Wednesday, 21 March 2018

Finance ministry shoots down MoD’s proposal for “non-lapsable defence modernisation fund”

BJP govt shoots down a BJP proposal, first budgeted in 2004 by Finance Minister Jaswant Singh

By Ajai Shukla
Business Standard, 21st Mar 18

The finance ministry has shot down the defence ministry’s proposal to implement a longstanding quest of the Bharatiya Janata Party (BJP) – to create a “non-lapsable defence modernisation fund (DMF)”, in which the military’s unspent capital budget is parked at the end of each financial year, from where it can be made available for the subsequent year’s procurements.

The military points out that bureaucratic delay in sanctioning capital (modernisation) expenditure has led to the surrender of billions of rupees in successive years, severely disrupting the military’s long-term modernisation plan. The BJP has traditionally been sympathetic to this perspective.

On February 3, 2014, National Democratic Alliance (NDA) finance minister (and former defence minister) Jaswant Singh, while presenting the interim budget, announced the setting up of a non-lapsable defence modernisation fund (DMF).

Three months later, the NDA was voted out of power. For the next ten years, the United Progressive Alliance (UPA) government rejected any need for a non-lapsable DMF. From 2014-2016, the current NDA government followed the UPA lead.

In December 2016, however, the defence ministry did an about turn, informing Parliament’s Standing Committee on Defence (hereafter ‘the Committee’): “On further consideration… it has been felt that the utility of creation of a non-lapsable, roll over fund for Capital cannot be completely negated as the same would help in eliminating the prevailing uncertainty in providing adequate funds for various defence capability development and infrastructure projects. The Ministry therefore has reviewed its stated position taken so far and proposes to take up the case for setting up of a capital non-lapsable, roll–on fund afresh with Ministry of Finance immediately.”

But when the defence ministry took up the proposal, the Finance Ministry shot it down. According to the Committee’s latest report, tabled in Parliament on March 13, the Defence Ministry reported: “The proposal for creation of ‘Non–lapsable Capital Fund Account’ in Public Account for Defence Modernisation, was sent to Ministry of Finance, but the same was not agreed to by the Ministry of Finance (sic).”

The Finance Ministry has offered several reasons for turning down the proposal for a non-lapsable DMF. Its first reason is, “Adequate budget provision is made available to Ministry of Defence to finance the capital requirements of Defence Services.” Presumeably this suggests that each year’s capital budget allocations are sufficient in themselves and do not need to be supplemented by the previous year’s unspent balance.

This argument, however, is negated by the army vice chief’s detailed complaint to the Committee that this year’s capital allocations are inadequate even to service instalments due on purchases made during earlier years. The latest Committee report has noted that all three services got significantly lower allocations than they had bid for. The army got just 60 per cent of what it had projected; the navy got 56 per cent; and the air force got barely 45 per cent of its requirements.

Next, the finance ministry argued that a non-lapsable DMF would not be available for capital expenditure automatically, but would require fresh Parliamentary sanction through Demands for Grants. “Hence, mere creation of non-lapsable funds yields no additional advantage to Ministry of Defence and could rather induce complacency in incurring expenditure”, stated the finance ministry.

Further, the finance ministry objected that “Creating a corpus” of non-lapsable DMFs, would make money “unavailable for other essential expenditure.” It pointed out that the Standing Committee on Finance had recommended that “unutilized funds/funds kept idle for more than two years may be transferred to Consolidated Fund of India so that these funds could be utilized for other prioritized schemes”.

Finally, the finance ministry argued that “Moving general revenue out of Consolidated Fund and parking in [a] corpus fund” would violate Article 266(1) of the Constitution and “could raise competing demand from other Ministers.”

Monday, 19 March 2018

Five civilians killed, two injured on LoC as Pakistan ups the ante

11-year-old Nasreen Kouser is flown to hospital by the army after being seriously injured by Pakistani firing on Sunday

By Ajai Shukla
Business Standard, 19th March 18

In an increasingly hostile atmosphere of tit-for-tat firing across the Line of Control (LoC) between India and Pakistan, five Indian civilians were killed and two injured – all members of the same family – on Sunday morning near Poonch, Jammu & Kashmir (J&K).

