Five Highlights of FY 2012-13

As the FY 2012-13 comes to a close, five developments, each with an underlying message, are worth highlighting. While it seems like distant history now, FY 2012-13 had actually started on quite a bright note. The budgetary allocation was quite reasonable and there was nothing much to complain about, despite the allocation being less than the projection. The comparative figures are as follows:

Note: Based on the author’s estimation of the capital acquisition budget 2013-14. BE is Budget Estimate; RE is Revised Estimate

There is a message hidden in this comparison. The increase in this year’s allocation with reference to the previous year’s RE is quite comparable to the increase in last year’s allocation with reference to the RE of 2011-12, except in the case of capital acquisition. Under capital acquisition also, the increase in the BE for 2013-14 with reference to the RE of 2012-13 is quite reasonable, especially if one takes into account the fact that there was a huge reduction of approximately INR 10,000 crore under the capital budget, most of which was borne by the capital acquisition budget. The capital budget is generally reduced on the basis of a realistic assessment at the RE stage of how much could actually be spent in the remaining part of the year. That the reduction was not unwarranted is evident from the fact that at the end of February 2013 approximately INR 6,000 was available in the capital budget for spending, out of which INR 3,500 was available under the capital acquisition budget. The message: no need to despair. It may not really be as bad in 2013-14 as it appears on first sight, especially if one also considers the state of the economy.

There was another development right at the beginning of the year. Stung by the constant criticism about non-finalization and non-approval of defence plans, the Defence Acquisition Council (DAC) approved both the Long-Term Integrated Perspective Plan [LTIPP] (2012-27) and the 12th Five Year Defence Plan (2012-17) on April 2, 2012 itself. This step was significant for two reasons. One, the plans were approved right at the beginning of the plan period. Two, it settled the issue of whether it was necessary for the Five Year Defence Plans to be brought before the Cabinet Committee on Security (CCS).

The ninth Five Year Plan (1997-2002) was approved by the CCS in December 1997. Before that the sixth (1980-85) and seventh (1985-90) plans were also approved by the Cabinet Committee on Political Affairs (CCPA). But none of the subsequent plans was brought before the CCS, primarily because of differences with the Ministry of Finance (MoF) about the financial size of the plan. In fact, the Ministry of Defence (MoD) seems to have made up its mind not to bring the plans before the CCS when it decided not to take the 11th Five Year Plan of the Coast Guard to the CCS despite there being complete agreement with the MoF regarding the size of the plan.

Since it is not a settled issue that there are clear cut advantages of seeking CCS approval, it is just as well that the LTIPP 2012-27 and the Five Year Defence Plan (2012-17) were approved by the DAC. However, a few issues remain to be addressed. The biggest issue concerns availability of funds as per these plans. Since that appears to be unlikely the fallback plans need to be prepared. Two, the plans approved by the DAC in April 2012 relate to the armed forces. There were supposed to be another two Five Year Plans relating to the Department of Defence Production and the Ordnance Factory Board. One did not hear anything about them during FY 2012-13. Three, the existing procedure requires a public version of the LTIPP outlining the technology perspective and the capability roadmap covering a period of 15 years to be released by the MoD. It has been a year since the LTIPP and the Five Year Plan were approved by the DAC, but the public version is yet to be released though it is believed that Headquarters Integrated Defence Staff had prepared it a long time back. Considering that this could be the starting point for the private industry to plan indigenous manufacture of defence equipment, it is not a day too early to pay attention to the requirement of releasing the public version of the LTIPP.

The third landmark development was the notification of the much awaited new Defence Offset Guidelines which came into effect on August 1, 2012. These guidelines were radically different from their earlier avatars and were expected to facilitate implementation of the offset policy. While this development held a lot of promise, the subsequent inertia in addressing various issues relating to implementation of the guidelines, coupled with the slowdown of the economy which raised the spectre of reduction in the defence budget, appears to have somewhat dampened the initial enthusiasm. This is reflected in the dreary web pages of the Defence Offset Management Wing (DOMW), which was created as a part of the new guidelines, to walk the talk on offsets. There is an urgent need to energize the DOMW.

The fourth important development of the year was the economy cut imposed on the defence budget, followed by a further reduction of INR 10,000 crore at the RE stage in the capital budget, bringing up the total reduction to almost INR 15,000 crore. The buzz about the cut in the capital budget had been in the air for a long time before it became officially known when the union budget for 2013-14 was presented to parliament by the Finance Minister. The question whether it was justified or not is moot at this stage but the unfortunate fallout was the perception that it created. This cut was viewed as a setback to modernization, which probably also created anxiety in the defence industry. It is becoming increasingly clear that the reduction did not really mean a setback for modernization but it is too late to mend the damage it might have already caused. The underlying message is that there is a need for greater transparency and engagement with the print and electronic media by way of detailed briefings so as to prevent misgivings.

The fifth development of the year could have far-reaching consequences. The year ended with the unfortunate incident involving the VVIP helicopter deal. The matter is now under investigation and hopefully at the end of it there will be clarity about the whole incident, which should ideally be the basis for taking corrective action. But that might take a while. Meanwhile, the government has reacted by announcing that procedural changes will be made to provide Indian industry the first right of refusal. One does not know what changes are being contemplated but any change in the policy or procedure that brings about an improvement in the system must be welcomed. However, it would be naive to assume that the spectre of transgressions in defence deals will go away by taking the proposed measure. Promotion of indigenous industry and dealing with corruption are two different issues. The first right of refusal to Indian industry might not be enough unless a conducive eco-system is created by addressing issues related to industrial licensing, taxation, foreign direct investment and exports. Greater engagement with industry and coordination with other ministries and departments will go a long way in resolving these issues.

Incidentally, the Defence Procurement Procedure 2011 has been under review for more than a year. The Defence Procurement Manual 2009 (and its supplement of 2010) has also been under review for a long time. The financial powers delegated to the Services in 2006 were reviewed by a committee and recommendations made by it were accepted in late 2010. These recommendations have since then been on hold. The procurement procedures and the delegation of financial powers have a direct bearing on efficient utilization of the defence budget. This unfinished agenda of 2012-13 merits urgent attention.
FY 2013-14 has transited into the annals of the MoD but picking up a few messages from it and carrying forward the unfinished agenda to the next year would be the greatest tribute to the year gone by.

The author is Former Financial Advisor (Acquisition) & Additional Secretary and Member, Defence Procurement Board, Ministry of Defence. He is presently a partner in Dua Associates, Advocates and Solicitors.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.