‘Where do Budget cuts figure in Defence modernisation?’

[MINK]

With Finance Minister P. Chidambaram saying that there are plans to reduce the Defence budget, a fresh debate has been set off on whether it is prudent to do so at this juncture.

In an interview with Business Line, global consultancy firm KPMG’s head for Defence and Security Advisory Services, Wg Cdr Neelu Khatri (retd) and her colleagues from the US, Marty Philips and partner, global international corporate tax, Gaurav Mehndiratta spoke about the importance of getting the Defence sector to respond to newer challenges.

Excerpts:

The Finance Minister has talked about plans to reduce Defence spending. Are our Forces ready for such a scenario?

Wg Cdr Neelu Khatri: I think what is important is to see that the Defence Ministry gets its act together.

Even though new policies have come into force, the actual problem comes in when you operationalise the policy.

When you speak to the companies, their main concern is ‘how does one actually put them on the ground’, whether it is through the offset policy or the DPP (Defence procurement policy).

There are issues like ‘no cost, no commitment,’ or the lowest tender being chosen. Then there is the fact that, in spite of following the entire DPP, the deal suddenly gets cancelled.

Now the world looks at them as there are costs they have to incur. If the participation still ends in cancellation and then there is a reissue, it becomes a problem.

Marty Philips: My country (the US) is cutting the Defence budget right now.

Every country, including many in Western Europe, is struggling with the same issues: ‘How do you balance a shrinking budget with the Defence budget and social programmes?’ So, no one looks negatively at India for making cuts in the Defence budget.

India has said that they are going to modernise and upgrade their Forces. They have an FDI in place too.

So, I would ask how can the budget be cut, and from what to what.

How does that figure in the modernisation programme? It is baffling to the West how the budget process works. What is going to happen and what is not going to happen.

Even during good times, the Indian military is still struggling to drive procurement closure. If they can figure that out, it would surely give a boost to confidence in the West.

It may seem bureaucratic but these checks and balances have been put in so that the right things are done all the time…

Marty Philips: Look at where I live. There is nothing more bureaucratic than the US Government. You have to work through the process. Weed out waste and abuse. At the end of the day, India needs new equipment, planes. I am not saying just make it easier. But look at how to go through these processes. I don’t know how to add velocity to the process.

Do you really think our offset policy is not well thought out?

Khatri: What is important is how much of the advantage this policy can bring to the Defence sector. Now that it is here, let us take advantage of that.

If one does a back of the envelope calculation, what needs to be seen is how many RFPs came up through the offset policy and how many of them actually turned into contracts (see Table, based on information received through RTI). If one looks at the time from 2008 to 2013, we can see that almost $45 billion of contracts were signed.

The difference between this year’s Aero Show (where the contract for the French Rafale fighter jet was signed) and the previous one, however, is that earlier, there were plenty of sellers.

Now, those who have received contracts want to implement them and, hence, serious discussions are taking place.

If you look at the history of offsets, we found that 12 contracts were signed, though, of them, nine had the implementation of less than 5 per cent. Of the nine, seven had zero per cent implementation, as per the RTI we filed.

All these have to be carried out in time. Otherwise, there will be penalties. But the Government is going slow on penalising the defaulters, which means they are empathetic about the delays.

Mehndiratta: The offset policy we have is not just an Indian phenomenon. Offset in other countries is much higher.

Now, how can a company meet the offset policy? Either by investing in an Indian company or buying its products. If you were to invest, you only have 26 per cent. And that’s an issue.

How do you view the modernisation happening in the Defence sector now? Is the Government doing it right?

Khatri: That is an area of concern. We have conducted some research to look at what major contracts have been signed in the past. To our surprise, not a single Army contract has been signed. Only contracts for the Navy and the Air Force have been signed.

Some field trials are going on, which means it will take another six to eight months to complete. So, maybe in another 12 months, contracts could get signed.

How dated is our military equipment?

Khatri: We are still operating with machines and guns that were procured 30 years ago and this is as per official data, which show how grim the situation is.

Whenever you buy a new machine, it has a certain shelf-life and once that period gets over, you can go for a major overhaul which adds another 10 or 15 years to the life of the machine.

Maybe another overhaul can add five years more.

Unfortunately, 50 per cent of the machines have already lived through that last stage too.

