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Tag Archives | Defence

Northeast Asia looks at India

The Geo-strategic significance of Northeast Asia dates back to the cold war  period  and continues to be relevant even in the current context. The region houses several important powers like China, Japan, the Koreas and there is a strong presence of United States in the region.

Economically vibrant region, Northeast Asia continues to attract the interest and attention of great powers. Though India is traditionally not a part of the region, today it is gaining relevance and credence an an important strategic player. This opportunity seems to be extremely critical, as the regional powers like Japan and South Korea sees India as potential player who could possibly alter the dynamics of the region.

Northeast Asia is becoming increasingly unstable with unresolved disputes and shifting alignment in the face of China’s growing presence in the region.  Though India-China relations is often seen in the light of cooperation and competition, the regional powers see India’s rise  probably as a swing in balancing China or leading to a multipolar order.

How is India seen as a vital player in Northeast Asia: 

India’s presence in the Northeast Asia is typically welcomed by South Korea, Japan and the United States. United States sees India’s presence as vital to the Northeast Asian security order. Unlike the past, US is today convinced of an expanded security role for India beyond the Indian Ocean Region. United States has made an ernest effort to conceptualise a strategic interconnection for India beyond the Indian Ocean and the Asia Pacific. A means to justify India’s role in Northeast Asia. Further United States has deliberately boosted politico-diplomatic engagement between India and the regional powers in Northeast Asia.  India has been welcomed in  the East Asian forums and institutions- probably a counter weight to China in the regionIn terms of security role, India has been involved in periodic naval exercises with the United states and Japan. The most recent has been the  Exercise conducted in Northeast Asia. Most of India’s allies in the Northeast Asia are formal and informal partners with United States. This strategic entente has brought India into the foray of partnership with Japan and South Korea.

Japan remains key to Asia Pacific, and  the recent interaction between India-Japan has strengthened the links further. The cold war politics drew India into an alignment different from that of most of the states of East Asia. and this created a sense of disjunct in terms of understanding each other.  The most complex of the India-Japan relation was the incomprehensible meaning on the  values and cultures that existed in both the countries.

However the perceived separation between the two countries are drawing to a close, the Japanese Prime Minster Shinzo Abe has called for a deeper, broader, action-oriented partnership with India. Both the Prime Ministers of Japan and India have unswervingly committed to a peaceful, open, equitable, stable and rule-based order in the Indo-Pacific region and beyond. Both the Prime Minsters have committed to an extended bilateral cooperation in spheres of security, stability and sustainable development. Several areas have been identified in terms of cooperation-people-to-people, tourism, infrastructure collaboration,civil nuclear energy and educational collaboration. Crucial areas in terms of transfer of Defence Equipment and Agreement concerning security measures for the protection of classified military information  further deepens the strategic ties between India and Japan. The participation of Japan in the India-US Malabar Exercise  has further forged the long term commitment with Japan and to deal with maritime challenges in the Indo-Pacific region.

India-South Korea relations is gaining credence in the recent years. Ideological differences through the cold war deterred the relationship between India and South Korea. But the recent “New Asia Diplomatic initiative” by South Korea and India’s “look East Asia Policy” has further elevated the relationship between the two countries.

While India and Japan have expressed concerns over North Korea’s continuous development of Nuclear weapons and have urged North Korea to comply with the international regimes. India is seen as a constructive  and viable partner in the security network in Northeast Asia. Is Japan, South Korea and Untied States subtly engaging India to contain China.

India at this juncture stands to benefit as this bilateral and multilateral engagement with North East Asia and United States is seen as a positive move towards India’s “Act East Asia Policy”.

Priya Suresh is a Research Scholar @Takshshila Institute. She tweets @priyamanassa.

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Thoughts on defence land

The Land Division of the Directorate General Defence Estates states that “The Defence forces require large areas of land for training, ranges, depots, airfields, quartering, camping, offices etc for military activities. Ministry of Defence, therefore, owns large tracts of land of approx 17.54 lakh acres, out of which approximately 1.57 lakh acres is situated within the 62 notified Cantonments and about 15.96 lakh acres is outside these Cantonments. The responsibility of day-to-day management of land is with the user services”

The Comptroller and Auditor General (CAG) undertook a performance audit of Defence Estate Management covering the period from 2004-05 to 2008-09, and submitted its report on March 25, 2011.  Some major findings of the CAG report were

  • delay in mutation of land in favour of MoD
  • increased encroachment
  • exploitation of defence lands for commercial purposes, and
  • the dismal state of lease management.

