Money Over Matter | Cost Consciousness

Defence economics is important for any armed forces, and India can no longer ignore it

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

Every nation evolves 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 the achievement of these objectives.

However, due to constantly evolving geo-strategic environment, discernment of probable threats with any degree of certainty poses a formidable challenge to the defence planners. Resultantly, there is a tendency amongst the defence planners to play safe. They tend to be extra-cautious by overplaying the threats in all possible contingencies.

Although foreign policies and economic strength are of immense importance, pre-eminence of a nation has always been a function of its credible military prowess. A militarily weak nation counts for little on the world stage. In other words, the achievement of NSO is possible only if the nation possesses enough muscle to project its military strength. And for that, adequate resources have to be made available to the armed forces.

Undoubtedly, national defence is a costly proposition. All governments are hard pressed to make available the needed resources to the armed forces to enable them to fulfil their responsibility. Defence and economic development have a mutually antagonistic relationship as both vie for the same pie. Defence always draws resources away from economic growth. That is the reason that militaries in all countries are increasingly having to contend with mounting public demand for reduction in defence outlays.

Further, increasing public scrutiny raises questions about justification for major military expenditure. Defence equipment, especially high-tech, are priced exorbitantly. Unconventional conflicts and internal security concerns necessitate entirely different inventory. Manpower overheads are rising. Worse, as defence budgets have failed to keep pace with inflationary trends, defence allocations have been falling in real terms.

As can be seen, it is a dilemma that all countries face, i.e. how to achieve NSO with limited resources that a nation can afford to spare for the armed forces. Two obvious options available are either to dilute NSO or to provide matching resources. Both are not pragmatic. Dilution of NSO implies compromising national security imperatives, a highly undesirable course of action that can prove perilous for the nation’s survival. On the other hand, provision of addition resources to the armed forces would mean curtailment of resources for economic development and public welfare. It is an equally undesirable alternative as public welfare lies at the heart of every nation’s core aspirations.

While the debate regarding division of resources between the armed forces and the economic growth continues unabated, the militaries carry on shouldering the responsibility of safeguarding national interests. There is no dilution in that as the militaries cannot fail their nations. Therefore, the only viable option available to the national leadership is to strike the right balance while allocating resources.

More importantly, the militaries have to learn to manage within the limits of the apportioned capital. Application of the scientific tool of defence economics is considered to be ideally suited for that. Emergence of defence economics as a separate and distinct discipline of study is of great significance as it helps identify methods/ techniques of maximising the yield of the assigned resources to achieve NSO to the maximum extent possible.


Import of Defence Economics in Optimising the Defence Budget  

At the outset, it will be in order to differentiate between finance and economics as many tend to consider them to be similar or synonymous. Whereas finance is primarily concerned with the science of managing available funds, economics covers a much wider span and range. Economics is a social science that studies the broader management of goods and services, including their production, consumption and the factors affecting them.

Defence economics encompasses all aspects of defence that have a cost implication.  According to Encyclopaedia Britannica: “Defence economics is a field of national economic management concerned with peacetime and wartime military expenditure.” It also includes cost of non-conventional conflicts, terrorism and civil strifes. More importantly, defence economics attempts to analyse defence expenditure (both as budgetary allocation and as a proportion of gross domestic product); expenditure on inland security; promotion of defence production and acquisitions; relationship between defence expenditure as a function of national economic aspirations; and international military cooperation having economic ramifications.

A word of prudence will be in order here. The discipline of defence economics should not be treated merely as an academic exercise of theoretical value. It must produce well-founded inferences and indicators that can be applied to defence related subjects with sound economic logic. To start with, it must examine if NSO are within the realm of achievability. Else, the national leadership should be cautioned against being over-ambitious. NSO must be achievable, viable, practical and commensurate with the nation’s affordability.

Defence minister Rajnath Singh at the Naval Commanders Conference

Once a decision is taken as regards the required military capability, it is for the defence economists to suggest the best course for its effective projection. Military prowess of a nation can be demonstrated in a number of ways to convey the desired message of deterrence/ retribution to the prospective adversaries. Defence economists should be able to provide cost implications of pursuing different paths and suggest the least-cost route/ routes, including foreign policy initiatives, economic reforms and pacts/ alliances (both military and trade).

After broad contours and dimensions of the overall force level get mapped, defence economists should step in to provide guidelines to help determine exact shape and size of the various components of the forces and sub-allot funds to create and sustain them. Though laborious, all aspects of defence should be subjected to costing to identify areas which need cost-cutting measures. Innovative steps should be initiated to re-engineer and reconfigure targeted constituents to reduce costs and improve efficiency. Procedures should be regularly revised to make them responsive to changing ground requirements and to facilitate fiscally prudent decision making. Periodic review of major mile-stone is essential for mid-course corrections.

