in view of the implementation of the Fifth Pay Commission. Consequently, P&A rose from Rs. 661.55 crore in 1996-97 to Rs. 895.55 crore in 1997-98, accounting for an increase of 35.37 per cent in this category from the previous year (Table 4). This resulted in the third highest annual increase in RE in the 1990s.

Table 3: Naval Revenue Expenditure in Crores of Rupees (Current Prices)

Year P&A Stores Works Transport Others Total

1990-91 318.66 352.69 93.88 34.95 36.35 836.53

1991-92 356.72 414.00 102.27 25.71 67.13 965.83

1992-93 375.90 409.42 125.36 33.73 55.22 999.63

1993-94 506.58 510.58 115.78 40.72 139.89 1,313.55

1994-95 517.37 603.15 136.38 45.54 142.73 1,445.17

1995-96 586.65 798.97 134.02 44.71 255.54 1,819.89

1996-97 661.55 877.98 166.53 48.11 291.42 2,045.59

1997-98 (RE) 895.55 953.82 208.48 58.90 319.86 2,436.61

1998-99 (BE) 985.10 1,199.77 224.12 64.79 450.44 2,924.22

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are actuals, unless stated otherwise.

Interestingly, in 1993-94 the Navy witnessed a similar rate of increase in P&A (34.76 per cent), due to payment of additional dues. Along with a large increase in ordnance stores, due primarily to an attempt to meet an urgent need for stores in view of the limited procurement the previous year, naval RE registered its highest rate of increase (31.40 per cent) in 1993-94. This was followed in 1995-96, by an increase of 25.93 per cent.

Meanwhile, in constant terms, RE increased by only 59 per cent from Rs. 368.07 crore in 1990-91 to Rs. 584.84 crore in 1998-99 (Table 5). Whereas the highest increase took place in 1993-94 (20.45 per cent), another important rise took place in 1995-96 (13.34 per cent) (Table 6). In comparison, the rise in RE in 1997-98 (due to the implementation of the Pay Commission) was negligible (5.37 per cent). In 1998-99 also, naval RE in constant terms is expected to increase by only 4.36 per cent.

Notwithstanding these increases in P&A, naval ordnance stores continued to constitute the largest share of naval RE in the 1990s (Tables 3 and 5). This was due primarily to relatively high annual increases in three years; 1993-94, 1995-96, and 1997-98 (Tables 4 and 6). The only exception was 1992-93, when expenditure on stores actually decreased in current rupees, from Rs. 414.00 crore in 1991-92 to Rs. 409.42 crore in 1992-93. This was due to the disintegration of the erstwhile Soviet Union in late 1991, and immense difficulties in procuring stores from Russia and the other members of the Commonwealth of Independent States (CIS) during the financial year. Meanwhile, in constant terms, expenditure on stores also declined in 1990-91 and 1997-98 (Table 6). From an analysis of changes in P&A as well as stores (in both current and constant terms), it is clear that a total absence of long-term planning prevailed in naval RE in the 1990s (Tables 4 and 6).

Table 4: Changes in Select Categories of Naval Revenue Expenditure (Current Prices) in % Terms

Year P&A Stores Total

1990-91 +7.01 +3.24 +2.59

1991-92 +11.94 +17.38 +15.46

1992-93 +5.38 -1.11 +3.50

1993-94 +34.76 +24.71 +31.40

1994-95 +2.13 +18.13 +10.02

1995-96 +13.39 +32.47 +25.93

1996-97 +12.77 +9.89 +12.40

1997-98 (RE) +35.37 +8.64 +19.12

1998-99 (BE) +10.00 +25.78 +20.01

Source: Government of India, Defence Services Estimates 1991-92 (1991) to 1998-99 (1998).

Moreover, it is wrong to infer that a higher rate of increase in expenditure on a particular category of naval RE for a particular year results in greater benefits during that year alone. In actuality, contractual obligations of the past become liabilities for the current year's budget, and account for a vast proportion of funds annually. In terms of RE, it has been authoritatively estimated that 70-75 per cent of expenditure relating to Stores and Works is on account of commitments made in the past.11 As a result, "It is the expenditure which will determine the budget rather than the budget determining the expenditure".12 In effect, the Navy, like the other armed services, does not have much leeway in expenditure even during a relatively high annual increase in RE.

