Tag Archives | expenditure

Vertical bypass

A better ride between Bangalore and Mysore

Driving on the Bangalore-Mysore highway frequently, this blogger couldn’t help but notice why modernising the highway has not reduced travel times by as much as it could have. The dream of a 90 minute drive largely remains elusive, not least because getting out of Bangalore city limits has become a painful experience.

Like in most parts of the country, the highway bisects the towns and villages en route, becoming the “main road” in places like Maddur and Mandya, with commercial establishments, schools, offices and busy traffic intersections. This means that the highway traffic has to inevitably slow down to the speed of the local town traffic until it exits the town limits, before picking up speed again. And because drivers might not slow down in time, traffic police have created enormous road humps and placed double barricades outside the town/village limits, ensuring that you must slow down to nearly zero speed before every town and village along the way. It is not uncommon to see people, bicycles, carts and other vehicles attempt to cross the highway, raising the risk of accidents.

Obviously, this causes highway traffic to slowdown and accidents to increase—when people try to avoid the humps, or when they crash into the barricades especially at night.

How might things be improved? The first way, adopted by many countries around the world, involves making the highway bypass towns and villages by skirting around them or following a different route altogether. The problem is: given how complex and time-consuming land acquisition has become, especially in Karnataka, this is unlikely to work. The travails of the NICE road, part of the Bangalore-Mysore Infrastructure Corridor, indicate how fraught re-routing is.

The second way might be to bypass the towns and villages vertically. In other words, build flyovers across the stretch of the highway that passes through town and village limits. This does not require new land to be acquired. In fact, this might be a faster and cost-effective way to modernise India’s highway infrastructure.

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Rush to spend

How the defence budget is suddenly spent in the last month of the financial year

From the CAG Report No.12 of 2010-11 (Defence Services) [pdf here] :

1.14 Rush of expenditure in the last quarter of the financial year and in particular, in the month of March

Ministry of Defence (Finance/Budget) has from time to time, issued instructions to maintain an even pace of expenditure through the year. Such instructions had, however, little effect on the pace of expenditure. 62 per cent of the annual Capital expenditure for all services to Budget Estimates was spent during the last quarter of 2008-09. 43 per cent of the expenditure to Budget estimates took place in the month of March, at the fag end of the year.

This actually points to an undue haste in spending the money at the last moment so that the amount is not returned expended. The unexpended capital expenditure of the defence budget had earned the ire of most commentators in recent years and thus the defence ministry has been keen to spend the complete allocation within the financial year. The ministry has succeeded in doing so in the last couple of years. But it also means that the quality of this last-minute expenditure remains questionable. Not only is this reflective of poor planning, it also indicates that the processes and systems have not been fine-tuned in the recent years to meet the stipulated expenditure targets.

It would be interesting to see the guidelines issued by the Finance Ministry in December 2006 about restrictions on expenditure during the last quarter of the financial year (pdf here). The scheme envisaged for 23 Budgetary Grants from 2007-08, which excluded the grants of the defence budget, had stated:

(a) MEP [Monthly Expenditure Plan] for the month of March may not exceed 15 per cent of the budgeted provision [Budget Estimate];
(b) MEP for the months of January-March may be so fixed that the QEA [Quarterly Expenditure Allocations] for the last quarter may not exceed 33 per cent of the budgeted provision;

When it comes to the budgetary grants for the defence ministry (and other grants not covered by the MEP and QEA guidelines), these guidelines have an advisory:

…it is advised that even in respect of Demand for Grants not covered by the modified exchequer management system, the expenditure in the last quarter of the financial year may not exceed 33 per cent of the Budget allocation for the Demand for Grants.

Finance Ministry’s advice to the defence ministry is to limit the expenditure for the last quarter (January to March) to 33 per cent whereas the actual capital expenditure is nearly double at 62 per cent. In fact, the expenditure in the month of March at 43 per cent is greater than the advisory suggests for the whole last quarter. So much for government advice.

This leads to the long-standing question: Where are our defence economists?

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Not from ‘Yes Minister’

The government’s reason for quashing a proposal for direct cash transfer of subsidies

There has been quite a buzz over the announcement made in the Union Budget to implement direct cash transfers of subsidies. The Union Finance Secretary suggests that March 2012 is the outer date for implementing cash transfers for kerosene and fertilizer, after the recommendations of the task force headed by Nandan Nilekani are considered by the government.