Such tragedies are not unprecedented in villages near the LoC. On February 7, the defence minister told Parliament that, in each of the last three years, Pakistani firing had killed 12-16 Indian villagers and wounded 71-83. That casualty number has been surpassed already this year.

Rising heat in J&K

Year-wise occurrence

Ceasefire violations (CFVs)
351 (Till 12th Feb)
Terrorist Initiated Incidents (TIIs)
7   (Till 29th Jan)
Infiltration Bids Eliminated (IBE)
3  (Till 29th Jan)
(Source: answers to Parliamentary questions)

Neither India nor Pakistan have yet repudiated the unsigned ceasefire that came into effect in November 2003. It has survived even cross-LoC raids that resulted in the killing and savage mutilation of the bodies of enemy soldiers. Not even India’s “surgical strikes” on Pakistani terrorist camps in September 2016 caused either side to officially call off the ceasefire.

But now, with both sides targeting each other’s posts – and occasionally, as today, even civilians – with heavy machine guns, automatic grenade launchers, guided missiles, heavy mortars and even medium artillery, there sense is growing that the ceasefire is dead, even if not buried.

The first indication came on January 12, when Indian Army chief, General Bipin Rawat, implied the ceasefire had ended: “If we see a drop in infiltration [by terrorists] along the LoC, we are willing to call for a ceasefire. But not until we see a drop in infiltration levels.”

Abandoning the longstanding convention of blaming the other side for instigating firing, Rawat bluntly stated: “Ceasefire violations are initiated by us in counter-terrorist operations. These are when we target Pakistani posts that are involved in infiltrating terrorists [across the LoC].

Rawat elaborated: “Earlier, we were targeting (firing at) only the infiltrating militants. But these extremists are disposable commodities for Pakistan. Instead, the pain has to be felt by the Pakistan armed forces for supporting infiltration. So we have started targeting his posts and I can assure you that, in these exchanges of fire, he has suffered 3-4 times the casualties. That is why we get repeated requests from Pakistan to take the ceasefire back to 2003 levels.”

On Tuesday, in New Delhi, Rawat returned to this theme. “Earlier, the burden was only on us to man the border and remain alert, and now the Pakistan Army is feeling the same pain. They also have to remain alert on the border”, he said.

Even so, Rawat accepted that Indian pressure had not yet induced the Pakistan Army to reduce infiltration, and might have to be stepped up. “If we want to raise the threshold [of firing], we can… We don’t want a ceasefire on their terms. We want it on our terms”, said Rawat.

However, as even serving generals have pointed out, there is a limit to how much India can escalate without triggering war. The western army commander, Lieutenant General Surinder Singh, stated in Chandigarh earlier this month: “You can only push them (Pakistan) conventionally to a limit and not beyond that. And no nuclear nation can be browbeaten beyond a particular stage.”

New Delhi’s sensitivity to escalation was illustrated in September 2016, when an Indian general, while announcing the “surgical strikes” on terrorist camps explicitly underscored its limited objectives, stating: “The operations aimed at neutralising terrorists have since ceased. We do not have any plans for further continuation.”

It is now clear that the “surgical strikes” have not deterred Pakistani aggression. Figures tabled by the government in Parliament reveal that Pakistan violated the ceasefire 228 times in 2016, up from 152 times in 2015. After the “surgical strikes”, that went up fourfold in 2017 to 860 violations. In the first 43 days of 2018, Pakistan opened fire 351 times, averaging more than eight incidents daily.

Pakistan might well be paying a heavier cost, as General Rawat has stated. Yet India’s escalation strategy is incurring a significant cost in soldiers’ lives. This was evident on December 23, when a major and three jawans were gunned down on the LoC near Rajauri, Jammu & Kashmir.

Army sources say that 21 Indian soldiers and 12 civilians were killed in border firing last year. Without an early ceasefire, the cost will almost certainly be higher this year.

The big losers from escalated firing are residents of villages near the LoC. Rawat alluded to this when he said in January: “[Army] bunkers are always bulletproof, and can even take the impact of artillery shells, [but] we have a problem of civilian bunkers. I’ve ordered that we will make bunkers, or trenches or pits for schoolchildren.”

