Defence ministry struggles to spend funds budgeted for modernization

[Rangila]

NEW DELHI: The defense ministry has been unable to fully utilize the capital funds budgeted
for modernization projects, even as expenditure on routine items like salary, administration and transportation training has swelled, latest data on the finances of the Ministry of Defence suggest.


Worryingly, areas considered as critical by the Modi government, including funding development of military systems by the private sector and research by the Defence Research and Development Organisation, are the worst performers in terms of money spent.


An account of the MoD's budget for the current fiscal year reviewed by ET reveals that under the two heads of 'prototype development - for which Rs 144 crore was allocated - and assistance to Small and Medium Enterprises for Technology Development, not a single rupee was spent in the first seven months through October.


While the Air Force has done well till October to spend more than 54 per cent of the capital budget of Rs 33,657 crore that is earmarked for purchase of equipment and weapon systems, the Navy and Army have utilised just around a third of their modernisation funds.


According to the data, the Army in particular is likely to shoot above its projections for revenue expenditure with 56 per cent of the funds allocated already spent, with the major overflow being pay and allowances. This follows a trend for the Army that eventually leads to 'borrowing' from its capital funds to meet expenses. Until October, the Army has spent only 35 per cent of its Rs 27,227 cr capital budget. In comparison, the navy has used just 31 per cent of its Rs 25,000 crore capital budget.


For the DRDO, it has been a struggle to spend money on R&D with just 24 per cent of the Rs 869-crore budget being utilised. Capital budget tends to get exhausted faster towards the last quarter but the numbers are an indication that though incremental policy reforms have taken place, very few significant contracts have actually been inked by the ministry this year.


The two major contracts signed are for the Apache and Chinook choppers that would cost upwards of $2.5 billion (Rs 16,500 crore). This has led to concern in the private sector that has been investing heavily in defence manufacturing, given that the government is the only customer.


While there have been numerous announcements of major military purchases, most pertain to acceptance of necessity (AON) - a nod by the ministry to start the long procurement process that lasts at least 3 years - or repeat orders placed on public sector units.

 

[Echo_419]

@Abingdonboy

 

[Abingdonboy]

A few points

1) we are only about 50% through this financial year so more deals will be closed
2) It is a a pretty well known trend that the Indian Mil sign the vast majority of their deals towards the end of the financial year (December-March).

So yes, alarming news on the face of it but less so with the application of some critical thinking. Having said that, there is also a worrying trend that gets repeated almost year in year out that vast sums of the Military's capital expenditure budget is returned (unspent) to the Fin Min. There is clearly a lot of work that needs to happen to streamline the procurement path for defence equipment and this is an area the DM is said to be focusing on intensively- the new DPP cannot come fast enough.

According to the data, the Army in particular is likely to shoot above its projections for revenue expenditure with 56 per cent of the funds allocated already spent, with the major overflow being pay and allowances. This follows a trend for the Army that eventually leads to 'borrowing' from its capital funds to meet expenses. Until October, the Army has spent only 35 per cent of its Rs 27,227 cr capital budget. In comparison, the navy has used just 31 per cent of its Rs 25,000 crore capital budget.

@Echo_419 what we were talking about the other day. THIS is by far the most worrying part of the entire article (typical Indian media- missing the forest for the trees). The IA is simply unable to meet its everyday requirements from its dedicated OPEX account and so consistently dips into their CAPEX. This is not something that has an easy fix nor is it something that will be addressed in the coming years- it will in fact get a lot worse as the IA continues to expand.

The two major contracts signed are for the Apache and Chinook choppers that would cost upwards of $2.5 billion (Rs 16,500 crore). This has led to concern in the private sector that has been investing heavily in defence manufacturing, given that the government is the only customer.

A stupid statement beyond belief. This deal has been pending for years and was always going to be a govt-govt deal (FMS) with no scope for much local collaboration (even though Boeing has said they will be expanding their defence footprint in India over the next few year specifically when it comes to the Apache and Chinook). I don't believe the industry officials (who are meant to be experts in this field) were either shocked or disappointed by these two deal being signed.

 

[Echo_419]

A few points

1) we are only about 50% through this financial year so more deals will be closed
2) It is a a pretty well known trend that the Indian Mil sign the vast majority of their deals towards the end of the financial year (December-March).