But this is not the first time such a suggestion has been made; not by economists and columnists, but from within the government. Here is an extract from Eighth Report by the Parliamentary Standing Committee on Food, Consumer Affairs and Public Distribution on Food Subsidy and its Utilization (pdf here), August 2010:

2.9 In reply to another question, the Department [Department of Food and Public Distribution] stated that it is proposed to disburse equivalent amount of food subsidy in cash instead of subsidized foodgrains to the eligible BPL and AAY families. The amount of food subsidy will be deposited directly by the concerned district authority in bank/post office accounts to be opened by each of the beneficiaries. Food subsidy account in the bank/post offices are to be opened in the name of women heads of households and in case the women head is not surviving, only then it should be opened in the male head of family. With this cash subsidy, the BPL/AAY families would be able to purchase foodgrains and sugar of their choice from open market instead of taking delivery from the fair price shops as at present.

2.10 The proposal was referred to Ministry of Finance in September 2008 for placing the matter before the Committee on Non Plan Expenditure (CNE). On the advice of CNE, the proposal was referred on 28.11.2008 to Ministry of Finance, Department of Expenditure for their consideration. The proposal was examined by Department of Expenditure and that Department vide their note dated 26.12.2008 advised to defer the proposal, inter-alia, saying that in terms of their austerity instructions dated 5.6.2008, no new scheme other than which is part of Budget announcement 2008-09, was to be introduced in that year. The proposal has been resubmitted on 26.6.2009 to the Ministry of Finance. The proposal is under consideration with that Ministry. Latest, they have reminded on 22.3.2010 to expedite the matter. The above proposals of the Department of Economic Affairs were examined in this Department and comments were sent. There is no further development on that proposal.

This sounds straight out of an episode of Yes Minister: Because the government is following austerity instructions, no new scheme were to be introduced, even though it may end up bringing more austerity in government expenditure.

“People do not want to know how welfare money has actually been spent. Nobody asks the priest what happens to the ritual offering after the ceremony.”

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Budgeting Jammu and Kashmir

The state budget doesn’t make for a happy reading.

A quick look at the state budget of Jammu and Kashmir presented in the state assembly yesterday provided the following highlights:

  • J&K SGDP has a growth rate of 6.61%, compared to the all-India GDP growth rate of 8.6%
  • The per capita income in the state is estimated at Rs 32,496, compared to the all India figure of Rs 54,527
  • The state government borrowed Rs 1,300 crore as additional open market borrowing outside the FRBM arrangement, to reduce the accumulated overdraft of the government with the J&K Bank
  • Expenditure on payment of interest is estimated at Rs 2,363 crore during the next year as against Rs 2,251 crore for this year
  • Expenditure on account of cost of purchase of electrical energy is projected at Rs 2,400 crore for next year, as against the current year’s Rs 2,324 crore
  • Rs 1,174 crore is estimated to go out on account of repayment of loans next year, as against Rs 959 crore this year
  • State’s Annual Plan is yet to be finalised by the Planning Commission, receipt figures in the budget have been worked out on a projected State plan outlay of Rs 6,600 crore
  • In addition, the PMRP outlay is of Rs 1,200 crore
  • 57% of budgeted income is funded by central grants
  • 44% of budgeted expenditure is towards salaries and pensions of government employees
  • The budget has a fiscal deficit of Rs 2,979 crore over a total outlay of Rs 31,212 crore next year, i.e., 9.54%

The bottom-line is simple. At the next instance of the minutest trouble in Kashmir Valley, many commentators will come forth and place the blame on the economic condition of the state. The state government, it will be suggested, is not doing enough economically. But a closer look of the state budget actually shows that there is very little that the state government can do to revive the state’s economy.

Of course, it is another matter that the Central government has also not been able to do enough for the state’s economy. The Prime Minister’s Reconstruction Programme has been extended for another year now (when it was supposed to culminate in 2008) and Dr C Rangarajan has now submitted his third report on economic revival of the state (the earlier two reports lie deeply buried in the cupboards somewhere).

It is easy for many Kashmiris to look at some other parts of India and feel that they have been left behind. But the best years of India’s economic growth, since 1992, have coincided with the worst years of terrorist violence in J&K. In 1989, no one had ever imagined that the sleepy pensioners’ paradise of Bangalore would be an IT hub or Tamil Nadu a major location for auto-manufacturing. Things took their own course and hitherto unthought-of opportunities emerged in many regions of the country. We don’t know what Kashmir could have become had it not been engulfed by violence since 1989.