Table 5: Naval Revenue Expenditure in Constant Terms in Crores of Rupees (1980-81 prices)

Year P&A Stores Works Transport Other Total

1990-91 140.21 155.18 41.31 15.38 15.99 368.07

1991-92 139.12 161.46 39.89 10.03 26.17 376.67

1992-93 135.32 147.39 45.13 12.14 19.89 359.87

1993-94 167.17 168.49 38.21 13.44 46.16 433.47

1994-95 155.21 180.954 40.91 13.66 42.82 433.55

1995-96 158.40 215.72 36.19 12.07 68.99 491.37

1996-97 172.00 228.27 43.30 12.51 75.77 531.85

1997-98 (RE) 205.98 219.38 47.95 13.55 73.56 560.42

1998-99 (BE) 197.02 239.95 44.82 12.96 90.09 584.84

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are actuals, unless stated otherwise.

GDP deflator used, where 1990-91 is 0.44, and 1998-99 is estimated at 0.20; see Government of India, Economic Survey 1997-98 (1998), p. S-1.

Table 6: Changes in Select Categories of Naval Revenue Expenditure (1980-81 prices) in % Terms

Year P&A Stores Total

1990-91 -3.91 -7.29 -7.88

1991-92 -0.78 +4.05 +2.34

1992-93 -2.73 -8.71 -4.46

1993-94 +23.54 +14.32 +20.45

1994-95 -7.15 +7.40 +0.02

1995-96 +2.06 +19.22 +13.34

1996-97 +8.59 +5.82 +8.24

1997-98 (RE) +19.76 -3.89 +5.37

1998-99 (BE) -4.35 +9.38 +4.36

Source: Government of India, Defence Services Estimates 1991-92 (1991) to 1998-99 (1998).

Finally, it is also important to note that during the last month of every financial year there is a rush to spend the remainder of the money allocated to the armed services for the entire year, otherwise the financial allocation would lapse. In March 1997, for example, the Navy spent 15.72 per cent of its entire RE for the year during that month, as opposed to 23.1 per cent for the Army, and 18.31 per cent for the Air Force. For the Navy, this included 17.83 per cent for Other Expenditure, 17.70 per cent for Works, and 16.17 per cent for Transportation.13

Capital Expenditure (CE)

Naval CE constituted the largest share of naval expenditure for seven of the nine years of the 1990s, averaging 52.66 per cent; the only exceptions were 1996-97 and 1997-98. Naval CE rose from Rs. 1,126.80 crore in 1990-91 to Rs. 3,051.85 crore in 1998-99, an increase of 171 per cent (Table 7), which was less than the increase in RE for the same period. The largest annual increase in naval CE took place in 1993-94 (35.31 per cent), followed by the 1998-99 budgetary allocation of 30.63 per cent, although it declined in 1990-91, 1992-93, and 1996-97 (Table 8). In contrast, in constant terms, naval CE grew by only 23.11 per cent during the nine-year 1990-1 to 1998-99 period (Table 9). Moreover, naval CE actually declined in the first three years of the 1990s, and once again in 1996-97 (Table 10).

The fleet continued to constitute the largest share of CE, accounting for an average of 74.12 per cent during 1990-91 to 1998-98; this included a dramatic increase from 60.38 per cent in 1990-91 to a high of 84.88 per cent in 1994-95, before declining to 68.19 per cent in 1998-99. Expenditure on the fleet also rose considerably, from Rs. 680.34 crore in 1990-91 to Rs. 2,081.02 crore in 1998-99, an increase of over 200 per cent (Table 7). The largest increase, by far, in expenditure on the fleet took place in 1993-94, when it rose by over 54 per cent (Table 8). Nonetheless, during two years, 1992-93 and 1996-97, expenditure on the fleet declined (Table 8). In contrast, in constant terms, expenditure on the fleet increased by only 39 per cent from 1990-91 to 1998-99 (Table 9).

Additional expenditure on the fleet is clearly imperative, in view of the worrying decrease in the number of the Navy's principal combatants over the years (even in the absence of an unrealistic 1:1 replacement programme). According to a study carried out by the author, these warships decreased from 44 in 1990 to 40 in 1995, and to 36 at present; they are expected to reduce even further, to 32 in 2000, and possibly to as few as 30 in 2005. Moreover, this estimated decrease from 1995 is unprecedented in the history of the service; in essence, this will mean a reduction of a fifth in the number of principal combatants operational in the Navy in the year 2000 (from 40 in 1995 to 32 in 2000).14

In the current financial year, budgetary allocation on the fleet has been increased by 16.31 per cent to Rs. 2,081.02 crore (Tables 7 and 8); this will attempt to stem this decrease in numbers, by providing part payment for the first and second new Kilo-class submarines (the first arrived in early 1998, with the second expected early next year), and the first of three Krivak-class frigates to be acquired from Russia, as well as ensuring the early stage of production of three Project 17 frigates, approved recently by the Cabinet.

