Money Over Matter | In Defence of Economics

Financial prudence in defence spending is essential

Maj. Gen. Mrinal Suman (retd)

While addressing a think-tank function on 4 May 2017, Army Chief General Bipin Rawat stressed the need to appreciate that defence and economy go hand in hand. “Only strong military can help in ensuring stability along the borders and within the nation in the hinterland and that will help to develop the economy,” he said. He lamented the fact that while developing the economy, military was not getting its due share.

The policy governing allocation of resources for the defence of a country is a dynamic process that changes with political dispensation in power, geo-political milieu and threat perception. Investment in defence is not carried out to utilise spare and disposable resources but is an essential cost that a nation has to pay to acquire assurance of security. And, without assured national security, economic prosperity remains a pipe-dream. Indisputably, militaries in all countries remain dissatisfied with the quantum of resources allotted to them and demand more. India is no exception.

Whereas demand for additional allocations by the armed forces is understandable, it is equally incumbent on them to exercise extreme financial prudence in defence expenditure to ensure optimum utilisation of the scarce resources. The armed forces owe it to the nation. Prudence means exercise of ‘care and good sense’ while making a decision or taking action. Financial prudence implies acting with utmost propriety and acumen; and exercising due care, caution and attention to obtain best value for money.

The discipline of defence economics is the most potent tool that helps ensure financial prudence. It encompasses all aspects of defence imperatives that have cost implications. Contrary to the common misconceptions, defence economics is not an academic exercise of theoretical value that confines itself to case studies to ascertain expenditure data of every military action or policy initiative. On the contrary, it is dynamic in nature and provides a well-evolved methodology to facilitate application of economic logic to defence issues. It is an instrument of decision making.

Dassault Aviation’s Rafale
Dassault Aviation’s Rafale

Defence economics is a very broad-based discipline and embraces all aspects of the economics of defence. It has been defined as a field of national economic management concerned with peacetime and wartime military expenditure. It includes defence expenditure (both as budgetary allocation and as a proportion of gross domestic product); expenditure related to inland security; defence industry, international arms trade, defence offsets and arms embargoes; and relationship between defence expenditure and economic activities both domestically and externally.

Defence economics has some limitations too. As military is not a profit centre in the corporate mould, it is difficult to compute its productivity and cost-effectiveness. Any attempt to measure military’s usefulness in terms of tangible gains that a nation can draw is bound to be flawed. Further, it is difficult to explore socio-economic issues involving the military, especially in the developing nations where it performs the functions of a catalysing agent for national integration, economic development and social change.

Every nation has well-considered National Strategic Objectives (NSO). These are based on a nation’s aspirations as regards its envisioned place in the comity of nations in short, medium and long terms. All its planning and initiatives (foreign policy, economic reforms and military strength) are directed towards achieving these objectives. As there may be multiple routes to achieve NSO, it is for the defence economists to analyse them and suggest the most economically beneficial option. In addition, defence economics imposes caution against seeking over-ambitious NSO: they must be commensurate with nation’s potential.

Defence Economics as a Decision-Making Tool
Defence economics also assists in defining the equipment policy. It suggests the fields in which indigenous competence should be developed on priority to reduce dependence on imports, including co-development of equipment with other friendly countries. It also helps in framing policies for defence offsets in order to draw maximum benefits from them. Export of defence related goods is another area where defence economics can contribute.

Defence acquisitions consume a major portion of the defence budget. Defence economics play constructive role in ensuring that due diligence is exercised while incurring expenditure through adherence to well-evolved procedures ensuring probity and demonstrating transparency. It also helps in guarding against inadvertent ambiguities in deals that may prove costly to the exchequer at a later stage.

As is apparent, defence economics covers the complete gamut of defence issues that have a cost implication. It is a holistic discipline that aims to seek continuous improvement of defence structures and procedures through innovative measures that are developed, re-engineered and reconfigured to reduce costs and improve efficiency. In addition, policies are regularly revisited to make them responsive to changing ground requirements.

Financial Prudence
Due to a number of historical and cultural reasons, there is a total absence of defence economics in India. Financial prudence is limited to ensuring adherence to the laid down procedures. As defence is generally considered to be a holy cow with secrecy shrouding its myriad features, public scrutiny has also been limited to a few high-value procurement transgressions. Even the Parliament allots negligible time to discuss the defence budget. Presently, the ministry of defence (MoD) is totally bereft of any economic advice whatsoever. There is no institutionalised mechanism in place to examine various alternatives at different stages of decision-making to identify the most cost-effective option. As a matter of fact, cost is of peripheral importance in the current decision-making process.

Defence Accounts Department provides financial services cover to MoD. It is tasked to prepare budgetary projections and monitor expenditure; examine proposals received from the services to ascertain their compliance with financial rules and regulations; and carry out post-audit of all transactions to identify infirmities, if any. As is apparent, provision of dynamic defence economic advice to affect savings is not a part of its charter of duties.