There is only one lesson to be learnt here. If there is a climate of fear, terror, violence and insecurity in the state, no amount of planning, funding, schemes and programmes will make a difference. While the government must do what it can to revive and kick-start the economy of the state, the most important thing it can do is to ensure peace, security and rule of law to allow economic activity to flourish. If peaceful conditions prevail uninterruptedly for a substantial period of time, one never knows what success stories can emerge from the state of Jammu and Kashmir. They may not be the sufficient condition, but peace and security remains the essential prerequisite for economic revival of the state.

Of course, this blogger does remember his old aphorism: “The secret of success is this: There is no secret of success.”

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Decoding defence budget

It means that India can sign deals for new defence equipment worth Rs 60,000 crore this year.

Union Budget for 2011–12 has seen the defence budget going up by 11.6% to Rs 164,415 crore from Rs 1,47,344 crore last year. Before delving on this any further, let us just consider the following equations.

Defence Budget = Revenue Expenditure + Capital Expenditure

Capital Expenditure = Capital Acquisition Budget + Other items

Capital Acquisition Budget = Committed Liabilities + New Purchases

So the Revenue Expenditure of Rs 99387.85 crore is just the operating expense to keep India’s military juggernaut running. It doesn’t augment India’s military capability in any manner whatsoever.

But it would be a mistake to assume that all of Capital Expenditure goes towards acquisition. As a rough yardstick, only three-fourths of the capital expenditure budget goes towards capital acquisition. Out of that acquisition budget, 60% would already be due out as payment for committed liabilities. That leaves around (0.40*0.75=0.30) i.e. 30% of the capital budget available for new defence purchases.

As per the Finance Minister’s budget speech, the increase in the budget was to procure modern weapon systems and defence equipment, and Rs 69,199 crore has been allocated as capital expenditure for the same. Incidentally, capital expenditure was Rs 60,000 crore last year. As per the back of envelope calculations, 30% of Rs 69,199 means approximately Rs 20,000 crore being available for new defence purchases this year.

Forget all the headlines like “With an eye on China, India steps up defence spending“, this is the only figure that matters in the defence budget — Rs 20,000 crore. If only one-third of the total amount for a defence deal were to be paid upfront, this would mean that for Rs 20,000 crore, India can actually afford to sign deals for new defence items worth Rs 60,000 crore in the coming year.

In any case, Rs 60,000 crore is not some loose change. Even then, we can perhaps take solace in the sentence that we hear every year, from every finance minister, unfailingly: “Needless to say, any further requirement for the country’s defence would be met.”

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Don’t read, study this data

Making sense of the data for defence capital acquisition expenditure

In the answer to a question raised in the Lok Sabha, the Union defence minister gave out the following data for capital acquisition allocation & expenditure for the Armed Forces for last three years.

Obviously, the total and the percentages were not given there in the official table for anyone to make sense of the dense data. This blogger put those figures up in the table for easier understanding. But even then, it is not the complete story.

As this blogger had explained earlier [here], the capital acquisition consists of two components: one used to fund committed liabilities for items already procured in previous years; and the other for procuring new items and equipment. For eg., the capital acquisition budget for 2008-09 was earmarked as 37482.77 crore, which included committed liabilities of 17846.57 crore. When the actual capital acquisition budget finally spent in 2008-09 was 30000.42 crore, the expenditure on account of new purchases was only 12153.85 crore against an initial allocation of 19636.2 crore. Thus, the unutilised portion of 7482.35 crore that the government was unable to spend in that year was only from the amount earmarked from new schemes — which comes to 38 percent. 38 percent is the figure to note, and not 20 percent as this data purports to depict.

Similarly in 2009-10, the committed liabilities were for 21248.98 crore and new schemes were budgeted for 19118.74 crore. Thus, the amount that the government was unable to spend in 2009-10 was 1940.72 crore out of 19118.74 crore — more than 10 percent. This happened despite a huge push to spend in the last few weeks of the financial year, as evident from the government’s own Revised Estimates prepared a few weeks before the end of the financial year. The Revised Estimates had envisaged that the government would be able to spend only 13897.9 crore, whereas they ended up actually spending 17178.02 crore due to this last-minute push. It is reflective of the systemic mess that engulfs the complete defence procurement process in this country.

The usual tendency is to blame the politico-bureaucratic lethargy for this mess. But it goes well beyond that simplistic explanation. And it begins with one simple question: Where are the defence economists in this country?

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Planning development

The new member-secretary of the Planning Commission has got the right ideas about the development-security paradigm in the areas affected by the Maoist problem.