Meanwhile, expenditure on Aircraft and Aero-Engines (A&AE) constituted the second largest share of naval CE, although accounting for an annual average of only 13.66 per cent during the 1990-91 to 1998-99 period (Table 7). Moreover, expenditure on A&AE decreased considerably in the 1990s, from Rs. 301.96 crore in 1990-91 to Rs. 287.00 crore in 1998-99 in current rupees (Table 7) or Rs. 132.86 crore in 1990-91 to Rs. 57.40 crore in 1998-99 in constant terms (Table 9). This overall decrease was somewhat reduced by a one-time large scale infusion of funds to naval A&AE in 1995-96; 135.04 per cent in current rupees (Table 8) or 111.55 per cent in constant terms (Table 10). From an analysis of changes in expenditure on the fleet as well as A&AE (in both current and constant terms), it is clear that a total absence of long-term planning also prevailed in naval CE in the 1990s (Tables 8 and 10).

Table 7: Naval Capital Expenditure in Crores of Rupees (Current Prices)

Year Fleet Works Docks A&AE Land HMV Other Total

1990-91 680.34 69.68 66.06 301.96 -0.89 4.25 5.40 1,126.80

1991-92 793.36 69.17 44.84 228.83 1.86 3.14 14.10 1,155.30

1992-93 727.31 62.37 33.40 161.88 2.09 2.02 32.51 1,021.58

1993-94 1,122.21 56.62 36.76 139.83 1.89 2.80 22.21 1,382.32

1994-95 1,318.66 49.28 35.93 122.08 10.00 2.42 15.26 1,553.63

1995-96 1,524.64 55.09 93.37 286.94 4.71 3.13 9.70 1,977.58

1996-97 1,524.34 76.79 113.89 172.46 -1.50 5.94 38.74 1,930.66

1997-98 (RE) 1,789.18 86.08 163.26 225.00 9.75 2.00 61.00 2,336.27

1998-99 (BE) 2,081.02 85.08 400.25 287.00 2.50 6.00 190.00 3,051.85

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are actuals, unless stated otherwise.

Table 8: Changes in Select Categories of Naval Capital Expenditure (Current Prices) in % Terms

Year Fleet A&AE Total

1990-91 +22.05 -23.31 -0.69

1991-92 +16.61 -24.22 +2.53

1992-93 -8.33 -29.26 -11.57

1993-94 +54.30 -13.62 +35.31

1994-95 +17.51 -12.70 +12.39

1995-96 +15.62 +135.04 +27.29

1996-97 -0.02 -39.90 -2.37

1997-98 (RE) +17.37 +30.47 +21.00

1998-99 (BE) +16.31 +27.56 +30.63

Source: Government of India, Defence Services Estimates 1991-92 (1991) to 1998-99 (1998).

Table 9: Naval Capital Expenditure in Constant Terms in Crores of Rupees (1980-81 prices)

Year Fleet Works Docks A&AE Land HMV Other Total

1990-91 299.35 30.66 29.07 132.86 -0.39 1.87 2.37 495.79

1991-92 309.41 26.98 17.49 89.24 0.73 1.22 5.50 450.57

1992-93 261.83 22.45 12.02 58.28 0.75 0.73 11.71 367.77

1993-94 370.33 18.68 12.13 46.14 0.62 0.92 7.35 456.17

1994-95 395.60 14.78 10.78 36.62 3.00 0.73 4.58 466.09

1995-96 411.65 14.87 25.21 77.47 1.27 0.85 2.63 533.95

1996-97 396.33 19.97 29.61 44.84 -0.39 1.54 10.07 501.97

1997-98 (RE) 411.51 19.80 37.55 51.75 2.24 0.46 14.03 537.34

1998-99 (BE) 416.20 17.02 80.05 57.40 0.50 1.20 38.00 610.37

Source: Government of India, Defence Services Estimates 1992-93 (1992) to 1998-99 (1998).

All figures are Actuals, unless stated otherwise.

GDP deflator used, where 1990-91 is 0.44, and 1998-99 is estimated at 0.20; see Government of India, Economic Survey 1997-98 (1998), p. S-1.