We also need a single agency which can deal with licences for offset contracts. We don’t even know which ones require a licence and which ones don’t.

Where do Budget cuts figure in Defence modernisation? - The Hindu Businessline

 

[Koovie]

I think that smaller deals like those for BPJs will be hurt since the capital acquisition budget will only lose 1.3 billion USD.

 

[IndoUS]

I think that smaller deals like those for BPJs will be hurt since the capital acquisition budget will only lose 1.3 billion USD.

If they cut it from the army it would be shame since the regular infantry is in dire need for new gear and these cuts will only delay the needed upgrades in the BPJ's ans new weapons for the army.

 

[Koovie]

If they cut it from the army it would be shame since the regular infantry is in dire need for new gear and these cuts will only delay the needed upgrades in the BPJ's ans new weapons for the army.

But on the other hand, deals for the IAF and IN are more important than small things like BPJs.
Air and naval superiority and the key to success and the Army can do its job with or with out lighter BPJs.
And fiscal consolidation to attract investors is the need of the hour anyway.

 

[IndoUS]

But on the other hand, deals for the IAF and IN are more important than small things like BPJs.
Air and naval superiority and the key to success and the Army can do its job with or with out lighter BPJs.
And fiscal consolidation to attract investors is the need of the hour anyway.

True but if you look at it the navy and the AF are already on their way to modernization while the army is still struggling. The navy will get the INS Vikramaditya this year and possibly the INS Arihant, and the AF(MoD) will hopefully sign the deal for the MMRCA which will be a great boost to the IAF. While in the case of the army we haven't seen any such big ticket items. All of the modernization are currently geared towards the SF which they hope will trickle down to the regular infantry. And the cuts will further delay these process.

 

[anant_s]

Attack Helicopter RfP cancelled? are we talking about impending apache deal, don't think it is cancelled.
Similarly, Mida Air Refuellers, i thought the deal is going through

 

[Ayush]

We need to find a balance in our expenditure. Though these cuts make me feel bad, , maybe the government knows the situation better,that is if they function without any corruption.

 

[Abingdonboy]

Once again the media is making a montain out of a molehill- this is a ONE OFF cut that exsists specifically for the FY-2012-13, the defence budget of 2013-14 will be greater than the allocation for 2012-13, following a trend that has exsisted for almost a decade now.


When was the AAR deal cancelled? When was the Apache deal cancelled? When was the MRMR a/c deal cancelled?


As for BPJs and SPGs there are tenders and RFIs out for both. How can 2011 cancellations have anything to do with budget cuts in 2013?!

FFS media grow up!

 

[satish]

We should not cut the defense budget, we should instead get the govt out of the subsidy business of petroleum products(diesel, LPG) and other goods and services as well. We should auction off all PSUs except defense related PSUs. Get the govt out of banking business. Govt role should be limited to national defense, foreign policy and judicial system. Govt should also try to reduce its revenue and it should try to become a less burden on the country. Every rupee that govt takes in is a rupee that is denied to economy of India.

If they knew the situation, we would probably have not arrived at this situation and our economy wouldn't have slowed down. If the govt knew better , we wouldn't have gone bankrupt in 1991. Govt knows nothing. They are like a bunch of kids in a chemical lab, throwing all chemicals around and expecting a miracle but all they gonna do is blow us up.

We need to find a balance in our expenditure. Though these cuts make me feel bad, , maybe the government knows the situation better,that is if they function without any corruption.

 

[T90TankGuy]

We should not cut the defense budget, we should instead get the govt out of the subsidy business of petroleum products(diesel, LPG) and other goods and services as well. We should auction off all PSUs except defense related PSUs. Get the govt out of banking business. Govt role should be limited to national defense, foreign policy and judicial system. Govt should also try to reduce its revenue and it should try to become a less burden on the country. Every rupee that govt takes in is a rupee that is denied to economy of India.

If they knew the situation, we would probably have not arrived at this situation and our economy wouldn't have slowed down. If the govt knew better , we wouldn't have gone bankrupt in 1991. Govt knows nothing. They are like a bunch of kids in a chemical lab, throwing all chemicals around and expecting a miracle but all they gonna do is blow us up.

Well i dont know what to say about your post !!! but lets leave that aside for a moment and i was wondering if you could elaborate on the bold text?