The standing committee made the following observations and recommendations:

  • Application of land norms: The Committee noted that MoD has faltered in applying norms for proper and judicious management of lands at its disposal.  It noted the inherent risks of holding vast tracts of unoccupied land, including hoarding.  It recommended that the entire ambit of defence land record keeping, mutation, sale and transfer, etc. should be bestowed upon the Directorate General of Defence Estates (DGDE).  Further, the whole issue of requirement of land by defence forces needs to be revisited so that land is put to optimum use.
  • Variation in records: The Committee expressed concern over discrepancy in land figures in the records of Local Military Authorities (LMAs) and Defence Estate Officers (DEOs).  In a survey, the land area in the records of LMA was 47% higher than that in the records of DEO for 9 army stations.  It recommended that the MoD make it mandatory for DEOs to periodically inspect the land records maintained by LMAs.  Further, there should be a comprehensive survey of all defence lands.
  • Mutation of defence land:  The Committee noted that a large portion of acquired land has been awaiting mutation for a long period, in some cases as long as 60 years.  It noted no serious efforts were made to expedite mutation of land to MoD.  It recommended that steps be taken for the same, and documents pertaining to non-mutated land be made available to the Committee within six months.
  • Unauthorised use of defence lands: The Committee noted that the CAG has repeatedly objected to the use of defence lands for unauthorised commercial purposes such as golf courses, but no action has been taken.  In addition, revenue generated from such activities has not been credited to government accounts.  The Committee recommended that the DGDE be supplied with all information relating to such activities and revenue generation.
  • Encroachment of defence lands: The Committee noted that non-mutation of land records, non-utilisation of land and existence of multiple authorities has resulted in encroachment of land.  It recommended that a single unified authority be created to look into management and protection of defence lands.
  • Dismal state of management of leases: The Committee observed that defence land is leased out at a very low rate compared to its market value.  In addition, no serious effort has been made to renew the leases, leading to loss of revenue to the government.  It suggested that the government bring out a policy in this regard within six months.

The defence services and the Ministry of Defence must act on the recommendations of the CAG as soon as possible(the recommendations were made 6 years ago). One must also take into account that a large portion of defence lands is in central business districts of major Indian cities and monetising these pockets will enable the forces to provide modern facilities with vastly improved living conditions for personnel and their families.

PS – My colleague Nitin Pai’s article  in Business Standard, argues for moving cantonments 20 km away from 20 cities

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DRDO exists to protect the nation and not the other way around

It is not in India’s national interest to continue to run public sector organisations like DRDO if they are inefficient and not meeting their objectives

— Varun Ramachandra and Nitin Pai

Recently, the Defence Institute of High Altitude Research — a Defence Research and Development Organisation(DRDO) laboratory — inked an agreement with Patanjali Ayurveda Limited for a non-exclusive license through transfer of technology on nutritional products.

The agreement was signed under the DRDO – FICCI Accelerated Technology Assessment & Commercialisation programme which “aims to create a commercial pathway to deliver technologies developed by DRDO for appropriate commercial markets for use in civilian products and services.” Previous deals under the programme have been with business houses like Dabur Ltd, Gujarat Fluorochemicals Ltd, Bhilai Engineering Corporation to name a few.

The DRDO is not involved in production of equipment, instead it is primarily responsible for research and development till the transfer-of-technology(ToT) stage. The move to rope in Patanjali to popularise DRDO’s  seabuckthorn based nutritional products is well within its mandate. But it must also be noted that many critical projects under DRDO that have a direct bearing on combat preparedness like the Light Combat Aircraft and Kaveri jet engine are delayed by several years.

Therefore, it is important to examine the raison d’être for DRDO in the first place. The organisation was set up in 1958 with the objective of providing the Indian armed forces with indigenous scientific and technological support. In 2015, 57 years after the formation of the DRDO, India continues to rely on imports to meet its domestic defence demands. This clearly indicates a mismatch in the said objectives and the achieved outcomes of the DRDO(and other public sector undertakings that are involved in defence).

In 2007, the government set up a committee chaired by Dr. P Rama Rao to specifically improve the operations of DRDO. The committee’s report suggested a breakdown of the organisation into smaller manageable units along with merging several of its laboratories with other institutions. The committee’s recommendations have been implemented in a half-hearted manner. The DRDO is far from reaching the operational efficiency of similar organisations from across the world and successive governments have continued to spend money, inefficiently, on DRDO.

From a financial point of view, national security is a delicate relationship between the taxpayer and the armed forces. Hence, it is incumbent upon the armed forces to equip itself with the best available technologies, be it domestic or international. In such a scenario, if Indian organisations are unable to meet the armed forces’ requirements it is natural and expected of the forces to look elsewhere to meet its primary goal of national defence.

The operational costs of running an organisation like DRDO run into several thousand crores. If such an organisation is inefficient and not meeting its objectives, it is not in India’s national interest to continue to run these organisations, especially when taxpayers money is involved. The same money can be used elsewhere to meet other national objectives.