So yes, alarming news on the face of it but less so with the application of some critical thinking. Having said that, there is also a worrying trend that gets repeated almost year in year out that vast sums of the Military's capital expenditure budget is returned (unspent) to the Fin Min. There is clearly a lot of work that needs to happen to streamline the procurement path for defence equipment and this is an area the DM is said to be focusing on intensively- the new DPP cannot come fast enough.



@Echo_419 what we were talking about the other day. THIS is by far the most worrying part of the entire article (typical Indian media- missing the forest for the trees). The IA is simply unable to meet its everyday requirements from its dedicated OPEX account and so consistently dips into their CAPEX. This is not something that has an easy fix nor is it something that will be addressed in the coming years- it will in fact get a lot worse as the IA continues to expand.




A stupid statement beyond belief. This deal has been pending for years and was always going to be a govt-govt deal (FMS) with no scope for much local collaboration (even though Boeing has said they will be expanding their defence footprint in India over the next few year specifically when it comes to the Apache and Chinook). I don't believe the industry officials (who are meant to be experts in this field) were either shocked or disappointed by these two deal being signed.

Agreed the only way forward is to cit down on the size of army,perhaps replicate what the Chinese are doing

 

[Spectre]

A few points

1) we are only about 50% through this financial year so more deals will be closed
2) It is a a pretty well known trend that the Indian Mil sign the vast majority of their deals towards the end of the financial year (December-March).

So yes, alarming news on the face of it but less so with the application of some critical thinking. Having said that, there is also a worrying trend that gets repeated almost year in year out that vast sums of the Military's capital expenditure budget is returned (unspent) to the Fin Min. There is clearly a lot of work that needs to happen to streamline the procurement path for defence equipment and this is an area the DM is said to be focusing on intensively- the new DPP cannot come fast enough.

@Echo_419 what we were talking about the other day. THIS is by far the most worrying part of the entire article (typical Indian media- missing the forest for the trees). The IA is simply unable to meet its everyday requirements from its dedicated OPEX account and so consistently dips into their CAPEX. This is not something that has an easy fix nor is it something that will be addressed in the coming years- it will in fact get a lot worse as the IA continues to expand.

A stupid statement beyond belief. This deal has been pending for years and was always going to be a govt-govt deal (FMS) with no scope for much local collaboration (even though Boeing has said they will be expanding their defence footprint in India over the next few year specifically when it comes to the Apache and Chinook). I don't believe the industry officials (who are meant to be experts in this field) were either shocked or disappointed by these two deal being signed.

Indian Army needs to follow the Western Model - Lean and Mean, even China is going for it disguising it as downsizing.

I would say 200,000 cut would do nicely, invest the money saved on OPEX in CAPEX instead. IA is woefully ancient when it comes to lot of equipment which their western peers take for granted. With improved equipment levels comes a certain degree of confidence too.

However I don't see it likely in present condition - it has to be a gradual and long term process. Unlike China we are a democracy and can't just take jobs away of 200,000 highly trained people. That is a recipe for disaster.

Certain degree of peace on the borders would help too - but hey who am I kidding

 

[Abingdonboy]

Indian Army needs to follow the Western Model - Lean and Mean, even China is going for it disguising it as downsizing.

I would say 200,000 cut would do nicely, invest the money saved on OPEX in CAPEX instead. IA is woefully ancient when it comes to lot of equipment which their western peers take for granted. With improved equipment levels comes a certain degree of confidence too.

However I don't see it likely in present condition - it has to be a gradual and long term process. Unlike China we are a democracy and can't just take jobs away of 200,000 highly trained people. That is a recipe for disaster.

Certain degree of peace on the borders would help too - but hey who am I kidding

No doubt about it- the IA is bloated and could easily be pruned. The fact is a 30% cut in manpower would lead to an overall performance/lethality gain of, easily, 400-500%. This would only need comprise a few reserve divisions/brigades. The actual number of combatants cut would be minimal but for every 1 combat/infantryman you would be able to cut 8-10 support staff (logistics, medical, signals etc etc) who would be surplus to requirements.


Hard decisions need to be taken but India has clearly demonstrated it isn't mature enough to tolerate such sense in 2015. This is still the land of populism over pragmatism.

The IA is a mess- we just have to accept that for the foreseeable future (2-3 decades at least), let's just hope the IN and IAF are competent and modernised enough to offset this burden.

