It is reassuring to hear the Armed forces volunteer a freeze on defence budget for the current financial year. As the salaries of certain ranks have been increased ostensibly the freeze translates into a cut-back in defence procurement.
Between stability and freeze lurk a number of questions begging for an answer. Is economic stability an end in itself? Does the freeze of defence budget amount to a deferment of expenditure? Higher taxes and reduction of subsidies, higher interest rates, market-based exchange rates, and import management may reduce the fiscal and current account deficits but no one is telling us how exactly they will usher in greater prosperity.
Will the improved macroeconomic numbers do the magic trick of creating more jobs, for instance; or make exports grow? The orthodox view is that macroeconomic stability is a pre-condition to sustained growth. The theory is that it imbues certainty and facilitates transmission of right investment signals to the market.
The stability theory, however, does not guarantee growth and prosperity. Sound macroeconomic numbers do not, on their own, do the magic trick of creating more jobs, reducing inequalities, enhancing productivity, or boosting exports.
You need concrete plans to capitalize on macroeconomic stability. We are yet to see the government rolling out such plans. The focus is entirely on meeting IMF prior actions and structural benchmarks and not what is needed to build on these gains to secure a more vibrant manufacturing that alone will ensure sustained revenue growth, poverty reduction, and a paradigm shift in our export prospects.
The defence imperative underscores the gap between stability and sustainability. Unlike certain government agencies whose expenditure consists largely of salaries Defence requires both manpower and firepower.
Arguably, a buoyant tax base will help us pay for the higher Defence allocations that our security circumstances demand, but will we have the hard currency to pay for essential imports if we are not exporting enough to provide for it?
In an earlier article in these pages (Industry-Defence nexus) we had reflected on the urgent need to support the local manufacturing sector to support our defence capabability. We had acknowledged that the defence ministry had done a credible job of developing 'in-house' capability; but that it had structural limitations.
The way forward, in our view, is to leverage defence procurement in a way that promotes local manufacturing to provide cost efficiencies, sharing of risk, and a more reliable supply base.
Knowing the sensitivities of the current economic sovereign - let the market, not the government, pick the winners - we will demonstrate unusual restraint and desist from kicking and screaming for an Industrial Policy, even if we are convinced that is the way forward if we are to have a competitive manufacturing base.
Instead, let's talk sectoral. Let's talk symbiotic. Let's talk about enhancing defence capability in partnership with the private sector. Surely, PPP (public- private-partnership) is kosher? We take heart from the World Bank sparing no effort, nor paper, to champion PPP.
The main elements of defence-private sector partnership will consist of sustained demand, production efficiencies, and a deep diffusion of technology. The government, on its part, will need to provide reasonable (time-bound) tariff protection and strong export support on the strength of 'infant industry' argument.
The partnership hinges upon Defence providing a fairly predictable and robust market; with the private sector delivering on productivity-based cost-efficiencies. Defence will also need to weigh in with transfer of technology through its offsetting arrangements, which the private sector can bolster through its collaboration with foreign partners for non-military applications.
It is in the critical R&D domain that the two partners will have their greatest challenge - and a unique opportunity to create strong spillover effects across manufacturing.
DEPO (Defence Export Promotion Organisation) already does some exports, albeit of basic ordnance stores. More interestingly, there is a handful of private sector firms that exports precision instruments in collaboration with their foreign partners.
[As an aside, those who claim to promote exports sometimes, almost intuitively, prevent them. Ask this exporter of bullet-proof jackets/products: he just can't get Commerce Ministry to allow him to import raw materials for use in an export order, despite export license from Defence Production Division. Ministry insists on dealing with each request on a case-to-case basis, after NOC from Interior. The time that the process consumes, and the uncertainty, means export orders lost]
In our earlier piece we had deliberated on the criticality of offsetting arrangements in Military's contracts with its foreign suppliers. Our past experience shows we have not really been able to fully exploit the gains that offsetting promises. To give a fillip to local manufacturing Defence should actively engage the private sector in these arrangements. Like elsewhere in the world, the private sector is better positioned to get the best bang for the off-set buck.
How does Defence begin? How does it choose the potential private sector partners? Obviously, you can't have a bidding process to choose partners. It will necessarily have to be somewhat judgemental: not who can bring what to the table but who is a better fit; who can supplement Defence's in-house capacities better; who has a greater absorptive capacity for technology transfer.
Atomic Energy Commission has a decent track record of choosing engineering units (almost wholly small and medium) that developed, with some hand-holding, into reliable supply sources. In a somewhat different sense the auto policy helped foster a viable engineering base.
Macroeconomic stability merely lays the foundations for future growth. We are paying a heavy social and political price for this stability. It will be a pity if we let the sacrifice go waste by not putting into place well thought out policies that give us a more reliable and competitive source of defence supplies, a more advanced engineering base, and a crack at exports.
Military should take the lead in strengthening the engineering sector. And please don't say how many burdens we can assume!
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