New Delhi
November 13, 2006

My distinguished colleague Mr. Pallam Raju, Minister of State for Defence, Defence Secretary Shri Shekhar Dutt, Secretary Defence Finance Shri V. K. Mishra, Financial Advisor (Acquisition) Shri K. P. Lakhmana Rao, Chief of Air Staff and Chairman, Chiefs of Staff Committee Air Chief Marshal Tyagi, senior officers of the services, excellencies, distinguished delegates, invitees, ladies and gentlemen,

I am extremely privileged to inaugurate this seminar on “Defence Finance and Economics” organized by the Department of Defence Finance of the Ministry of Defence. Perhaps many of you might not be aware that Defence Finance is one of the oldest organisations established more than 200 years ago. As I jokingly say, history of this country would perhaps have taken a different turn had an accountant of Defence Finance refused to pay the advance of one lakh of Arcot Rupees that was paid to Col Clive for the payment of the Madras troops.

It is with a sense of great satisfaction that I stand here today to address this august gathering of the academia, armed forces, policy makers, experts from leading think tanks, diplomats and other distinguished invitees who are associated with defence finance and economics in one way or the other. It is a matter of fulfilment because this seminar is the result of intense efforts made by the Finance Division of the Ministry of Defence over the past almost one year. It is always a pleasure to see the efforts fructifying into tangible outcomes. But this is just the beginning. I am sure the deliberations over the next three days will further the cause of bringing defence finance and economics to the center-stage in strategic thinking.

Ladies and gentlemen, global expenditure on defence has crossed the 1,000 billion US Dollar mark and it is rising. The peace dividend of the end of cold war does not seem to have had the desired effect on global defence spending, after showing some promise in the initial post-cold war years. At the most fundamental level, this expenditure has the effect of crowding out the spending on social sector. We do not live in a world that is free from hunger and want. Even a fraction of the money that the world spends on defence could make a difference to the lives of millions of people across the world who live in abject poverty and suffer from deprivation of survival needs. The irony, however, is that the increasing defence outlays are becoming necessary for the safety of those very people, as also of those who do not suffer from similar denial. What adds a sombre note to this irony is the fact that the defence outlays almost always fall short of the expectations of the defence planners in individual countries, whatever be the state of their military capability. There is a need to strike a balance between these two seemingly contradictory positions, which is what this seminar seeks to achieve by focusing on the issues that hold the key to this paradox.

I do not wish to dwell upon the expanding horizons of strategic thinking, which now encompasses such concerns as threats to the ecological system, sources of energy supply, trade and commerce, apart from the threat to human security. These threats have acquired new forms, which also do not need any elaboration. We hear about them every day. It is these new manifestations of security concerns that have a direct bearing on the defence preparedness of individual nations. Threat to security in any corner of the world is a threat to security of not only the individual nations facing that immediate challenge, but also to the security of other nations that are perceived as adversaries by the outfits that are endangering the world peace today. Every nation, therefore, has to prepare itself for this new demand on its resources, which has added a global dimension to national defence, without eliminating the possibilities of conventional wars. Even if these future wars are limited in duration, these will perhaps be more ferocious than ever before, thereby nullifying any advantage arising from the limited duration of future wars.

In view of this new global dimension of the security scenario, any meaningful strategy for meeting this challenge has to rest on diplomacy, economic development and defence capabilities – though not necessarily in that order. All strategic thinking must first weigh the options that do not add to the financial burden of those who could do without this additional burden. This underscores the need for cooperative efforts to secure world peace. These efforts must, however, not impinge on the sovereignty and integrity of the individual nations, as that would only prove to be counter-productive. The fundamental tenets of India’s foreign policy are in sync with this new reality: autonomy in decision-making, continued commitment to Panchsheel or the five principles of peaceful co-existence, friendly and co-operative relations with all countries, resolution of conflicts through dialogue and peaceful means, and equity in the conduct of international relations. In fact, every nation in the world today has a similar approach to foreign relations. We believe that every nation in the world today wants peace, which, as Albert Einstein said, cannot be achieved by force but by understanding. But Einstein also said, “so long as there are men, there will be wars”. World consensus on the imperatives of peace notwithstanding, there will always be someone somewhere, or some incident somewhere, that will trigger a conflagration. Therefore, while diplomacy can – and should - reduce that risk with attendant lowering of the cost of maintaining world peace, no nation in the world can afford to be complacent about the prospects of peace being violently disturbed by an unwanted conflagration. No nation can, therefore, afford not to maintain military capability that in its own perception would be required to meet those challenges.

