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Challenges of Defence Economics

There are several operational difficulties that one faces while analysing the economics of defence in the Indian context – Varun Ramachandra(_quale)

Keith Hartley in his book “The Economics of Defence Policy” describes defence choices as complex because they have to be made in world of uncertainty and assumptions are on the basis of likely future threats(internal, external, and/or via non-state actors). Today’s choices may not be sufficient for tomorrow’s threats or worse still, today’s choices might be irrelevant tomorrow.

In such a scenario, the defence budget cannot be viewed as a stand alone entity. The larger question of how much of our national resources be directed to defence is an important one and deserves holistic treatment(pardon the cliche).  As AK Ghosh in his book “India’s Defence Budget and Expenditure Managament in a Wider Context” suggests “to say that it(defence budget) ought to be larger or smaller, without regard to its internal components or the external components that define it, is worse than useless”.

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There are several operational difficulties that one faces while analysing the economics of defence in the Indian context(or perhaps even in a global context) and this post explores the complexities one faces while studying this area.  The challenges can be classified as

  • Semantic
  • Accounting
  • Obfuscation

Semantic – Currently, there is no clarity on what constitutes as military expenditure and what constitutes as security expenditure. For constitutional and operational reasons internal security is the mandate of Ministry on Home Affairrs whereas the external defence is the mandate of Ministry of Defence. That said, there are several grey areas. Eg., Border Roads Organisation under the MoD has a peace time mission of “Contributing to the Socio-Economic Development of the Border States”. There are several strategic reasons for such assuming such roles, primarily being development and nation-building, but an analysis on whether this constitutes as military expenditure(and if it is being accounted for) is required.

Accounting – Currently, the services follow a cash accounting model which does not capture the market value of current asset and liabilities. A cash based process is a single entry accounting process which records cash transactions but does not capture non-cash transactions. This is a major challenge because large swathes of land and precious resources like spectrum and human resource are not captured while allocating newer resources. This results in unknown spending as opportunity costs are involved. (Some thoughts on accrual accounting by experts can be accessed here)

Obfuscation – As a strategic and a security measure there is definitely a need to obfuscate certain aspects of the defence budget. But care must be taken to ensure that the defence expenditure does not come under civilian heads (if however there is a case for it, it must certainly be justified and necessarily not concealed) . This adds an extra layer of complexity while analysing the economics of defence services.

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

photo credit: Crossed wires via photopin (license)

 

 

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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

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

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