Catch-22 of defence spending
Khalid Iqbal


A typical national purpose has two vital components: National development and national survival. These two facets support and compete with each other. National development without security attracts aggressors, while national security at the cost of development degrades social security and erodes public welfare. A balance between the two is essential, but it is difficult to achieve. The disintegration of the Soviet Union and the occupation of Kuwait by Iraq are two contemporary examples of imbalance between national development and national security.

There are many ways of looking at defence spending; each approach leads to differing perceptions. First, letís take a look at Pakistanís budget from a broader perspective.
The outlay of our national budget (Rs 2767 billion) is 14.2 percent higher than the previous year, net revenue receipts (Rs 1529 billion) are expected to be up by 11 percent, and size of Public Sector Development Programme (PSDP) (Rs 730 billion) shows an increase of 58 percent from the revised PSDP figures of 2011. Foreign remittances are likely to reach $12 billion mark by the close of this year, foreign currency reserves have reached $17.3 billion, and exports grew by 28 percent during the current fiscal year. Foreign assistance (Rs 414 billion) is expected to be 42.7 percent, or Rs 124 billion, higher than the current fiscal year.
On expenditure side, debt servicing (Rs 1034 billion) will consume 37.4 percent of the total budget expenditure. Within this framework, defence budget (Rs 495 billion) is 17.9 percent of the total expenditure; it is up by 11.4 percent from the closing year. Going by this framework, it appears that that, by and large, our traditional pattern of broader budgetary contour has been preserved vis-ŗ-vis defence spending.
Conversely, the defence spending in the outgoing fiscal year was Rs 586 billion - about 23 percent of the 2010-11 budget; by adding pension-related expenses of Rs 71.9 billion in the outgoing fiscal year, the total spending would come to Rs 658 billion, or 25.6 percent, of the total budget. Likewise, if we add to next yearís budget additional Rs 150 billion that the government has allocated, almost half of which was billed under the Armed Forces Development Programme and Rs 73.2 billion paid from the civilian account as military pensions, the net allocation stands at Rs 718 billion, that accounts for around 26 percent of the total budget. However, these practices of funding defence spending through other heads are a common practice. Many countries, including India and China, also plan their funds for defence spending in a similar way.
The budgetís main distribution is: 41 percent (Rs 206.4 billion) for human resource related expenses, 26 percent (Rs 128.2 billion) for operating expenses, 23 percent (Rs 117.5 billion) for physical assets, and 8.6 percent (Rs 42.6 billion) for civil works. The share of three services is rationalised based on the strength of each service and its requirement of weapons and equipment; the remainder amount is further divided into various sub-heads. Expenditures on the ĎDefence Production Divisioní in the new financial year have been estimated to the tune of Rs 1229.725 million.
Records indicate that in 1996-97, defence spending consumed 26.25 of the budget. During 2001-02, however, defence allocation was 20.87 percent. So over the last few years, there has been a decline in the defence budget in practical terms. Also, there was no raise in defence allocations in 2009-10. During year 2010-11, in terms of GDP share, the defence allocation was 2.6 percent; whereas, despite an increase of 12 percent, the GDP share of defence allocation for the next year (2011-12) would go down to 2.4 percent.
This shows that there has been a steady decline in defence servicesí slice in the GDP cake over the years. This shortfall can be attributed to inflation, which has been around 12-14 percent. Moreover, dollar-rupee parity, rising cost of equipment, fuel and food are some of the factors that have been quietly eroding the purchasing power of our military.
Now letís take a look at our defence spending with respect to the threat perception; our main threat emanates form India and this year it has raised the defence allocation by 11.59 percent, last year it was jacked up by 30 percent. In the same vein, India considers China as its principal enemy and Beijing has upped its budget by 12.7 percent this year. Therefore, Pakistanís increase in its defence budget appears compatible within the context of triangular pattern of the threat perception. However, the Indian and Chinese economies with a growth rate of 9 percent support a competitive escalation in military spending, whereas Pakistan with an almost stagnated economy (GDP growth of around 2.4 percent) is trapped in an unenviable situation.
Our federal revenue is insufficient to even pay for its current expenditure. The federal government plans to spend Rs 975 billion more than its revenue. For this, it expects the provinces to generate a combined surplus of Rs 125 billion. As a result, the overall fiscal deficit is envisaged to come down to Rs 850 billion, that is the IMF prescribed deficit of 4 percent of GDP.
Anyway, the chances of Pakistanís economic bounce back in short to medium timeframe are remote. Likewise, there are no prospects of taking an early break from the quicksand of strangulating triangular threat assessment paradigm. The Indian economy is 12 times of our economic outlay and is growing around four times faster. Our inflation is 15 percent, while India has been able to contain it to 7 percent . Our tax to GDP ratio is 8 percent, while Indiaís ratio is 20 percent. Our GDP is up by paltry 2.4 percent, while we are constrained to up our defence spending by 12 percent. At the same time, Chinaís defence spending to GDP ratio is 1.4 percent, India spends 1.83 percent, whereas Pakistanís ratio is 2.4 percent. This certainly is not a sustainable preposition for Pakistan.
Another angle of viewing the budget is from volumetric perspective that is in dollar form, because that represents raw purchase power. The Chinese budget for the 2011-12 year is $91.7 billion - Indian spending is $36.03 billion and Pakistan plans an outlay of $5.764 billion. Pakistanís disparity vis-ŗ-vis the Indian armed forces in 2001-02 was 1:3.5; it has now accentuated to over 1:7. According to Stockholm International Peace Research Institute (SIPRI), the actual military defence expenditures of India are $41.3 billion.
The Economic Survey 2010-11 estimates that the war on terror has cost Pakistan $17.8 billion in the current fiscal year, which is nearly 70 percent of the countryís total exports. According to reports, Pakistan has suffered a loss of about $70 billion between 2001 and 2010; assistance from the United States is rather insufficient when compared to the losses being suffered by the country. More so, it gets $600 million a year under the Coalition Support Fund (CSF). During the recent years, the flow of CSF is often interrupted on one flimsy pretext or the other.
At policy level, Pakistan needs to embrace intellectual agility and functional culture to link our national security to national economy. Incidents, like Operation Geronimo and the attack on PNS Mehran, have tended to erode the public confidence in the capacity and capability of our armed forces. Nevertheless, there is a national consensus about funding the essential security requirements. For their part, the armed forces need to identify their flaws and take corrective steps; apart from other steps, belt tightening is certainly overdue.