From the LoC to the Kashmir Valley hinterland, the last two years have also seen a significant rise in militant activities, reflected in the casualties incurred by the security forces, civilians and also militants. Without de-escalation, 2018 is on track to be the bloodiest year of the decade.

Casualties in J&K from militancy*

Security Forces**
Terrorists killed

*   In terrorist initiated incidents (TII) and infiltration bids eliminated (IBE)
** Including military, Border Security Force and J&K Police

(Source: answers to Parliamentary questions)

Friday, 16 March 2018

Defence firms eye new opportunities as defence minister talks up Chennai-Bengaluru industry corridor

Defence Minister Nirmala Sitharaman addresses industry at Trichy, a pivot of the Tamil Nadu Defence Quadrilateral

By Ajai Shukla
Business Standard, 16th March 18

With the Union Budget announcing a Chennai-Bengaluru defence industrial corridor, companies located in the industrial hub of Coimbatore are gearing themselves for potentially lucrative opportunities in defence manufacture.

On Monday, in New Delhi, Defence Minister Nirmala Sitharaman pledged her ministry’s support to the “defence production corridor”. She said the stretch from Chennai to Bengaluru, passing through Trichy, Coimbatore, Salem and Hosur, housed a sprawl of ordnance factories and defence public sector units which would be ready buyers for what small and medium industries in the corridor produce.

Hoping to benefit are engineering firms like the Coimbatore-based Shanthi Gears from the low-profile Murugappa Group, a Rs 300 billion group that employs 35,000 workers in 28 companies with 55 manufacturing locations worldwide.

Shanthi Gears, a subsidiary of Tube Investments of India (TII), is currently a high-tech supplier of gearing to the auto industry. It has long been on the fringes of defence manufacture, but hopes that the new corridor leads to greater participation.

Chief executive, Rajiv Moorthy, describes Shanti Gears’, low-volume but high-tech presence in the defence market. The firm is developing T-72 tank gearboxes and superchargers for the Heavy Vehicles Factory, Avadi (HVF), which will now be a lynchpin of the Chennai-Bengaluru corridor.

Shanthi Gears is also developing gearbox components for the range of indigenous helicopters being built by Bengaluru-based Hindustan Aeronautics Ltd (HAL). These include the Dhruv Advanced Light Helicopter, the Light Combat Helicopter and the Light Utility Helicopter.

With an eye on the future, and on proposed projects like the indigenous development of a main battle tank called the Future Ready Combat Vehicle (FRCV), Shanthi Gears has entered a partnership with the UK-based gearbox firm, David Brown.

And in recognition of its technological expertise, Shanthi Gears is poised to contribute to a prestigious marine indigenous development project.

Yet, highlighting the difficulty that private firms have long faced in creating a large presence in defence, Shanthi Gears obtains just four per cent of its turnover in defence. Moorthy hopes to grow this to six-seven per cent this year, or Rs 15 crore out of a Rs 250 crore turnover. In 2019-20, he plans to touch eight per cent.

Like many defence small and medium enterprises (SMEs) that hope to benefit from the Chennai-Coimbatore corridor, Shanthi Gears focuses strongly on technology. Even though parent company, TII, already operates a large research and development (R&D) centre, Shanthi Gears got its own R&D Centre approved last year by the Department of Scientific and Industrial Research, which functions under the Ministry of Science and Technology.

Hoping to harness the expertise of firms like Shanthi Gears, Sitharaman has been promising that the defence ministry will handhold private industry. More than half of her 23-minute talk at an industry gathering in Delhi on Monday was devoted to assuring private firms of support.

“In every town that is a milestone in the corridor -- Chennai, Trichy, Coimbatore, Salem, Hosur – each has had extensive consultation process [where the defence ministry] explained what we are looking for and what they want in turn from the ministry of defence so that their defence production capabilities can be enhanced. Investment in common facilities, testing labs, etcetera -- anything that they think it would be better for the government to invest, we will work it out with them”, said Sitharman.

“All this will culminate in the second week of April in the Defexpo 2018 [in Chennai]. For SMEs, we have announced a 50 per cent reduction in space rental. Accent is being given for them to become active in finding buyers and partners and making sure they can display all that they can do”, she said.