Cloaking reforms under patriotism or indigenisation has resulted in a state where India imports large chunk of its equipment, but is reticent to allow FDI in defence manufacturing. The Indian defence establishment too has called for indigenisation to avoid being coerced by exporters in the hour of need, a problem that can be solved by developing strong economic ties with all exporting countries and/or by procuring from countries where the economic ties are already in place. It is worth reinforcing the fact that defence is a sector where anything short of excellence is a failure.

The dogmatic approach towards indigenisation since independence has yielded limited fruit. It has largely resulted in policy capture by public sector undertakings in the name of indigenisation. The net result is that the domestic industry is incapable of meeting India’s defence requirements and the political economy of reforms has ensured that many PSUs are in a rut.

Indigenisation is a lofty goal that is worth pursuing. Until the goal is reached, defence requirements continue to exist. Therefore, the path towards indigenisation need not be studded with inefficient public sector undertakings. Instead, actively allowing private players and FDI in the defence sector can inject competition and contestability. This will also allow Indian industries to acquire the necessary competence to deliver world-class results.

The government must urgently implement the recommendations of the P Rama Rao committee to restructure DRDO. The DRDO must focus on projects of importance and align its project priorities with that of the defence establishment. India can ill afford inefficient institutions for they have far reaching fiscal and social consequences. Moreover, DRDO exists to protect the nation and not the other way around.

A modified version of this piece was translated to Hindi and appeared in BBC Hindi 

Update: A translated version of this piece appeared in the Kannada daily Prajavani

Varun Ramachandra and Nitin Pai are with Takshashila Institution, a Bangalore based independent think-tank and a school of public policy. Varun tweets @_quale and Nitin tweets @acorn

Featured image credits: The Surya Kiran Aerobatic Team (SKAT) at Aero India 2011 by Ruben Alexander, licensed under creative commons

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More thoughts on accrual accounting

This is a part of a series on Defence Economics. Previous blogs on the same topic can be found here, here, and here.

In continuation with the last piece that dealt with democratic accountability and defence economics, this post provides some more sources that have analytically written about the importance of an accrual-based accounting system.

Gur Saroop Sood  in this excellent article refers to the cash-based accounting thus:

 “Under the cash-based system, the currency transactions, pertaining to a Financial Year, are available till the closing of accounts. Once the accounts are closed, past transactions do not become readily available. In this system, committed liabilities incurred do not get recorded in the accounts at the time of their occurrence. Therefore, for commitment control, such information has necessarily to be generated through additional reports. If the committed liabilities are not available, the possibility of over or under committing resources vis-à-vis available funds in a Financial Year cannot be ruled out. The accounting system also does not generate information for the decision-makers to know whether the money is being spent on core or peripheral activities. Due to the principle of lapse, the Executive tends to spend the earmarked funds during the month of March, sometimes also referred to as ‘March rush’, in order to avoid surrender of unspent funds spend the earmarked funds during the month of March, sometimes also referred to as ‘March rush’, in order to avoid surrender of unspent funds.”

Amaresh Bagchi in his Business Standard piece says

Such a system does not provide a full picture of the government’s liabilities, because accrued liabilities such as those from unfunded pensions and commitments are not taken into account; two, it keeps no track of the assets of the government, nor do they provide information on the costs of holding and operating them or of their consumption or use”

The 12th Finance Commission’s recommendations are as follows

“Compared to the cash based system, the system of accrual accounting recognizes financial flows at the time economic value is created, transformed, exchanged, transferred or extinguished, whether or not cash is exchanged at that time. It is different from cash based system in that it records flow of resources. Expenses are recorded when the resources (labour, goods and services and capital) are consumed, and income when it is earned, i.e. when the goods are sold or the services rendered. The associated cash flows generally follow the event after some time and may or may not take place during the same accounting period. Thus, in addition to cash flow, unpaid consumptions (payables) and unrealized income (receivables) are also recorded. Resources acquired but not fully consumed during an accounting period are treated as assets (inventory and fixed assets). Payments made for acquisition of inventory are included in the operating cost for the period in which it is consumed. Payments made for acquisition of physical assets, that have future service potential, are amortized over the entire useful life of the asset by charging depreciation

The system of accrual accounting thus, inter alia, allows better cost – price calculations, records capital use properly, distinguishes between current and capital expenditures, presents a complete picture of debt and other liabilities and focuses policy attention on financial position, as shown in the whole balance sheet not just cash flows or debts thereby providing a complete measure of cost of various services and provides net worth and their changes over time

The Controller General of Defence Accounts while talking about implementation of accrual accounting in Government says the following

Accrual accounting system enables system enables a more effective assessment of the performance and provides the necessary information for linking the input costs to outputs and outcomes that is required by services.

The challenge of moving to an accrual based accounting is the time that is required for the transition. Also, the switch will place considerable demands on the accounting personnel particularly at the lower and middle levels of the accounting hierarchy.