This raises the first serious question about military strategies and planning. While the military strategies have to take into account the non-military initiatives that would serve the objective of achieving and maintaining peace, these strategies also have to relate to the capacity of the economy of the country concerned to afford ideal solutions. It will serve no one’s purpose if the economic realities are not factored in while working out the strategies. You could acquire all the military capabilities that the world can offer and consider yourself absolutely invincible. But that would only be a delusion. For one thing, technological superiority, or even mastery, is no guarantee of invincibility as the recent events the world over have so amply demonstrated. More importantly, every new capability that is added to the arsenal is only at the cost of something else that could be done to mitigate or improve the lot of the human beings. Thus affordability of defence is a moot issue that Defence Economics will have to address. I am not sure whether as a branch of knowledge, Defence Finance & Economics could offer solution to these issues with clinical precision but I have no doubt in my mind that this branch of knowledge has advanced enough to facilitate informed assessments by military planners and other decision-makers.

The strategies have to be converted into specific plans. This is a more difficult task as it involves assessment and management of a host of micro issues, ranging from the kind of military capabilities required for meeting the challenge to the nature and size of force levels required to be maintained to operate those capabilities. Then there are other questions related to defence logistics, which account for a large proportion of defence outlays the world over. There are issues related to the cost and quality of training. As they say, more you sweat in training, less you bleed in war. This list does not really cover the entire spectrum of issues but is only indicative of the range and diversity of concerns that need to be addressed.

Each of these issues raises a hundred other questions that need to be answered. Let me touch upon a few of them. Take, for example, the question of logistics. It is generally accepted that defence spending has a linkage with economic growth. Generation of direct and indirect employment is perhaps one of the most mundane manifestations of the economic impact of defence spending. But this is also perhaps one of the most significant as it impacts the lives of the ordinary citizens. Therefore, any decision concerning force-levels has to weigh its socio-economic impact vis-à-vis the likely savings accruing from the decision that could be diverted to the social sector or utilized for strengthening the military capabilities. This is not an argument in favour of maintaining large force-levels but a pointer to the kind of issues that Defence Finance & Economics, as a specialized branch of knowledge, needs to address.

It is a harsh reality that defence expenditure involves huge outlays on defence acquisitions. Technology is changing fast and newer technologies cost a fortune. While choice of technology has to be made carefully keeping in view the felt need of the country concerned, rather than for sheer power projection, there is no denying the fact that the challenge of modern warfare, with the likely nuclear, biological and chemical dimension, cannot be met with outdated technologies. This assumes greater significance because of the unfathomable dangers arising from wanton proliferation of nuclear technology over the years and the capabilities acquired by international terrorist organizations. Therefore, there is no escape from modernization of the defence capabilities. What is required, however, is a close look at the options that present a fine blend of economic sense and military sensibility.

It is in this context that Defence research and development and defence production assume greater significance. There is a direct correlation between investment in R&D and economic development. This is true of Defence R&D as well. Investment in defence R&D would encourage indigenisation, reduce reliance on uncertain sources of supply, increase military capabilities in the long run and, most importantly, give a fillip to economy because of the inevitable spin-offs from such investments. But this is a costly affair. Every country cannot afford to invest heavily in an area in which the results are not guaranteed. This calls for greater synergies between public spending and private enterprise. Such synergies are also required in regard to defence production. There are spin-offs from such synergies that could bring immense benefit to the social sector and reduce the cost of defence through such policy initiatives as making offsets integral to defence purchases. This will make defence expenditure more sustainable, apart from creating a growth spiral in the economy.