Here are a couple of extracts from an interview with Sudha Pillai, member secretary of the Planning Commission, who is responsible for planning development for areas affected by the Maoist problem.

How can this problem be solved?

By righting the wrongs. Development is non-negotiable. But to carry it out, you need security. Criminal elements have to be handled by someone. It’s important to ensure there is no wanton destruction of life and property. When killings take place, anything you do to tackle it becomes public. It’s not so with development work. In Dantewada, road contractors ran away because they were intimidated by the Maoists. After a contractor was beheaded in Gadchiroli, we could not get anybody to come and build a road.[ToI]

Ensuring security is not a sufficient, but an essential condition to undertake development in the areas affected by the Maoist problem. Those who demand development for these backward areas thus must even more vociferously demand coherent security operations against the Maoists. Security, though a desirable end-state by itself, cannot be the legitimate final goal of the state. The challenge for the civil society is to ensure that the government remains focused on development even when a semblance of security returns and provides an illusion of normalcy in these areas.

Currently, there are two ways in the popular discourse to look at the development and security paradigm in the Maoist-affected areas. The first view is enunciated by many left-liberal commentators who consider development and security as mutually exclusive choices — it can be either development or security in these areas. The other view, which is more acceptable politically now — being advocated as the two-pronged approach by the Home Minister in recent weeks — is to regard development and security as coterminous and coincidental activities. As Ms Pillai explains so well, both the above views are fallacious, and plainly dangerous. Development and security are, in fact, sequential choices on the time-continuum where development can only, has to, and must follow security.

This brings to another important point made by the Member Secretary of the Planning Commission — measuring the effectiveness of development activities undertaken in the areas affected by the Maoists. The current model of the Government of India for measuring development involves simply looking at expenditure incurred out of the budgetary allocations made for various development schemes in these areas. This percentage of expenditure can provide little idea about actual development on the ground, and provides no clue whether outlays have actually resulted into outcomes in these areas or not. But this is about to change with a new proposal by Ms Pillai.

What initiatives have you taken to tackle the Maoist problem?

We are preparing an Integrated Action Plan for the 33 districts affected by the Maoist problem. I have written to the states to prepare a plan for each district. These have to be sent to us by May 31. Also, the Planning Commission has commissioned 33 studies to find out about governance on the ground, implementation of schemes and whether benefits are reaching people. We will get the inputs in a month-and-a-half.[ToI]

Ms Pillai’s plan to commission independent studies to assess developmental outcomes in 33 districts most affected by the Maoist problem is surely going to get the debate about development in these areas on the right track. It will prove that simply throwing money at the Maoists in the name of development is not going to make a difference unless the state is able to first ensure security in these areas. Let us hope that the political leadership, civil society and the mainstream media takes note of these Planning Commission studies and the ensuing debate. And keeps the government honest in its dealings: development certainly a must, but security first.


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The way we allocate our defence budget

Incremental budgeting for defence expenditure by the government demolishes all talk of budgeting based on capability-based, long-term integrated defence planning.

Amidst all the pretentious talk about LTIPP (2007-2022), five-year defence plans, forward planning, capability based restructuring and more such gibberish  put forth by the defence services, defence ministry and myriad strategic commentators on allocations for the defence budget, the facts speak for themselves — and speak to the contrary. The government of India has already decided the yardsticks for preparing the defence budget for next few years, both under the revenue and the capital expenditure heads. Not surprisingly, it prefers simple incremental budgeting — a linear graph irrespective of the changing nature of threats, or our responses to those challenges. In this regard, the Report of the Thirteenth Finance Commission [pdf here] makes  for a very interesting and educative read.

For defence expenditure, the Ministry of Finance has projected a growth rate of 7 per cent per annum for defence revenue expenditure. Capital expenditure is projected to grow at 10 percent per annum. The Ministry of Defence has emphasised the need to provide adequately for enhanced force multipliers. We also recognise the need to provide for some real growth in defence revenue expenditure, to allow for adequate depreciation and maintenance. We are of the view that the Finance Ministry’s projections address these needs and have, therefore, adopted them. The resultant projection for the overall annual growth rate of defence expenditure works out to 8.33 per cent. [Paragraph 6.27 of the Report of the Thirteenth Finance Commission]

Based on this assessment and inputs from the Ministries of defence and finance, the Commission has made certain projections for the defence budget, both under the revenue and the capital expenditure heads [Annexure 6.3 of the Report]. For the year 2009-10, it had estimated that the defence expenditure would come down from the BE [Budgetary Estimates at the beginning of the financial year] of 141,703 crore to 128,792 crore in the RE [Revised Estimates close to the end of the financial year] stage, with all the savings coming from the revenue head (from 86,879 to 73,968 crore) and the complete capital budget (54,824 crore) being expended.