Table 10: Changes in Select Categories of Naval Capital Expenditure (1980-81 prices) in % Terms

Year Fleet A&AE Total

1990-91 +9.60 -31.14 -10.82

1991-92 +3.36 -32.83 -9.12

1992-93 -15.38 -34.69 -18.38

1993-94 +41.44 -20.83 +24.04

1994-95 +6.82 -20.63 +2.17

1995-96 +4.06 +111.55 +14.56

1996-97 -3.72 -42.12 -5.99

1997-98 (RE) +3.83 +15.41 +7.05

1998-99 (BE) +11.40 +10.92 +13.59

Source: Government of India, Defence Services Estimates 1991-92 (1991) to 1998-99 (1998).

In a manner similar to RE, a vast proportion of CE is accounted for by contractual obligations, debt payment obligations, and deferred payment obligations of the past, thereby leaving only a small proportion of funds for current and future programmes. In the budgetary estimates for 1996-97, for example, the Navy sought Rs. 2,791.40 crore for its CE. This was reduced by 18 per cent to Rs. 2,303.35 crore by the Ministry of Defence, and further reduced by 13 per cent to Rs. 2,011.75 crore by the Ministry of Finance; in effect, the Navy received 28 per cent or Rs. 780 crore less than what it had sought that financial year.15 Of this reduced amount, as much as 80 per cent (Rs. 1,618.91 crore) was required to meet the contractual liabilities of the Navy. This effectively left only Rs. 392.84 crore with which to begin new modernisation programmes, worth a maximum sum of only Rs. 3,000 crore!16

During the next financial year as well (1997-98), a worse state of affairs ensued. Although the Navy had projected a demand of Rs. 3,103.78 crore in the budgetary estimates, only Rs. 2,513.25 crore was recommended by the Ministry of Defence, with only Rs. 1,828.99 crore being allocated by the Ministry of Finance. This involved a total reduction of Rs. 1,274.79 crore, or a massive 41 per cent of total CE sought by the Navy (in the budgetary estimates).17

Meanwhile, in terms of naval CE, the "rush of March" in 1997 accounted for 34.82 per cent of total expenditure for the Fleet, 41.98 per cent for A&AE, 51.57 per cent for Naval Dockyards, 44.19 per cent for Construction Works, 33.31 per cent for Other Equipment, and 20.68 per cent for Heavy and Medium Vehicles (HMV).18

New Management Strategy (NMS)

In order to decentralise the process for the formulation of the budget, and acquire greater financial control, an NMS was recommended for adoption by the three armed services. This concept emphasises planned expenditure, essentially aiming at a long-term equipment plan while keeping in view the long-term defence plan. The benefits of decentralisation are proper utilisation of resources, a budget linked with targets, and a review of both physical and fiscal performance.19 The NMS originated from the April 1992 Report of the Task Force on "The Review and Rationalisation of Accounting Classification of Defence Services: Receipts, Expenditure and Budgetary Control", prepared by A.K. Ghosh, the then Financial Advisor (Defence Services), Ministry of Defence.20

Perceiving the advantages and benefits of the NMS, the Navy was the first service to implement it in part in two areas in 1994-95. In April 1997, the Master General of Ordnance (MGO) in Army Headquarters also launched a Financial Management Strategy (FMS), and Air Headquarters belatedly recognised its Maintenance Command as a centre for budget management.21

In view of the enormity of the task at hand, it was decided to implement NMS in the Navy in phases. Accordingly, it was first introduced in the dockyards, followed by sections of the logistics arm. The implementation of the NMS has "brought changes such as the exercise of enhanced financial powers in consultation with the respective IFAs, preparation of Annual Provisioning Plans based on indicative budgets and the creation of Authority-cum-Responsibility and Budget Centres".22

In addition, the Navy is working on a computerisation project of logistics called Integrated Logistics Management System (ILMS), expected to provide a detailed framework as well as computer-assisted processes relating to the entire gamut of material functions at different levels. A Logistics Manual, laying down the basic objectives of material management and dealing with the subject in totality, has also been brought out. All the six major activities involved in material management -planning, procurement, warehousing, technical services, disposal, and financial management-have been dealt with separately.23

Defence Plans

Although the annual plans of the Navy (based on its 15-year long-term perspective plan) are supposed to be intrinsically linked to the "roll on" Five-Year Defence Plans for the armed services, the reality is quite different. The Five-Year Plans are not based on the prioritisation of the defence needs of the country: at times they are not even finalised for several years, and often bear no relation to the actual amount of funding allocated to the services. Since the formulation of the First Five- Year Defence Plan (1964-69), several additional plans have been formulated, with the Ninth Five-Year Defence Plan (1997-2002) recently being finalised. However, these plans are essentially based on the amalgamation of all the needs/desires of the three individual service Headquarters/Chiefs, without any effective attempt at prioritising the plans in view of the overall national security requirements of the country, or even an analysis of the nature and extent of budgetary resources available in the future. Although the Directorate General of Defence Planning Staff (DPS) of the Chiefs-of-Staff Committee (COSC) in the Ministry of Defence is tasked with this responsibility, its organisation and functioning are not conducive to undertake it.