Amaresh Bagchi’s Business Standard piece has a solution to this problem as well where he suggests

 transitioning in a phased manner and in the interim both cash and accrual accounting can run in parallel to ensure a smooth transition.

There is overwhelming evidence, and scholarly  agreement about moving towards an accrual based accounting system. It is a matter of wonder that the move has not yet happened. Perhaps, an analysis on why cash based accounting  system is still in vogue is an exercise worth undertaking.

Varun Ramachandra is a policy analyst at Takshashila Institution, he tweets @_quale

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Opportunity cost of delays

Recent news reports suggest that the final operational clearance for  India’s homegrown Light Combat Vehicle might be delayed. If this is indeed true, this is not good news.  There is also news about handing over the entire project to the private sector. Irrespective of whether the LCA will be delayed or not, most newspapers and reports suggest that the Indian government has spent enormous amounts of money on this project.

Although the losses are significant,merely looking at a huge rupee number does not complete the story. The concept of opportunity costs has to be factored in while analysing such delays in projects. Opportunity cost in simple terms can be defined as the loss of the next best opportunity. In case of the LCA or any other delayed projects the question that must be raised is “What is the next best thing we could have done with the money”?

In an area like defence, the opportunity costs are exacerbated because delays inevitably reduce combat preparedness. A logical question to raise therefore is to track how many such delays have affected India in the numerous conflicts that it has had to face in the past.

As this ET report suggests

Sources said discussions have taken place in the top echelons of the government on the best ways to inject urgency into the Tejas programme, possibly even with the involvement of a private sector player that would be clearly incentivised to deliver a new aircraft on time and within budget

One wonders why the government has decided to bring in private players so late in the game(Depending on how the timelines are viewed, there has been a delay of more than 10 years in the LCA project).  The idea about only state-run firms handling  strategic programmes has not been a success. It is time the defence ministry and the defence establishment views efficiency, as opposed to ownership, as the metric while choosing vendors/partners.

Better late than never. Hopefully.

Varun Ramachandra is a policy analyst at Takshashila Institution and tweets @_quale

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Need for a systematic study of defence economics

Ensuring security from external aggression is a basic public good that the governments have to provide and given that it is not possible to reveal individual preferences, this has to be financed from taxes.   The important issue confronted by the policymakers, however, is the basic economic dilemma of scarcity and choice.  The funds allocated for defence are not available for spending on physical infrastructure or human development which are necessary to improve the living conditions of people.

As stated by David Greenwood[1], “What the budgeting system should ideally do is to ensure that the ‘right’ amount is spent on defence in the light of pattern of national priorities, and the ‘right’ military capabilities developed in the light of the structure of security priorities” The answers to what the “right” amount is depends on the economic choices the government has to exercise in providing various public goods, merit goods and services, given the overall resource envelope.

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As the world’s largest democracy, with an annual gross domestic product (GDP) of almost $2 trillion it is imperative to understand what the ‘right’ amount is and to evaluate whether what we are currently spending is high, low, or indeed the ‘right’ amount. While understanding the numbers are important, it is also important to explore the following

  1. various priorities in which defence spending can happen
  2. assessing existing resources
  3. investigating the possibility of developing  normative frameworks to understand security priorities & threat perception
  4. how the defence forces can be effective and yet be fiscally prudent

The national security of a country depends on defence installations and facilities being in the right place, at the right time, with the right qualities and capacities. Spending on defence, therefore, is a resource allocation problem and the budgeting for defence has two broad functions[2]

  1. Management Function — to enable concerned personnel to spend money for various activities in an efficient and economical manner.
  2. Planning Function — Budgetary resources are to be allocated such that it enables achievements regarding operational preparedness and defence capability-building.

Defence budgeting literature indicates that budget is a three-tiered exercise in choice. First, it involves choosing how much to spend on defence, given the resource constrtaint, keeping in view other competing demands. Second, it involves choosing the basis for allocating resources among the services (army, navy and airforce). Third, it involves allocation among various programmes for capability-building, which entails what capabilities to acquire & maintain and the degree of military preparedness to aspire for[3]. Therefore, development of defence economics is necessary from the perspectives of

  • democratic accountability
  • efficiency of resource allocation to ensure preparedness
  • military effectiveness to ensure the right mix of services are deployed to ensure peace
  • improvement of service conditions — that ensures state of the art quality of life of servicemen, ex-servicemen and their families.

Varun Ramachandra is a policy analyst at Takshashila Institution and tweets @_quale

[1] David Greenwood, “Budgeting for Defence”, RUSI, 1972, p8.

[2] AK Ghosh, “ Defence budgeting and planning in India”, p.25

[3] Ibid 27

(Photo License)

PS- My thanks to Nitin Pai and Dr. M. Govinda Rao for their inputs and help.

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