Defence and Economics: Both Sides of the Coin

Laxman Kumar Behera

Despite many pioneering works in the developed countries, defence economics has few takers in the developing world including India, where the relevance of the subject has not been comprehended until now. Even at present, many security analysts question the utility of application of economic principles in the strategic sector! Nearly fifty years after the formal inception of study on defence economics by Hitch and McKean, only recently the Indian Ministry of Defence (MoD) is taking some bold steps to familiarize the subject within the country which, if pursued in the right spirit and vigour, could give a new direction to defence and help improve the functioning of this crucial sector.

There are number of reasons why the subject has been neglected and not discussed for so long in India. To some analysts and policy makers, defence acquires a status of ‘holy cow’, therefore immune from public discussion. That is why our defence budgets (Rs. 89,000 Crores in 2006-07) are passed in Parliament without debate on its content. The advocates of ‘holy cow’ have so far succeeded with the help of a narrow world view of defence being a matter of national security and ultimate state power. In addition, they argue that the financial and economic concerns could be easily bypassed while meeting strategic and operational requirements, without even bothering about its impact and affordability. More importantly, there is a fear in the conscious or subconscious mind of experts that economics is all about scrimping, i.e., reducing expenditures, no matter how important are the things to be bought or made.

In contrast to the prevailing notions, defence economics is not about reducing expenditure or putting the crucial national security matters in the public domain. A formal definition is needed for the sake of understanding the subject. Though it has been defined in various ways, but the core definition remains that of applying economic principle and tools to all issues of defence, disarmament and peace. In recent years this definition has been modified to include the issues like economics of war, conflict and non-conventional conflicts, namely, terrorism, civil wars, revolutions, insurrections.

The basic application of economics in defence arises from the fact that total national resources is scarce and defence eats away a sizable portion from it, many a time crossing 3 per cent of our GDP, if SIPRI (Stockholm International Peace Research Institute) data are to be believed. Basic economics teaches us to make rational choices, in the form of efficient resource allocation, a principle equally applicable to both defence and non-defence matters. In other words, defence economics is about allocating resources in terms of “choosing right doctrines, equipment and techniques, and so on to get the most out of available resources”. Economising resources may imply spending less on some things and more on others to make the efficient use of resources available which has variety of uses and users.

The relevance of defence economics can be gauged from its numerous contributions that range from economics of arms races to disarmament to modelling terrorist behaviour. It is worth mentioning a few areas which are significant from Indian context. The most pressing issue is demand for defence expenditure, as it elicits a great deal of debate on the right size of defence budget. For defence economics, the basic determinants of defence expenditure are the national income and the level of threat perception (both internal and external). Once these determinants are quantified and put into a time-series analysis it becomes easy to come to a figure which represnts the country’s total demand for military expenditure. The advantage of this estimation lies in its sensitivity to the changes of both threat perception and national income as well as forecasting the future demand level.

India with its vast military manpower has its own advantages as well as disadvantages for obvious reasons. While keeping a vast manpower, though, seems logical considering its border and internal problems, yet the financial burden and impact of maintaining 13 lakh armed forces personnel (the figure goes upto 42 lakh if Reserves and Paramilitary forces are included) need a careful examination. Beseides, as the present day warfare is more technology-driven, meaning machine replacing man, the concept of factor substitution becomes more relevant in striking a right balance between the optimum size of human force and the technical capability that the country wants. Defence economics examines the role of manpower in the overall military production function, thereby addressing some crucial issues concerning it.

India is a major victim of terrorist and other subversive activities. Understanding terrorist behaviour is of crucial importance to thwart such malicious designs. Defence economics through its use of standard consumer choice models could predict such behaviour which can be used for policy making.

The global security apparatus of the 21st centuty has undergone a tremedous change, especially since the 9/11. The ‘Revolution in Military Affairs’ (RMA), brought about by the “innovative application of new technologies, combined with dramatic changes in military doctrine and operational and organizational concepts”, has fundamentally altered the character and conduct of military operations. With the RMA the burden of defence as proportion of total national income has grown many fold. Even the only superpower, the US, with its defence budget of more than $ 450 billion (India’s defence budget is around $20 billion) is finding it very difficult to meet all the pressing needs, hence requiring a rigorous economic analysis for efficient allocation of resources. Be it NATO alliance or joint product development in the form of F-35 joint strike fighter aircraft, the economics of defence is quite visible.

Defence economics has a larger role to play in the modern global security system. India has long ignored its relevance. However, a ray of hope seems to hover in the horizon. The recent initiatives by MoD are certainly a welcome step in the right direction. What needs to complement it is a dedicated research to unravel a lot of things – things about the cost-effectiveness of our products, production agencies; procurement policies; military alliances, and many others.

Author Note
Laxman Kumar Behera is a New Delhi based research scholar.