 

[Sri]

No doubt about it- the IA is bloated and could easily be pruned. The fact is a 30% cut in manpower would lead to an overall performance/lethality gain of, easily, 400-500%. This would only need comprise a few reserve divisions/brigades. The actual number of combatants cut would be minimal but for every 1 combat/infantryman you would be able to cut 8-10 support staff (logistics, medical, signals etc etc) who would be surplus to requirements.


Hard decisions need to be taken but India has clearly demonstrated it isn't mature enough to tolerate such sense in 2015. This is still the land of populism over pragmatism.

The IA is a mess- we just have to accept that for the foreseeable future (2-3 decades at least), let's just hope the IN and IAF are competent and modernised enough to offset this burden.

Well I believe MP has done this to Mountain strike corps, but I agree there is a lot that needs to be done.

 

[Abingdonboy]

Well I believe MP has done this to Mountain strike corps, but I agree there is a lot that needs to be done.

Indeed, the new GoI has revised the plans for the MSC to mean they are a more realistic size (but far more capable). Maybe it was the news that they were being equipped with the war reserves of the rest of the IA that made them open their eyes?

 

[Sri]

Indeed, the new GoI has revised the plans for the MSC to mean they are a more realistic size (but far more capable). Maybe it was the news that they were being equipped with the war reserves of the rest of the IA that made them open their eyes?

I think change is needed from top to bottom, I mean there needs to be a cohesion in the forces regarding to any goal/capability/resources. And once this is done then a leaner force can achieve desired goals. I believe this news in the right direction India may soon have Chief of Defence Staff | and wants this to happen soon.

Source: Defence ministry struggles to spend funds budgeted for modernization

 

[Ragnar]

Indian Army needs to follow the Western Model - Lean and Mean, even China is going for it disguising it as downsizing.

I would say 200,000 cut would do nicely, invest the money saved on OPEX in CAPEX instead. IA is woefully ancient when it comes to lot of equipment which their western peers take for granted. With improved equipment levels comes a certain degree of confidence too.

However I don't see it likely in present condition - it has to be a gradual and long term process. Unlike China we are a democracy and can't just take jobs away of 200,000 highly trained people. That is a recipe for disaster.

Certain degree of peace on the borders would help too - but hey who am I kidding

The downsized troops can be divided into:
a)Paramilitary for dealing with Maoists and other insurgents:
b) Engineer corps for building infrastructure in remote areas and for missions like clean Ganga, and other necessary rural infrastructure.

 

[Sri]

The downsized troops can be divided into:
a)Paramilitary for dealing with Maoists and other insurgents:
b) Engineer corps for building infrastructure in remote areas and for missions like clean Ganga, and other necessary rural infrastructure.

Fighting Maoists is not the job of Paramilitary and CRPF is the right force to deal with them, also there needs to be a political solution to this issue rather than to a use of force.
Regarding to Engineering corps - I believe more are needed there, a proper road to border can reduce the logistic nightmare of airlifting troops etc in case of need. I have seen them struggling to keep the road link etc in shape with little resources. India needs to invest heavily on the border infrastructure.

 

[PARIKRAMA]

The downsized troops can be divided into:
a)Paramilitary for dealing with Maoists and other insurgents:
b) Engineer corps for building infrastructure in remote areas and for missions like clean Ganga, and other necessary rural infrastructure.

I like the point 1 surely.. The reds needs to be cleaned.. Internal extremism elements which cannot be handled by police/CRPF needs dedicated manpower so transferring them into such forces makes sense. The only downsixze is that such a force also requires benefits similar to main army unts or call them as under deputation (for technicality). IA units cannot directly take on Maoists as its against political class will and policies.

Point 2 is of course gives tactical connectivity but perhaps it would be nice if we say allow dedicated border road expansion plan from2 lane to 4 lane and perhaps border railway lines and stations all under such Engineering corps with support from other departments like NHAI/Indian Railways etc. This way we can multiply and upgrade connectivity as well. How about some ALGs by Engineering Corps? Or multiple way points of bridges over rivers say over Brahmaputra for easier access in Assam and Arunachal Pradesh for IA (an example)

A special mention is dedicated railway lines and stations which allow goods transport, carriages carrying arms and tanks like heavy equipment's and also allows rail canisterised missiles (strategic depth in terms of mobility - enemies searching inland for LR missiles and here it sits near border ready to launch !!)