While firms like Shanthi Gears are savouring this unaccustomed attention, their success or failure will eventually hinge on how much equipment the services procure, and whether the finance ministry supplements the allocations in the budget, which have already been criticised by the military. 

Wednesday, 14 March 2018

Army vice chief criticises “insufficient” budget before Parliament committee

By Ajai Shukla
Business Standard, 14th March 18

Expressing grave concern at the “insufficient” allocation of funds for new weaponry, a top army general has told Parliament’s Standing Committee on Defence (hereafter “the Committee”) that the budget announced on February 1 “has dashed our hopes”.

A draft report by the Committee on Defence that Business Standard has reviewed notes that the army has been allocated just Rs 26,816 crore ($4.14 billion) for equipment modernisation against the Rs 44,573 crore ($6.88 billion) it had projected. That is barely 60 per cent of its request.

The navy’s and air force’s capital budget requests were slashed even more drastically. Against Rs 35,695 crore ($5.5 billion) the navy projected, it has been allocated Rs 20,004 crore ($3.1 billion), just 56 per cent of its requirement. The worst hit is the air force, which was allocated Rs 35,770 crore ($5.52 billion) against its projection of Rs 77,695 crore ($12 billion), barely 45 per cent of its needs.

Services capital budget: requests versus demands

(Rupees crore)

(Source: Draft report of Parliament Standing Committee on Defence)

The defence committee is chaired by Major General BC Khanduri (Retired) and includes 21 Lok Sabha and eight Rajya Sabha members. These include heavyweights like former prime minister HD Devegowda, Murli Manohar Joshi, Kalraj Mishra, Ambika Soni and Subramanian Swamy.

Deposing before them, the army’s vice chief, Lieutenant General Sarath Chand, said “the marginal increase in BE (budgetary estimates) barely accounts for inflation and does not even cater for the taxes.” Chand was apparently referring to the new Goods and Services Tax (GST), which has placed an added load on the defence budget.

Typically, the three services submit their projections in the third quarter of each year, for which they add up “committed liabilities” (annual instalments due on purchases previously made) and “new schemes”, for which the calculate the first instalment on new acquisitions likely in the coming year.

But Chand deposed before the Committee that the army’s capital allocation this year “is insufficient even to cater for committed payment of Rs 29,033 crore ($4.48 billion) for 125 on-going schemes, emergency procurements, 10(I) (or the urgent procurement of ammunition for 10 days of intense war) and other DGOF (director general ordnance factory) requirements.”

Further, Chand stated: “Committed liabilities of 2017 which will also get passed on to 2018 will further accentuate the situation… [and] will hardly leave any funds for new schemes in 2018-19.”

This is of serious concern, he said, given the state of army equipment. “Typically, any modern Armed Force (sic) should have one-third of forces, one-third of its equipment in the vintage category, one-third in the current category and one-third in the state of the art category. As far as we are concerned, the state today is 68 per cent of our equipment is in the vintage category, with just about 24 per cent in the current, and eight per cent in the state of the art category”, Chand told the Committee.

The army’s vice chief stated that, leave alone fresh capital acquisition, the prime minister’s vision of “Make in India”, which focused on greater indigenisation, would be badly affected. “We in the army have identified as many as 25 projects for Make in India. However, there is not adequate Budget to support this. As a result of which, many of these may end up foreclosed”, said Chand.

High value and prestigious projects to indigenously develop a Future Ready Combat Vehicle (FRCV) and a Future Infantry Combat Vehicle (FICV) were also likely to be scuppered by a lack of funds. Chand said “with the kind of Budget that has been allocated, this may get delayed by a few years. I am not sure what is going to be their future.”

The pared down capital allocations this year are not a one-off case. A summary of previous years’ projections and actual allocations illustrates that this has been the pattern of the past as well.

As in previous years, the Committee has called on the government to remedy the situation. The draft report notes: “The Committee opine that keeping in view the likely cost escalation due to inflation, [the increase over last year’s budget] is quite minimal to meet requirements of Capital acquisition and other works planned for 2018-19. Therefore, the Committee would like the Ministry of Defence to strongly put its case before the Ministry of Finance for adequate allocation of funds, commensurate with the requirement of Modernisation and acquisition plans for 2018-19 (sic).”