An enigma called defence technology fund

Delivering his maiden budget speech in July 2014, the finance-cum-defence minister had made the following statement in the context of defence production:

“143.   In the year 2011 a separate fund was announced to provide necessary resources to public and private sector companies, including SMEs, as well as academic and scientific institutions to support research and development of Defence systems that enhance cutting-edge technology capability in the country. However, beyond the announcement, no action was taken. Therefore, I propose to set aside an initial sum of ` 100 crore to set up a Technology Development Fund to support this objective.”1

Since then there has been much speculation about which 2011 fund he was referring to, who is going to manage the proposed Technology Development Fund, how is it to be different from the already existing technology related heads in the defence budget, and how will the amount set aside for the purpose be utilized.

The proposed fund does not appear in any of the Demands for Grant that constitute the defence budget. It implies that either the ministry of defence (MoD) had not asked for this or, if had, it did so without adequate preparation. Surely, the MoD officials would now be engaged in preparing a scheme to activate the fund but, if the past experience is anything to go by, it is not going to be easy.

It may be recalled that the Kelkar Committee had recommended setting up of the following two funds in 2005:

1. “Strategic Defence Industry Fund”, which was to be ‘like a non-lapsable pool of resources’, exclusively for ‘Make’ projects.
2. “Defence Technology Product Development Fund”, to be sued for providing funds to SMEs to carry out design and development work.

The committee had also recommended provision of adequate fund to the services for taking up R&D work as deemed appropriate by them.

When the Department of Defence Production moved for setting up the funds, it discovered that the Ministry of Finance (MoF) was not warm to the idea of setting up a ‘fund’, especially of the non-lapsable variety. It was pointed out by MoF that even if a non-lapsable fund is created, MoD will have to seek parliamentary approval to appropriate any sum of money from the fund during the year in which the need arose. More to the point, such funds are typically serviced from the revenue budget which, in the case of defence, is always under strain.

However, MoF was amenable to budgetary support being given for the purpose for which Kelkar committee had recommended setting up of these funds, subject to proper schemes being drawn up for utilization of the budgetary allocation.

In pursuance of this, two Minor Heads 209 and 210 were opened in 2010-11 under sub-Major Head 08 Major Head 4076 in Demand No 27: Capital Outlay on Defence Services. These budget heads were meant to provide funds for ‘Make’ projects and assistance to SMEs for technology development.

Meanwhile, a ‘Make’ procedure had already been prepared and incorporated in Defence Procurement Procedure (DPP) 2006. The procedure, inter alia, envisaged funding of ‘Make’ projects to the extent of 80 per cent by MoD. With a budget head in place, allocations started being made sporadically from 2010-11 onward under Minor Head 209. It is another matter that despite the enabling provision in the budget, backed by a detailed scheme, no ‘Make’ project has actually materialized so far.  

On the other hand, the budget head for providing assistance to the SMEs never took off, primarily because it was not backed by any scheme. Though a blueprint was prepared and sent to the ministry of finance for their consent, it never got finalized.

The absence of scheme has, however, not stymied operation of budget heads related to research and development projects by the three services. These budget heads form part of the revenue allocation made to them under Minor Head 110: Stores.

Independent of all this, approximately 6% of the defence budget is operated by the Defence Research and development Organization (DRDO), whose mission includes designing and development of state-of-the-art weapon systems, platforms and allied equipment for the armed forces.

If there is any coordination and synergy between DRDO and the armed forces in regard to utilization of funds allocated to them for research and development, it is not too well know.

There are lessons to be learnt from all this.

First, the very purpose of setting up the fund would need to be clearly defined. The purpose as spelt out in the budget speech is precisely what the existing budget heads operated by the armed forces and the DRDO are meant for. Therefore, the objective of the proposed fund will have to be different.

Second, if it is going to be an independent fund, which is what seems most likely, its linkage with the already existing budget heads, whether being operated by the armed forces or DRDO, will need to be clearly spelt out to prevent redundancy and to ensure synergy.

Third, the merit of creating it as a non-lapsable fund would need to be carefully considered. The reason why the idea of setting up of a non-lapsable fund was given up in the past might be equally relevant today. 

Fourth, the issue of control over the fund could turn out to be contentious. The armed forces are already managing funds for the same or similar purpose, and so is the DRDO. The proposed fund cannot be placed under the control of the armed forces, unless it is trifurcated, with each service controlling a part of the fund for purposes other than those for which the existing budget heads are used by them. Why would DRDO need a separate fund for research and development is difficult to imagine. So, who will administer the fund – the Department of Defence Production? That could give a pro-DPSU/OFB slant to the fund.

Fifth, if this fund is going to be an addition to the already existing budget heads and the DRDO budget, a coordinating agency would need to be created. This may erode the freedom that the services and the DRDO presently have in deciding how to utilize the budget allocated to them for research and development. But a coordinating agency must be created to maximize the impact of disjointed budgetary allocations for the same purpose.

There is a need to think through all these, and other related, issues while formulating a scheme for creation and operation of the proposed fund. More complicated issues, such as an exit clause, modality of monitoring progress of the funded projects, ownership of IPR, could make the task difficult.

There are organizations like Global Innovation and Technology Alliance (GITA) – jointly promoted by CII and the Department of Science & Technology – pursuing similar objectives. The NSIC has entered into MoUs with nationalized and private banks to meet the credit requirements of MSMEs. It would make sense to learn from their experience and indeed to establish linkages with them and other similar organizations.

A Rs 100 crore corpus may turn out to be too little or too much, depending on how its utilization is envisaged. The future of the fund would depend as much on the steady flow of resources in future as on efficient management of the scheme. This would be a worrisome aspect of the scheme.

In the circumstances, the desirability of setting up a largely self-sustaining Section 25 company on the pattern of GITA merits serious consideration as it could take care of many a problem that is bound to come up if the fund is managed departmentally.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India

• 1. Speech of the Finance Minister, Union Budget 2014-15, accessible at http://indiabudget.nic.in/bspeecha.asp