Affordability should always be one of the prime considerations in all defence purchase decisions. As per the US Department of Defence, affordability can be defined as the degree to which the lifecycle cost of an acquisition programme is in consonance with the long-range plans relating to modernisation, force structure and manpower requirements. As affordability is a function of multiple variables in defence procurements, affordability analysis must precede every major defence procurement proposal.

Strangely, in defence procurements, affordability has generally come to mean availability of budgetary support to finance acquisitions. The complete exercise gets limited to prioritising procurement proposals and then progressing them as per the availability of funds for capital procurements. Limiting the scope of affordability to cost considerations can prove highly misleading and disadvantageous in the long term. Neglect of affordability analysis can result in a country getting saddled with uncalled for fiscal liabilities.


India’s Neglect of Defence Economics

In India, defence economics has never been given any importance. No comprehensive exercise has ever been undertaken to improve the process of decision making to obtain best value for money. It will not be incorrect to say that defence economics as a discipline is alien to Indian policy makers. There are a number of historical and cultural reasons for the same.

One, defence has generally been considered a holy cow with secrecy shrouding its functioning. Public interest has been limited to a few high-profile procurements that have come under scrutiny for alleged misdemeanours. Additionally, no independent think tank has ever tried to create public awareness and mould public opinion with respect to the optimisation of the defence budget.

Two, culture of cost-consciousness is conspicuous by its absence. Cost and affordability have never been analysed to ascertain the most prudent option. Thrust has been towards managing within the given budget rather than identify more cost-effective alternatives. As demand for new acquisitions far exceeds availability of funds, the constraint is overcome by prioritisation procurement proposals.

Three, although optimal utilisation of the allocated budgetary resources is one of the stated aims of the procurement procedure, scant attention is paid to it. The services formulate Services Qualitative Requirements (SQR) of equipment sought in total oblivion as regards their cost. They want the best; cost and affordability notwithstanding. Sadly, there is a misconception in the minds of the procurement functionaries that the whole concept of cost consciousness is limited to buying the cheapest product by identifying the lowest bidder amongst the SQR-compliant and technically acceptable vendors.

Finally, the ministry of defence (MoD) is totally bereft of any economic guidance. The defence planners need advisory support from experts, who are proficient in economics, possess required knowledge of the armed forces and are adept at the application of various scientific tools of financial management to optimise the use of scarce defence resources. In the absence of such expertise, no holistic exercise has ever been undertaken to evolve methodology for meaningful application of defence economics to various stages of defence planning.

In addition, MoD has failed to adopt many cost-saving measures like integration of facilities of the three services to eliminate duplication of facilities; making procurement purely need based; outsourcing maintenance support to the manufacturers; exploring joint development and joint production of equipment by following consortium approach to defray costs; exploiting competence of private sector through public-private partnership; application of dual use technology; and utilisation of commercially available equipment.

Some of the major issues with considerable economic implications that merit immediate attention of the Indian policy makers include adoption of scientifically evolved ‘Coefficient of Core Consumption’ model to reduce expenditure on non-core functions through outsourcing to civilian entities. Economics of offsets also need a relook. As they do not come for free, over a period of time, many countries have found to their dismay that the benefits flowing from offsets are illusory. Most defence economists are of the view that offsets rarely make financial sense.


The Way Forward

As seen above, it is time India gets over the old mindset that defence matters are beyond economic justification. There is a pressing need to inculcate a culture of cost consciousness in India. Policy makers should learn to take decisions with cost as an important parameter. For that, there is a need to create a separate pool of defence economists, trained, equipped and proficient in rational application of economic tools to assess costs and returns of major defence proposals to help evolve the most suitable alternative.

The experts should also be able to assist in the evolution of contours of force structure through establishment of dynamic linkages between well spelt-out strategic objectives and available resources. A system should be put in place to continuously upgrade their skills to enable them to function effectively in a dynamic world. The defence economic advisors should be capable of developing indigenous models for performance evaluation criteria, duly supported by methodological research support.

As defence systems consume a major portion of the defence budget, special attention is required to be paid to their long-term financial ramifications. While incurring capital expenditure on new procurements, both acquisition costs and sustenance costs must be factored in. 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.

Economics of defence cannot be ignored as financial reforms are not limited to reducing expenditure on defence. Far more important is to ensure that resources committed are applied optimally to achieve national security objectives through detailed analysis of multiple options with cost implications duly factored in. The British call the whole exercise as ‘defence value for money’; being the application of economic resources to generate and sustain a desired capability.

To sum up, defence economics is a scientific tool that helps in the selection of the most suitable option to achieve NSO; formulation of defence policy guidelines with broad contours of the targeted defence potential; and determination of structure, shape, size and equipment profile of the armed forces within the constraints of the allotted resources.

In other words, defence economics is an all-enveloping science concerning every aspect of defence that has an associated financial impact. Hence, it merits focused attention. India cannot afford to neglect it any more. To start with, a nucleus of defence economists should immediately be created under the Chief of the Defence Staff. As they gain experience, ambit can be enlarged in a phased manner.


Call us