Therefore, there is an urgent need to undertake a major holistic exercise to evolve methodology for meaningful application of defence economics to various features of defence planning to help initiate measures to save national resources. Five salient aspects that need special attention have been discussed below.

One, for the armed forces, mission accomplishment is the central issue. Help of defence economists can be taken to analyse all possible alternatives to select the most cost effective option. In that pursuit, scientifically evolved models to reduce expenditure on non-core functions by outsourcing them to private agencies can also be explored.

Modernisation of armed forces must take place in an integrated, planned and unified manner. As all constituents of a force are inter-dependent for optimum utilisation, overall profile should always be orchestrated and developed in a synergised and mutually complementary manner. There is no point in having excessive potential with one constituent without other constituents possessing matching capability.

US Army soldiers with M777 howitzer in Afghanistan
US Army soldiers with M777 howitzer in Afghanistan

Two, the services formulate the Services Qualitative Requirements (SQR) on the basis of essential military requirements corresponding to the tasks to be performed by the equipment. As cost is a function of performance, it is essential that every parameter be examined thoroughly for its inescapability with reference to the cost penalty. At times, minor acceptable moderation of SQR can result in huge savings. Seeking the best equipment in the world without reference to its full exploitability invariably results in wasteful expenditure. All procurements must be need based; and, should either cover existing critical gaps or enhance own operational capability for the assigned role.

Equipment purchased on the basis of initial cost may turn out to be more expensive in the long run. Therefore, it is essential to consider total cost of ownership. Efforts should be made by the services to explore all possibilities of making do with equipment which is commonly available off the shelf in the civil market. It is a highly cost-effective option with assured back up support. Similarly, application of dual-use technology can save considerable resources through economies of scale by defraying cost of acquisition.

Three, affordability should be a key criteria in all expenditure proposals. Affordability does not mean prioritising them as per the availability of funds. Affordability has a much wider ambit and covers myriad aspect of defence expenditure. For example, every major deal results in long-term contractual commitments which restrict India’s economic, strategic and foreign policy manoeuvrability. Therefore, every arms deal should be judged for objectivity, rationality, judiciousness and long-term fall-out. Detailed affordability studies should form the basis of decision making as India can ill afford to make its future decision-making freedom captive to poorly conceived plans.

Affordability of technology is another important issue. Many countries have rued purchase of technology which resulted in infructuous facilities and proved economically unviable. Purchase of technology has to be commensurate with own needs and affordability, lest it results in the wastage of precious economic resources.

Four, although optimal utilisation of the allocated budgetary is the stated aim of all government directives, cost consciousness is never given due importance, especially in procurements. Sadly, there is a misconception in the minds of procurement functionaries that the whole concept of cost consciousness is limited to buying the cheapest product that fulfils the laid down SQR. It is quite a juvenile approach while dealing with defence purchases worth billions of dollars.

Cost consciousness in defence procurements is a multifaceted and all-encompassing concept. Outlay has to include both acquisition costs and sustenance costs. As sustenance costs become confirmed liabilities, they reduce availability of funds for future acquisitions. This aspect needs special attention as procurement of any equipment saddles the exchequer with fiscal burden during its entire life span.

Finally, economics of offsets need a relook. Offsets certainly do not come for free. They are not complimentary gifts offered by indulgent vendors. Foreign vendors have to incur additional expenditure to fulfil them and hence mark up their commercial bids accordingly. It stands to reason as no vendor can be expected to reduce his own margin of profit by absorbing offset overhead costs. Therefore, most defence economists are of the view that offsets do not make financial sense.

Over a period of time, many countries have found to their dismay that the benefits flowing from offsets are illusory. Paying for unproductive and uneconomical offsets always results in wasteful expenditure. Worse, offsets are difficult to monitor. It is universally accepted that offsets make sound business sense only if the trade-off results in extraordinary economic or technological gains. For example, leverage of offsets can be effectively used to obtain critical technologies that industrially-advanced countries are reluctant to sell.

The Way Forward
Economics of defence cannot be ignored as defence consumes considerable resources. Though defence and economic development are complementary, they have a mutually antagonistic relationship as both vie for the same pie. Application of defence economics can reconcile the two and optimise returns.

Unfortunately, the discipline of defence economics is alien to the Indian policy makers. Increasing public scrutiny is resulting in demands for transparency and justification for defence expenditure. Rapidly changing face of conflicts is adding to the concerns. For optimum utilisation of the resources, the process of decision making must be based on the inputs received from the defence economists. They can help achieve national strategic objectives with least burden on the national exchequer. It is time India gets over the old notion that defence matters are beyond economic justification and develops a pool of skilled defence economists.