 

[Arav_Rana]

Wanna cut, cancel VVIP deal. No need to buy any VVIP hello.

 

[Sergi]

Once again the media is making a montain out of a molehill- this is a ONE OFF cut that exsists specifically for the FY-2012-13, the defence budget of 2013-14 will be greater than the allocation for 2012-13, following a trend that has exsisted for almost a decade now.


When was the AAR deal cancelled? When was the Apache deal cancelled? When was the MRMR a/c deal cancelled?


As for BPJs and SPGs there are tenders and RFIs out for both. How can 2011 cancellations have anything to do with budget cuts in 2013?!

FFS media grow up!

News is reporting something happened few years ago. Most if the things are correct.
Attack chopper RFP was issued in 2008 and canceled in 2009/10. It was reflotted again and Apache win.
MRMR was canceled. Reissues again. Didn't know about AAR

It's a speculation that the defence budget cut ( which is around 2 billion ) will hit BPJs

 

[Koovie]

We should not cut the defense budget, we should instead get the govt out of the subsidy business of petroleum products(diesel, LPG) and other goods and services as well. We should auction off all PSUs except defense related PSUs. Get the govt out of banking business. Govt role should be limited to national defense, foreign policy and judicial system. Govt should also try to reduce its revenue and it should try to become a less burden on the country. Every rupee that govt takes in is a rupee that is denied to economy of India.

If they knew the situation, we would probably have not arrived at this situation and our economy wouldn't have slowed down. If the govt knew better , we wouldn't have gone bankrupt in 1991. Govt knows nothing. They are like a bunch of kids in a chemical lab, throwing all chemicals around and expecting a miracle but all they gonna do is blow us up.

There is no other option. The government is not strong enough to push forward such liberalization right now.

MMS is a world wide respected economist who knows what he is doing, however, thanks to his Italian mistress, the everything denying opposition (BTW is the BJP for a liberal economy`?), and the weak position of the UPA he wont be able to implement bigger reforms.

So with this situation, the FM has not many other options left than to cut spending in all departments.

 

[satish]

The govt is liability on the people of India. It is neccessary libaility like if we live in a rented home, we got to pay for it. The govt is like a service provider for which you pay money for every month(in this case a year). The total revenue of the govt is nothing but the amount paid by the people of India to union govt for its services. If the govt takes in more money , less ,money is available with the people. For example, if you live in a rented home and pay Rs 2000 rent per month and rent goes down to Rs 1000 your economy will improve. The country as a whole do not have unlimited credit, so the credit allocated to govt is the credit denied to the productive sectors of the economy. Govt does not have any instrinic money wealth, if it has to give wealth to somebody, it has to take it from somebody else. So if the govt costs less to the people it will improve the economy by becoming a less burden and also by allocation of credit to productive sector, since it is the profit making companies that pays taxes. So less tax payed by them will result in more money available for expanding their business or by starting a new business which in turn creates employment and results in people becoming less dependent on the govt. Hope this explains.

Well i dont know what to say about your post !!! but lets leave that aside for a moment and i was wondering if you could elaborate on the bold text?

 

[satish]

I accept MMS is a world wide respected economist, but a lot of world experts on the economy (including MMS)(most of them Keynesians) failed to see the 2008 recession coming.They also weren't able to explain why there was a recession after the fact. The Austrians predicted it many years ago. So i doubt the MMS expertise in management of economy although, i believe in free markets and not in the economy being managed. It seems he believes in central management of economy. We have examples of that failing in soviet union, north korea etc., As far as BJP they should be better be for free markets otherwise i would consider them unpatriotic, treasonous and i will assume them as working against the prosperity of India.

As far as populism goes if the govt cannot do right thing , than we have a problem. Remember hitler was elected because of populism in germany. So the govt should get out of the subsidy business, if we have to remain a freedom and independence loving country.

If the govt makes a wrong decision(knowingly) because of populism, than it should be considered treasonous.

There is no other option. The government is not strong enough to push forward such liberalization right now.

MMS is a world wide respected economist who knows what he is doing, however, thanks to his Italian mistress, the everything denying opposition (BTW is the BJP for a liberal economy`?), and the weak position of the UPA he wont be able to implement bigger reforms.

So with this situation, the FM has not many other options left than to cut spending in all departments.