Will dragon trouble the elephant?

The recent discussions in National dailies and International Strategic Defense forum have raised the significant concern over development of tensions in Indo –china border. International community has perceived this situation as a strategic move for war by china. Keeping this in mind Ministry of Defense and External affairs have started moving the pawns for the next move which could impose block to the P.R.C (Peoples Republic of China). More than the political threat this has been viewed as the product of internal tensions developed with Chinese government about the increasing friendly orientation of Indian and US relations. The significant offshoot (negative) of this will be the increase in fiscal deficit due to increase in Non-developmental expenditure i.e., defense.

Elements of Tensions:
It all started with the border breaching by Chinese army and the reclaiming slogan of “Arunachal Pradesh belongs to china”. The diplomatic tensions has seen bit offset when Mr.Manmohan Singh met Chinese premier in Thailand. But the reality is what Politburo
Decides in P.R.C., not the premier. This move merely covered some space in National dailies.
a) India’s Foreign Relationship policy: India’s strategic stand on Tibet and providing political asylum to Dalilama has always been the hurdle between Beijing and New-Delhi. India has to reorient her decision for the interest of her citizens. It is important that Mr.Sarkozi has finally cancelled his meeting with Thalailama once Beijing has expressed concern over that. It is evident that China is one among the superior economic power and we should not discount the reality in the name of chauvinism.
b) Rift over the dam: Water is likely to become a source of another tension between India and China. Judging by its latest actions, China is set to embark on a series of river diversion plans including on the Indus and Sutlej, and especially the Yarlung Tsangpo (Brahmaputra River) plan. Yarlung Tsangpo project has been in the drawing boards of Chinese planners for several decades. But on October 14, 2008, Chinese engineers began digging a tunnel through Tibet’s Galung La Mountain in Nyingchi Prefecture to build the most difficult highway to China’s last road-less Medog County located 30 kilometers from India’s border. The road construction to be completed by 2010 is linked to the proposed dam construction at the Great Bend of Brahmaputra. China’s increased infrastructure activities near the Great Bend were even visible on Google Maps.

c) Investments in POK: Apart from this there are number of reasons which could compromise the Political and defense analysts for china, be the factor of threat to political and civil order in India. Most important one among them will be, POK (Pak-Occupied-Kashmir) as the unofficial base for Chinese secret agencies to encourage infiltration of the anti-social elements to India and as a easy trade route for smuggling arms to Naxal & Maoist organizations in North India. This assumption is supported by the increasing attacks (sudden) in Northern parts of India. Recent political developments in POK to provide security cover for Chinese investments and its interest over the region is the principal variable of developing tension.
Consequences of Tension:
The principal outcome of the tension, as we already mentioned will be the increase in fiscal deficit which will dent the growth as a result. If the government has to abide by the FRBM reforms at least to certain extent, it has to cut certain subsidies in the name of “Reforms”. The main contribution will be from the fertilizer & oil subsidy which is more than 5% of the total budget. This will disturb the agricultural activity which is still the main source of rural employment. This will reinforce the current issue of soaring food prices also.
If the government selects the other route of selling its stakes in PSU (most of them are profit making!) this will be the bad strategic move in long term as it may lose the prospective earnings. To be precise, the crux of the issue is achieving 7% of GDP growth in the coming year with the planned outlay will be the daunting task as the government has to spend much on defense in the current situation.

Economics of the Defense:
Defense budgeting comes under the Non-developmental expenditure. It looks like, for the past decade growth rate of Non-developmental expenditure heads are less than developmental expenditure. In other way, expenditure on defense is affordable you can say. Developmental Expenditure is incurred on account of Railways, Post and Telecommunications, Social & Community Services, General Economic Services, Agriculture & Allied Services, Industry & Minerals, Power, Irrigation & Flood control, Transport& Communications, and Public Works, etc. Non-Developmental Expenditure is incurred on account of Defense Services, Border Roads, Interest Payments, Fiscal Services, Administrative Services, Organs of State, Pension & other Retirement Benefits, Relief on account of Natural Calamities, Technical & Economic Cooperation with other Countries, Compensation& Assignment to Local Bodies, Food Subsidy, Social Security & Welfare, etc.

a) Defense, non-development expenditure: Defense comes under non-development expenditure. It’s the tradeoff between Gun and Butter. If you have seen the past expenditures, there is a significant uptrend in the Defense expenditure. Since it is the non-development element, the government has to sacrifice certain percentage of growth in the overall economic performance.

b) How much of Non-development expenditure?
If you see the share of defense in total non-development expenditure, currently it has 27% of total non-developmental expenditure of which “Revenue defense expenditure “eats the majority of the share. This indicates that, the significant amount of money spended for defense doesn’t result in asset creation, but only for payment of wages etc. This shows any plan for adding modern warfare’s will put more pressure on estimated expenditure. Additionally, the recent announcement of pay commission will add more expense to the “Revenue defense expenditure”

c) Implications on Fiscal deficit: Relaxations of FRBM policy and announcement of stimulus packages on the eve of economic downturn has already added some deficit to the budgeted estimates. Further tensions in the Indian border and the necessity for the improvement of coast guards will impose additional deficit to the Fiscal balance.
In spite of this, Union government has to reduce the outlay for the priority sectors which will further disturb the Employment and general price level. If we look at the historical statistics, there is a significant positive correlation between Defense expenditure and Fiscal deficit. This implies that any decision on increase in defense expenditure will impose more weight to the act to balance the expenditure and deficit.
The talk’s in capital about chances to increase the defense budget to 14% of the total budget will definitely have the impact o growth and if we say, china will be the principal reason behind this wont be a negligible argument.