Now anyone — however buoyant with optimism — who has even cursorily glanced at the past records of Indian defence expenditure would dare to make such a claim. No surprises then that what turned out finally at the RE stage was an increase of  1,779 crore in the revenue budget and a reduction of 7,000 crore  in the capital expenditure budget for 2009-10. Consequently, the revenue estimates for 2010-2011 presented by the finance minister last week bear little resemblance to the figures projected in the finance commission’s report — 87,344 crore has been budgeted against the commission’s projection of 79,146 crore. To keep up the pretences, the finance minister has budgeted 60,000 crore against the commission’s projection of 60,306 crore for the capital portion of the defence budget. Based on past experience, one can be reasonably certain that a fair share of this estimated capital expenditure will be returned to government coffers and some more reappropriated to the revenue head. And the skewed nature of India’s defence spending will continue unabated for a few more years to come.

But what is the conclusion to be drawn from this sermon filled with data and bureaucratic terminology? Simply that the problem with the Indian defence budget is not really about how we spend the money, but it is how we allocate it.

Defence economics, anyone?

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Less of a surrender(2)

A correction. 36.6 percent of allocations for new defence acquisitions has been returned unexpended this year.

Indian Express report quoted by this blog yesterday was slightly off the mark. It assumed that all the money — Rs 5221 crore — being returned out of the defence budget of 2009-10 was from the capital expenditure account.  After the presentation of the budget today, it turns out that 7000 crore has been returned unexpended from the capital defence expenditure account, out of which 5221 crore has been returned to the government coffers and the balance 1779 crore re-appropriated towards revenue expenditure account of the defence budget.

So what does it mean in plain English? It means that the defence ministry [which includes the three service headquarters] was unable to spend 7000 crore out of an allocation of 19118.74 crore for new defence acquisitions in the current year. This is the real figure — 36.6%.

Just for the record, the corresponding figure for the preceding year, i.e. 2008-09 was 38.1%.

Rejoice, for St. Antony’s ministry was able to spend 1.5% more of new defence acquisitions allocation this year compared to the previous one. At this rate of progress, it is just a small matter of 25 years before the defence ministry starts spending all the money within that year. Like this blogger, aren’t you eagerly looking forward to union budget of 2035-36 then?

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Teeth, tail and ratios

There is an urgent need to take steps to have a better ratio of capital to revenue expenditure in the defence budget.

For the current financial year (2009-10), the capital expenditure as a percentage of the defence budget is planned to be a rather modest 39 percent, the balance 61 percent being earmarked for revenue expenditure. But going by past experience, that figure is likely to be far lower than 39 percent when the budget year ends in a couple of months time. Last year (2008-09), the planned capital expenditure figure was 45.46 percent but it actually turned out to be 35.78 percent when the books were balanced at the end of the year.

Analysing the defence budget last year, former Navy chief Admiral(retd) Arun Prakash had flagged this issue as being critical to the issue of defence expenditure and national security. As the budget formulation process for the coming year is currently in progress at the North Block, it is instructive to revisit those thoughts now.

Since revenue expenditure is devoted mainly to support services which may or may not contribute to combat effectiveness, one of the more adverse effects of our inability to get the capital/revenue equation right is the skewing of the teeth-to-tail ratio of the armed forces.

There is world-wide recognition that the single most expensive item in defence budgets is manpower, with its ‘cradle to grave’ liability. While they eagerly bid for funds to acquire high-technology force-multipliers, our Services have remained unwilling or unable to either downsize force-levels, or create joint-service synergies as a quid pro quo.

While one Service stubbornly insists that there is no substitute for ‘boots on the ground’, another says that ‘technology is nice to have, but numbers have their own logic’. Obviously, everyone wants to eat their cake and have it too. Unfortunately, there is no one with the knowledge or authority in the national security structure to crack the whip and shatter this paradigm.

By their proclivity for adding numbers, and resistance to Jointmanship, the Services boost revenue spending on the ‘tail’ (items like rations, housing, pay and pensions) when they should be adding ‘teeth’ via capital acquisition of modern hardware.[Force]

Not that one expects things to change this year. The opportunity to make amends is there even today but the government will not act unless there is a crisis.

The difference between a crisis and an opportunity is when you learn of it. ~Alan M. Webber

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