All these issues have a common refrain: affordability, sustainability and accountability. Defence Finance & Economics cannot remain pre-occupied with the first two; accountability will need to be built into the entire process of strategic thinking, analysis, assessment and execution of plans. Defence Finance & Economics will need to provide useful tools for these tasks, particularly in regard to accounting and budgeting. If PPBS (Planning, Programming and Budgeting System) was developed as a response to a specific need in 1960s, new paradigms in accounting and budgeting will have to be evolved to meet the newer challenges of not just providing a format for defence outlays but bringing about greater transparency in defence expenditure with emphasis on outcomes. Zero-based budgeting, Outcome budgeting and Accrual Accounting will need to be applied more vigorously in planning and managing defence expenditure, than has been the case so far. As the defence expenditure involves huge outlays, there is a need for robust audit systems not just to keep the system on track but to provide useful insights into more efficient ways of achieving the defined objectives. Audit is uniquely placed to perform this task because of its accessibility to the entire gamut of information and data that could facilitate assessment and analyses in an overarching perspective.

Mahatma Gandhi, who guided us to the glory of independence, had once said, “My patriotism includes the good of mankind in general. Therefore, my service of India includes the service of humanity… Isolated independence is not the goal of the world states. It is voluntary interdependence.” This would aptly sum up the objective of the seminar, as I see it. With all the leading lights in the field of Defence Finance & Economics being present here, along with the decision-makers and strategic thinkers, this seminar should serve the cause of this inter-dependence in terms of experience-sharing, learning from each others’ mistakes and successes, and exposure to best global practices. All this should help in evolving our own paradigms of requisite military capabilities for, in the ultimate analysis, such interdependence can only supplement and not supplant the inalienable right of each country to an independent policy on defence and deterrence. Security interdependence is a better guarantee of peace than individualistic approach. But, for that to happen, interdependence must be based on certain complementary levels of military and non-military capabilities of mutually interdependent nations, failing which such interdependence runs the risk of falling into asymmetric relationship of the master and the serf. Every nation of the world has the right to – and must be able to – hold its head high on its own strength.

This is not utopian thinking. And even if it is, this Utopia must be achieved. For, there cannot be lasting peace among unequals. Speaking at the Bandung Conference, Pandit Jawaharlal Nehru, the first Prime Minister of India and a leading light of its freedom struggle, had said, “I never challenged the right of my country to defend itself; it has to. We will defend ourselves with whatever arms and strength we have, and if we have no arms, we will defend ourselves without arms. I am dead certain that no country can conquer India. …. I know what my people are. But I know also that if we rely on others, whatever great powers they might be, if look to them for sustenance, then we are weak indeed. …”. He could well be speaking about the basic philosophy that must guide military interdependence in today’s world.

Twenty nine countries, representing over half the world’s population, had sent delegates to the Bandung Conference held in April 1955 in Indonesia. A 10-point ‘Declaration on promotion of world peace and cooperation’, incorporating the principles of the United Nations Charter and the principles of Panchsheel enunciated by Pandit Jawaharlal Nehru, was adopted unanimously. The Bandung Conference ultimately led to the establishment of the Nonaligned Movement in 1961. This conference on Defence Finance & Economics, which, at one time, was to have representation from the same number of States, should be able to lay the foundation for a continuous dialogue on sustainable defence, which may serve as a path breaking step towards creating a world-wide forum for exchange of ideas, information, experience and, most importantly, trust and goodwill.

I am confident that this seminar, unprecedented as it is, will ignite the mind and trigger globalization of strategic thinking. I complement Mr Vinod Misra, Secretary (Defence Finance) and members of his team and all those who are associated with this preparation for their arduous effort at organizing this seminar, which traverses the entire spectrum of defence finance and economics.

I wish you all great success in your endeavours.

Thank you.

Jai Hind.