There is a growing gap between the projection of funds required by the armed forces and the allotment of funds by the government. While government accords AoNs at a breakneck speed for various proposals, is it possible to find the funds for acquisitions in the preferred timeframe while honouring accumulated liabilities from previous contracts? The author sheds light on the financial management of defence acquisitions.
In just four sittings since the beginning of the current financial year (FY) 2022-23, the Defence Acquisition Council (DAC) has cleared procurement proposals worth Rs 2,59,950 crore. This clearance -or Acceptance of Necessity (AoN)- is one of the most important initial steps in the long journey to fruition that every acquisition programme must traverse.
Most of the equipment will be sourced from Indian companies who are nevertheless permitted to tie up with foreign vendors for transfer of the manufacturing technology, except when an Indian company claims that the product is indigenously designed and developed by it.
Headed by Defence Minister Rajnath Singh, DAC is the highest decision-making body in the Ministry of Defence (MoD) on the acquisition of defence equipment for the armed forces and the Indian Coast Guard. It approves all capital acquisition proposals exceeding Rs 500 crore after a thorough brainstorming by the top brass of the civilian and military bureaucracies.
Proposals with an estimated acquisition cost up to Rs 300 crore are cleared by the Services Procurement Board (SPB), and those costing between Rs 300 crore and Rs 500 crore by the Defence Procurement Board (DPB). The Indian Army (IA) has obtained AoN for the largest number of proposals. These include Rough Terrain Forklift Trucks, Bridge Laying Tanks, Wheeled Armoured Fighting Vehicles with Anti-Tank Guided Missiles and Weapon Locating Radars, Guided Extended Range Rocket Ammunition, Area Denial Munition Type I and Infantry Combat Vehicle, Futuristic Infantry Combat Vehicles, Light Tanks, Mounted and Towed Gun System, Bulletproof Jackets, Close Quarter Carbines, Autonomous Surveillance and Armed Drone Swarms.
The Indian Air Force (IAF) follows with a slew of approvals, including Dornier and Sukhoi aircraft, Su-30 MKI aero-engines, a new range of missile systems, Long Range Guided Bombs, Range Augmentation Kit for conventional bombs and advanced surveillance systems.
Not to be left behind, the Indian Navy (IN) has had its proposals for the acquisition of the Next Generation Corvettes (NGC), 1250KW capacity Marine Gas Turbine Generator, Naval Anti-Ship Missiles, Multi-Purpose Vessels, High Endurance Autonomous Vehicles, BrahMos missiles, Shakti Electronic Warfare Systems, and Utility Helicopters approved by the DAC during those three sittings.
These approvals are in addition to the approvals given by the DAC in the earlier years, in pursuance of which the Requests for Proposal (RfP) have already been issued and the approvals given by the SPB and DPB.
Considering that all these proposals were approved after several iterations at various levels within the Services Headquarters and the MoD, the need for acquiring the approved items cannot be questioned, but from an outsider’s perspective, this long shopping list does raise a few questions.
First, the Defence Acquisition Procedure 2020, or DAP2020 (and its earlier versions), which regulates acquisitions, requires the Headquarters Integrated Defence Staff (HQ IDS) to prepare, by the 15th of March every year, an Annual Acquisition Plan (AAP) of prioritised acquisition schemes ‘based on the overall financial limits linked to the anticipated budget’ with the ‘limits being fixed in consultation with MoD (Finance)’. These AAPs are expected to flow out of the 5-year Defence Capital Acquisition Plan (DCAP), which, in turn, is supposed to be the offshoot of the 10-year Integrated Capability Development Plan (ICDP).
The entire planning process is predicated on the idea that it would ‘evolve from the National Security Strategy/Guidelines (as and when promulgated) and Raksha Mantri’s Operational Directives’. However, almost five years after the government constituted a high-powered Defence Planning Committee in 2018 under the chairmanship of the National Security Advisor, the National Security Strategy is not yet ready. There is also no indication of the ICDP and DCAP having been formulated by the MoD.
In the circumstances, the AAPs are prepared based on Raksha Mantri’s Operational Directives. The question whether these plans conform to the ‘financial limits linked to the anticipated budget’ is, however, moot, and so is the stipulation in DAP2020 that the financial contours of the plans should be fixed in consultation with the MoD (Finance).
It raises the second question, which concerns the financial viability of acquisition plans. The fact that the gap between the requirement of funds projected by the armed forces and the actual budgetary outlays has been widening is a pointer to the disconnect between aspirations and actuality. This gap widened from Rs 23,014 crore in the FY 2010-11 to Rs 1,01,678 crore during the current FY, which includes a shortfall of at least Rs 63,228 crore for capital acquisitions.
This financial imbroglio is further exemplified by the figures quoted by the fifteenth Finance Commission (FC) while making out a case in its 2020 report for setting up a non-lapsable Defence Modernisation Fund. According to these figures, MoD anticipated a shortfall of Rs 15,24,100 crore between the armed forces’ requirement and budgetary allocation over five years beginning FY 2021-22, after factoring in a year-on-year increase in the actual allocation by approximately 11.5 per cent.
To illustrate it further, according to the FC report, the MoD is expected to be allocated Rs 2,55,584 core and Rs 1,76,346 crore, respectively, for revenue and capital expenditure for the FY 2023-24, totalling Rs 4,31,930 crore. Against this, the actual allocations stand at Rs 2,70,120 crore and Rs 1,62,600 crore, respectively, which add up to Rs 4,32,720 crore. (This includes the allocation for other organisations like the Ex-servicemen Health Scheme and National Cadet Corps.)
It would be wrong to infer from these figures that, by and large, the armed forces’ requirement has been met in full, for the same FC report also shows that the actual requirement was much more than what the MoD expected by way of the budgetary allocation. For the FY 2023-24, this unbridged gap was expected to be Rs 3,02,119 crore, including Rs 1,69,784 crore for capital expenditure.
How does then the MoD fund all the acquisition proposals by the DAC, DPB and SPB from time to time? The short answer is that these are merely in-principle approvals which pave the way for the tendering process to start. There is many a slip between the AoN and the award of contracts for the approved items. The entire process should ideally be completed within 62-118 weeks, but the reality is that most of the proposals do not get finalised within this timeframe.
It helps the MoD in pacing the conclusion of new contracts, pay 15% of the contract value in advance on signing the contract while simultaneously honouring contractual payments against the previously awarded contracts. As the old liabilities keep retiring every year, enough room is created in the capital outlay to honour new liabilities.
There is little doubt, however, that the MoD will find itself in a tight corner if this equilibrium between the retiring and new liabilities is not reached in a particular year or if all acquisition proposals it approves every now and then were to fructify at the same time and payments have to be made against all those contracts over a span of the ensuing 4-5 years. It is not a particularly smart way of acquisition planning.
Inadequate attention to setting the priorities in the absence of a broader planning framework like the National Security Strategy, prioritisation of acquisitions through financially viable capability development plans, and timebound and outcome-oriented execution of those plans have been the bane of the armed forces’ modernisation. The need for dedicated 24×7 bespoke organisations for comprehensive defence planning and acquisitions has been felt for a long but generally ignored.