Although six defence plans were prepared in the twenty-year period of 1964-84, not a single plan could be completed for one reason or the other, and had to be either deferred or re-framed midway.24 Also, the Seventh Five-Year Plan (1985-90) was finalised not prior to the time-period involved, but only in August 1988, the last year of the Plan.25 Worse, the Eighth Five-Year Defence Plan, initiated in 1989 for the 1990-95 period, but shifted to the 1992-97 time-frame in accordance with the change in the National Plan, was never finalised.26 This was due to the national financial crisis in 1991-92, as well as "the mis-match between the projections of the Services and the resources available".27 Meanwhile, the Ninth Five-Year Defence Plan is likely to be drastically modified in view of the five nuclear tests in May, and India's unilateral declaration as a nuclear weapon state. This is bound to lead to the weaponisation of its nuclear capacity, and the formulation of a nuclear doctrine for the country. Clearly, the relationship between nuclear weapons and conventional forces will be re-examined in such a situation.

In addition, there have been considerable shortfalls of financial allocation for the Five-Year Plans. Instead of the total sum of Rs. 71,938 crore planned for the Seventh Five-Year Plan, only Rs. 58,188 crore was finally received, a huge gap of 19 per cent or Rs. 13,750 crore.28 Similarly, the Eighth Five-Year Defence Plan was formulated with an outlay of only Rs. 107,000 crore, whereas the armed services and the Ministry of Defence had sought much higher budgetary allocations. Although the three services had sought a total of Rs. 146,000 crore, this was reduced by 9 per cent or Rs. 13,000 crore to Rs. 133,000 crore by the Ministry of Defence (in the absence of the devaluation of the Indian rupee), and further reduced by 20 per cent or Rs. 26,000 crore to Rs. 107,000 crore by the Ministry of Finance. In view of such a reduced allocation (a total of 27 per cent or Rs. 39,000 crore), it is clear that important modernisation programmes of the three services have suffered. The total liabilities estimated on account of the inescapable requirements of the services were estimated at over Rs. 35,000 crore, of which as much as Rs. 24,000 crore would have been required during the 1992-97 period. For the Navy, this would have involved the acquisition of additional frigates, submarines, aircraft, early warning equipment, and upgradation of base facilities.

Moreover, in terms of the total fleet (including principal combatants, patrol and coastal combatants, and auxiliaries), only 26 warships were commissioned into the Indian Navy in the 1990-96 period, an average of just over four a year. This is in marked contrast to the admission of the Ministry of Defence that in order to maintain a fleet of 120 ships, an average rate of six ships per year need to be sanctioned (to meet its replacement programme).29 More important, it stated that in order "to maintain force levels commensurate with increased responsibilities and consistent with the threat perceptions, there will be need (for the Navy) to commission an average of 8 ships per year to sustain the force levels".30 In effect, therefore, in the first half of the decade, only half the number of warships required were commissioned.31

For the first time in 1996, the Ministry of Defence publicly estimated the essential capital costs of the Navy in the Ninth Five-Year Defence Plan as Rs. 14,000-15,000 crore. Without going into details as to the number or the nature of warships required, or the time-frame in which these acquisitions were expected to take place, the Ministry stated that this figure would include the acquisition of new frigates, an aircraft carrier or Air Defence Ship (ADS), submarines, and the modernisation/upgradation of existing submarines.32 Consequently, the Navy is estimated to have been allocated Rs. 33,000 crore in total in the Ninth Five-Year Plan, 45 per cent of which, or Rs. 14,850 crore, is destined for the capital sector. This is expected to include the establishment of a second submarine production line at Mazagon Dockyard Ltd. (MDL) or elsewhere on the west coast; three more Delhi-class destroyers; a new generation of tactical missiles, including two variants of Air-to-Surface Missiles (ASMs), and enhanced electronic warfare capabilities.33