The two major contracts signed are for the Apache and Chinook choppers that would cost upwards of $2.5 billion (Rs 16,500 crore). This has led to concern in the private sector that has been investing heavily in defence manufacturing, given that the government is the only customer.

Awesome inferences.
" The usual practice is for the defence ministry to pay 15 per cent of the negotiated value at the time of signing the contract, while the balance payments are made in accordance with the delivery schedule.
These helicopters are likely to be delivered within five years.
The first helicopter is expected to enter the IAF within three years."

Quote from Apache and Chinook in IAF; Modi govt’s biggest defence deals so far | The Indian Express

So majority of the payment will start by year 3 implying roughly another 15% by year 3 and 30% by year 4 and 40% by year 5 (simple example for benefits of explaining). Of course based on numbers handed to IAF

So 15% of $ 2.5Bn - $375 Mn or Rs 2475 Crs - thats the actual value under FY 2015-16 defence budget capex under head of Airforce new procurement. Its similar for IA and IN implying each of the arms have not used their allocated capital convincingly.

A simple check is actual DAC approvals versus Letter of Acceptance+Contract signing+Negotiated amount advance payment (typically 15%)

Unless some one proves that capex is all about big numbers like full contract values to be undertaken and year wise tranches not to be bothered then i guess Finance Ministry would rip all its hair out from every personnel for false accounting practices.( Actual money flows later and you already show a debit in your books? So you maintain multiple books one showing full amount (notional) and another show actual usage. So we should get notional GDP notional Fiscal deficit versus actual GDP actual Fiscal deficit... )

A point to note. @Abingdonboy did point out about max contracts signing and release of money in Dec -Jan quarter but question to ask is how many of DAC approvals actually will lead to realistically that situation. In terms of % and in terms of monetary value.

Consider M777 order $700 Mn - 15% implies $105Mn implying Rs 693 Cr outflow by March 2016 assuming its paid and deal is signed as indicated in reports. Another examples are the IN modernisation where different Brahmos units were bought or even where for IAF Akash systems were bought. Again a partial amount actually to be paid in this financial year.

Even the Modi-Putin deals signed will mean partial amounts (if DM MP did negotiate the contracts and its just signing and release of advance funds). Again if suppose its $10.5Bn or even $11 Bn apporx outflow in this FY2016 will be say at 15% again just $1.575 Bn or 1.65 Bn (for 10.5 and 11 respectively) implying a outflow in Rupee terms of Rs 10395 Cr - 10890 Cr. Probably that may be the highest value single packaged deal for the year

This implies unless we sign lots of contracts actually we will return the unused amounts back and push the pressure on next FY for allocating and signing of contracts. Of course not every deal can be closed in one FY but spillover effect in Indian context is actually quite legendary. We do need to set our house in order in order to have a effective modernisation not just say we bought X,Y, Z and sign nothing, pay nothing..

The line saying Pvt sector concerned is all a lie as actually we have maid meager amounts as part of signed contracts for this FY (staggered payment based on delivery). So in actual terms we have good amount available to be used and we need to do it judiciously in next 4+ months.

 

[Abingdonboy]

I think change is needed from top to bottom, I mean there needs to be a cohesion in the forces regarding to any goal/capability/resources. And once this is done then a leaner force can achieve desired goals. I believe this news in the right direction India may soon have Chief of Defence Staff | and wants this to happen soon.

Source: Defence ministry struggles to spend funds budgeted for modernization

I wouldn't bet on it mate. What is the CDS going to do to improve the situation? The same backwards mindset would prevail within the IA i.e. numbers> technology. This isn't an issue of a lack of "jointness" as the CDS would solve in many areas, this is an issue with the mindsets in the IA top brass and this won't change for the foreseeable future (generations perhaps).

Awesome inferences.
" The usual practice is for the defence ministry to pay 15 per cent of the negotiated value at the time of signing the contract, while the balance payments are made in accordance with the delivery schedule.
These helicopters are likely to be delivered within five years.
The first helicopter is expected to enter the IAF within three years."

Quote from Apache and Chinook in IAF; Modi govt’s biggest defence deals so far | The Indian Express

So majority of the payment will start by year 3 implying roughly another 15% by year 3 and 30% by year 4 and 40% by year 5 (simple example for benefits of explaining). Of course based on numbers handed to IAF

So 15% of $ 2.5Bn - $375 Mn or Rs 2475 Crs - thats the actual value under FY 2015-16 defence budget capex under head of Airforce new procurement. Its similar for IA and IN implying each of the arms have not used their allocated capital convincingly.

