Arms purchases need more bang for the buck

FINANCING DEFENCE-I

In what Defence Minister AK Antony billed as the first of its kind in the world, a three-day seminar on Defence Finance and Economics, attended by defence experts from 26 countries, including the US, Russia, the UK, France and South Africa, was held here from November 13-15.

For its organisers, the ministry of defence, it was an acknowledgement of the need to spend more efficiently the country's vast defence budget: at Rs 89,000 crore, it constitutes around 2.3 per cent of India's gross domestic product.

Reigning in their traditional secretiveness and insularity, defence ministry officials discussed "" in front of an international audience and the Press ""important issues like long-term defence planning, structuring the military, improving defence research and production and instituting transparent audit and accountability systems for monitoring defence expenditure. The fundamental issue that guided each session was getting "more bang for the buck".

The stakes for India are enormous. Over the coming Eleventh Five Year Plan (2007-2012), India will spend some Rs 600,000 crore on defence. Half of this is likely to go towards buying foreign weaponry.

India's own Defence Research and Development Organisation (DRDO) and its domestic arms infrastructure, consisting of 39 ordnance factories and eight defence public sector undertakings, have not significantly eroded the dependence on international suppliers.

As a result, New Delhi will spend in 2006-07 about the same on foreign arms as on education and health combined.

And while extensive public scrutiny accompanies the disbursement of the relatively smaller outlays on social sectors, a cloak of secrecy over defence spending precludes detailed discussion.

Generated by the seminar was a new glasnost that brought sharp official criticism on some of the ministry of defence's holy cows.

Training his cross-hairs squarely on the DRDO, Comptroller and Auditor General of India MK Kaul excoriated it for covering up a record of delay and failure by citing the need for self-reliance and indigenisation.

In the first ever official recognition of the DRDO's long-standing ploy of creating projects for its scientists by promising to make equipment that the military wanted to buy from abroad, Kaul declared, "Frequently, the lack of clarity on 'make versus buy' decisions has its origins in organisational conflicts of interest, which prove very costly for the country in the long run."

The DRDO, however, came to the seminar with a proposal to expand, not reduce, its role. DRDO chief M Natarajan, who is also scientific adviser to the defence minister, pleaded for greater funding for defence research and development since more than half the DRDO's annual Rs 5,000 crore budget went towards running an establishment of 30,000 employees in 50 laboratories.

The DRDO's proposal was an expanded budget, with 70 per cent coming from the government, 20 per cent from the private sector and 10 per cent from the military. This, suggested Mr Natarajan, would induce the military to accept the DRDO's projects and the private sector to benefit from the spin-offs of defence research and development.

Finance Minister P Chidambaram, however, made it clear that with a resurgent private sector waiting in the wings, patience was running out with the inefficient defence production behemoths (these include Bharat Electronics Ltd, Hindustan Aeronautics Ltd, Bharat Heavy Electricals Ltd and the public shipyards).

Mr Chidambaram flatly said, "The argument that the government in all circumstances must support loss-making undertakings or inefficient ordnance factories because of their strategic importance is difficult to sustain when there are many efficient alternatives."

Creating efficient alternatives was the provocative theme of keynote speaker Edward Luttwak from the Centre for Strategic and International Studies. Every country except India has avoided monopolies in defence research and development and production.

The US ensures that at least two private sector companies compete for every weapons contract; even the Communist Soviet Union, which ideologically rejected the concept of the free market, ensured that a number of design bureaus flourished and competed in designing weapons systems. Professor Luttwak pointed out that monopoly led not just to higher costs, but also to a slowing down of innovation.

"If I was appointed dictator of India, I would split up the public sector defence companies into two competing entities. I would surrender critical mass, I would surrender economies of scale, just to bring in competition," declared Luttwak.

Such radical surgery is unthinkable for the ministry of defence's department of defence production, but the seminar has placed before Indian planners, particularly the more open-minded junior ones, a whole new set of cutting-edge thoughts and concepts. And despite organisational inertia, these views could reverberate in the corridors of South Block.