Conclusion

The budgetary process and plans for the armed services are highly subjective and ad hoc. This includes the manner in which budgetary allocations are sought by the services, reduced arbitrarily by both the Ministry of Defence and the Ministry of Finance, and finally allocated to the services. This does not appear to bear any relationship to the Five-Year Defence Plans, which themselves are rarely, if ever, implemented. Although it would make eminent sense to provide some assurance for a five-year period of budgetary allocations, to coincide with the Five-Year Defence Plans, the Ministry of Defence recently made it clear that this would not be feasible under the present system.34 It stated, "The budget, being a yearly allocation, has to take note of the latest assessment of availability of resources, change in requirements, and changes imposed by external factors. In the context of the present resource crunch, guarantees about the assured availability of resources in terms of five-year budgetary allocations may not be feasible. Nonetheless, efforts towards securing advanced indication about resource allocation in a plan period are continuing".35

For cost-effective budgetting and planning, it is also imperative that reform in expenditure management and expenditure control be carried out, primarily to emphasise the "programme orientation" of defence expenditure. This would not only involve an intrinsic link between the annual financial plans and a five-year financial plan of the services, but also a total overhaul of the RE and CE categorisation of the budget. In this respect, the services themselves could be given control over their CEs, along with respective cash ceilings, thereby making them aware of contractual liabilities in weapon acquisition programmes in the future.36 Clearly, a major overhaul of the defence financial system is greatly overdue and needs to be conducted urgently.

 

NOTES

1. All figures used in this article are in net rupees.

2. Government of India, Economic Survey 1997-98 (1998), pp.66 and S-78.

3. Air Commodore Jasjit Singh, "Resource Allocation for Credible Defence", unpublished paper presented at an IDSA seminar on Defence Expenditure: Budgeting and Management, New Delhi, February 1, 1998, p.4.

4. Air Commodore Jasjit Singh and Swaran Singh, "Trends in Defence Expenditure", Asian Strategic Review 1996-97 (1997), p.51.

5. See Sanjaya Baru, "Defence Spending and National Economy", unpublished paper presented at an IDSA seminar on Defence Expenditure: Management and Budgeting, New Delhi, February 1, 1998, pp. 2-3.

6. See Times of India, June 25, 1998, p.1, and The Pioneer, June 26, 1998, p.13.

7. A.K. Ghosh, India's Defence Budget and Expenditure Management (in a wider context) (1996), p.92.

8. See Government of India, Defence Services Estimates 1998-99 (1998).

9. Rahul Roy-Chaudhury, Sea Power and Indian Security (1995), pp. 173 and 182.

10. Rahul Roy-Chaudhury, "Indian Naval Expenditure in the 1980s", Strategic Analysis, April 1992, pp. 55-56.

11. A.K. Ghosh, "Defence Expenditure: Planning, Management and Control", unpublished paper presented at an IDSA seminar on Defence Expenditure: Management and Budgeting, New Delhi, February 1, 1998, p. 2.

12. Ibid.

13. Report of the Comptroller and Auditor General of India (for the year ended March 1997), Union Government (Defence Services), Army and Ordnance Factories, No. 7 of 1998, pp. 21-22.

14. See Rahul Roy-Chaudhury, "The Indian Navy: Past, Present, and Future", Asian Strategic Review 1995-96 (1996), p. 101.

15. Ministry of Defence-Demands for Grants (1996-97), Standing Committee on Defence, First Report, Eleventh Lok Sabha, August 1996, p. 18.

16. Ibid., p.19.

17. Ministry of Defence - Demands for Grants (1997-98), Standing Committee on Defence, Fifth Report, Eleventh Lok Sabha, April 1997, p.10.

18. n. 13, pp. 24.

19. n. 7, pp. 281-82.

20. Ibid., p. 286.

21. n. 11, pp. 7-8.

22. n. 7, p. 282.

23. Ibid.

24. Ministry of Defence - Defence Policy, Planning and Management, Standing Committee on Defence (1995-96), Sixth Report, Tenth Lok Sabha, March 1996, p. 21.

25. Ibid., p. 20.

26. n. 17, pp. 12-13.

27. n. 24, p. 14.

28. Ibid., p. 18.

29. Ministry of Defence - Demand for Grants, Standing Committee on Defence, Fourth Report, Tenth Lok Sabha, April 1995, p. 15.

30. Ibid., p. 16.

31. n. 14, p. 105.

32. n. 15, p. 19.

33. Srinjoy Chowdhury, "Navy Drive to Pack Swadeshi Firepower", The Telegraph, June 8, 1998, p.5.

34. n. 24, p. 15.

35. Ibid., pp. 15-16.

36. n. 7, p. 394.