A simple check is actual DAC approvals versus Letter of Acceptance+Contract signing+Negotiated amount advance payment (typically 15%)

Unless some one proves that capex is all about big numbers like full contract values to be undertaken and year wise tranches not to be bothered then i guess Finance Ministry would rip all its hair out from every personnel for false accounting practices.( Actual money flows later and you already show a debit in your books? So you maintain multiple books one showing full amount (notional) and another show actual usage. So we should get notional GDP notional Fiscal deficit versus actual GDP actual Fiscal deficit... )

A point to note. @Abingdonboy did point out about max contracts signing and release of money in Dec -Jan quarter but question to ask is how many of DAC approvals actually will lead to realistically that situation. In terms of % and in terms of monetary value.

Consider M777 order $700 Mn - 15% implies $105Mn implying Rs 693 Cr outflow by March 2016 assuming its paid and deal is signed as indicated in reports. Another examples are the IN modernisation where different Brahmos units were bought or even where for IAF Akash systems were bought. Again a partial amount actually to be paid in this financial year.

Even the Modi-Putin deals signed will mean partial amounts (if DM MP did negotiate the contracts and its just signing and release of advance funds). Again if suppose its $10.5Bn or even $11 Bn apporx outflow in this FY2016 will be say at 15% again just $1.575 Bn or 1.65 Bn (for 10.5 and 11 respectively) implying a outflow in Rupee terms of Rs 10395 Cr - 10890 Cr. Probably that may be the highest value single packaged deal for the year

This implies unless we sign lots of contracts actually we will return the unused amounts back and push the pressure on next FY for allocating and signing of contracts. Of course not every deal can be closed in one FY but spillover effect in Indian context is actually quite legendary. We do need to set our house in order in order to have a effective modernisation not just say we bought X,Y, Z and sign nothing, pay nothing..

The line saying Pvt sector concerned is all a lie as actually we have maid meager amounts as part of signed contracts for this FY (staggered payment based on delivery). So in actual terms we have good amount available to be used and we need to do it judiciously in next 4+ months.

And excellent point that many all too often are not aware of. I have tried to put this point across in multiple threads on multiple topics. Major defence deals are not paid for in entirety upfront (depending on the deal it will be 10-15% upfront and a subsequent payment plan spanning 5-12 years).

This means that the Indian Military's $15BN CAPEX (for all services) does not equate to only being able to purchase $15BN worth of deals every year. In fact, the Indina military could be signing deals worth $100-150BN a YEAR! Even if you reduce this $15BN figure by 30% (pie in the sky figure) that has to be used to service payments for previous procurements the actual purchasing power of the Indian military is going to be around $60-100BN a year. It is abundantly clear that nowhere near this amount of deals are being signed every year- not even close.

This is also why the opportunity cost in returning unspent CAPEX to the Fin Min is massively understated. If they return $2-3BN a year they are effectively forgoing procuring equipment worth >$20BN. The cumulative figure for deals that should have been signed but weren't to date is going to be a stomach churning figure (probably in excess of $70BN) and then one wonders why the Indian Military's modernisation is progressing so slowly.

I don't think there could be a more frustrating situation- money is being allocated but it is being returned year in year out all whilst the military is rotting in many areas.

And once again, who are the worst offenders? The IA- taking money explicitly meant for CAPEX to supplement the OPEX account is CRIMINAL.


+ @PARIKRAMA once again- you make an excellent point, with every year that funds are returned and deals are not signed all that is happening is an almighty backlog of deals are building up and the DM (mt Parrikhar) comes in and says "now you have to prioritise which deals you actually want"


Just like in infrastructure projects, this Govt inherited a VAST backlog of deals in an array of different phases and troubles.

S-70B
RSH
M777
MMRCA
MRTT
MGS
P-17A
C-17 follow-on
AH-64E
CH-47F
MRTA
FGFA


I'm sure there are more, this is just from the top of my head and there will be scores of less well known but just as pressing deals. Anyway- the total value of the above deals is close to $100BN and this is just the ones we know about.


Why AK Anthony is not facing charges of treason is beyond me...


MP was right to say "it is a mess"- this mess will take decades to recover from. If India was to engage in a conflict tomorrow and loose it would be entirely self-inflicted. As usual, India is a nation of lions lead by sheep...