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Economics of Defence

Poor financial management is costing the defence ministry dear

Maj. Gen. Mrinal Suman (retd) Maj. Gen. Mrinal Suman (retd)

Defence minister Manohar Parrikar, in his press conference on 4 March 2016, dropped a bomb when he said that India’s USD3 billion had been lying forgotten in an account in Washington. Apparently, the money had been deposited as advance payment for planned procurements under the US Foreign Military Sales programme. More shocking was the revelation that India had been making fresh payments to the US for new weaponry while the said amount remained unremembered. Worse, it was not even earning any interest.

Neglect of the said account, Parrikar admitted, was due to ‘ill-management or lack of attention’. It defies logic as to how such a major lapse could ever take place when the ministry of defence (MoD) is over-populated with the officials of the defence finance, masquerading as financial experts.

The finance division, headed by the secretary (defence finance) and financial adviser (defence services), is responsible to provide financial support to MoD. The defence finance has staff strength of about 485 Group ‘A’ officers and 24,600 subordinate officers/staff with a vast geographical spread of 980 offices located at 230 stations. However, it is by far the most incongruous component of MoD. Many consider it to be a mill-stone around the neck of the ministry. Its gross incompetence has been identified as the single biggest impediment in defence procurements.

If one scans the past track record of the defence finance, the recent discovery of USD3 billion lying forgotten will not come as a surprise. Read any report of the Comptroller and Auditor General of India (CAG) and one gets surprised at the plethora of glaring financial irregularities of enormous proportions, resulting in huge losses to the state. Although they are mandated to ensure financial propriety, they have failed miserably.

Moreover, if MoD has been surrendering unspent funds every year, the fault is entirely of the defence finance. No procurement proposal can fructify unless the defence finance functionaries concur with it at all stages from acceptance of necessity to closing the deal. Most importantly, they actively participate in all facets of commercial evaluation and negotiation of contract. Unfortunately, they are ill-equipped for most of the tasks. For example, preparation of faulty contract documents can be directly attributed to their inability to understand implications of various provisions, resulting in nearly all subsequent arbitrations going against India’s interests.

The primary reason for the above shortcomings is the fact that India has failed to differentiate between financial/economic advice and account keeping. Notwithstanding the impressive taxonomy of ‘financial advisors’ used by them, officials of the defence finance are not advisors. They are mere account keepers, pretending to be financial experts. The difference between the two needs elaboration.

Defence minister Manohar Parrikar addressing the press conference where he announced that India’s USD 3 billion had been lying forgotten in an account in Washington
Defence minister Manohar Parrikar addressing the press conference where he announced that India’s USD 3 billion had been lying forgotten in an account in Washington

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