Sunday, January 31, 2010

Incompetence Worse Than Graft in Pakistan

"It has been my experience that folks who have no vices have very few virtues" is a quote often attributed to Abraham Lincoln, also known as Honest Abe.

I do not entirely agree with Honest Abe, but what does it mean in Pakistan's context, given the extraordinary and often hypocritical incessant demands for honesty by the nation's TV talking heads? Is competence not as big or bigger virtue than honesty? Is it not Utopia to expect angels to rise to leadership positions in a nation that generally scores badly at all levels on corruption indexes? Is it not better to elect and expect greater competence from the leaders in Pakistan? The kind of competence that delivers good governance for the greater good of society?

Since the beginning of Pakistan's existence as an independent nation in 1947, there has been constant repetition of slogans about piety and honesty by invoking the name of Islam, and its early legendary leaders, particularly great Caliphs like Omar. What is often overlooked is that Caliph Omar was not just impeccably honest; the key reason for his tremendous success as a great leader and highly respected ruler was his extraordinary competence in governance. Can we find a leader like Caliph Omar today? I think it's highly unlikely. However, I do think it is possible to find people who are reasonably competent amongst Pakistanis to help lead the nation to a better future.

Looking around at the recent history of successful leaders in the Islamic world, like Malaysia's Mahathir Mohammad and Indonesia's Suharto, there have been serious allegations of corruption and abuse of power against them. And yet, it is their sufficient competence in delivering good governance to their people that has brought great economic success and remarkable human development to their nations, and ultimately a greater measure of competent democratic governance to their highly literate electorates.

Beyond the Islamic world, there are various levels of corruption found in both developed and developing nations. But many of them have made significant strides in recent years, mainly because the leaders whom they have elected have been far more competent those in Pakistan. Even in Pakistan, whenever the military rulers have brought in technocrats and professionals to help develop and execute good policies, there have been periods of rapid growth. It is their competence, not their unassailable honesty, that has helped them deliver significant economic growth.

Pakistan's average economic growth rate was 6.8% in the 60s (Gen. Ayub Khan), 4.5% in the 70s(Zulfikar Bhutto), 6.5% in the 80s (Gen. Zia ul-Haq), and 4.8% in the 90s (Benazir Bhutto and Nawaz Sharif). Growth picked up momentum in the 21st Century under General Musharraf, and from 2000-2007, Pakistan's economy grew at an average 7.5%, making it the third fastest growing economy in Asia after China and India. There were 2-3 million new jobs created each year from 2000-2007, which significantly enlarged the middle class, and helped millions escape poverty.

Unfortunately, there is a troubling history of the democratic process in Pakistan resulting in the election of leaders who are demonstrably both corrupt and incompetent. After surviving the lost decade of the 1990s under such leaders, and then thriving in this decade under a more competent dictator until 2007, Pakistan has once again returned to the bad old days of the 1990s. The economy is stagnating, inflation is high, there are shortages of everything from food to water and power and security, unemployment is rising, and many are slipping back into poverty.

It would be great if Pakistanis can have both competence and honesty in their leaders. However, I would personally insist on competence to deliver good governance as a minimum criterion for leadership positions, if I can't have both.

Here is my incomplete wish list for the kind of competencies desirable in governing Pakistan at this critical juncture in its life:

1. Motivational Competency: The leadership needs to sell a vision of a secure, peaceful, stable and prosperous Pakistan, and motivate the people to work toward achieving it. It's not going to be easy, but strong motivational skills can help inspire the nation, in spite of the deep skepticism and toxic cynicism that pervades the nation's discourse today.

2. Security Competency: What the leadership needs is a comprehensive strategy using a mix of intelligence capability, political dialog, military force and close monitoring to isolate and defeat those who continue to perpetrate murder and mayhem on the streets of Pakistan. Such a policy must be developed, debated, sold to the people, and constantly refined to produce results.

3. Human Development Competency: No nation can achieve greatness unless its human resource potential is developed and utilized to the fullest. It is a challenge that will require a team of committed and competent professionals with the full backing and the resources of the state to build a public-private partnership for mass literacy campaigns and to provide access to food and health care. Beyond that, there will be a serious focus required to build great institutions of higher learning to develop knowledge based economy for the twenty-first century.

4. Economic Competency: There is a need to build a non-partisan economic leadership team with the best available talent and experience in Pakistan. Such a team should be chartered to come up with policies and programs to spur nation's economic growth to create opportunities for the tens of millions of young people, and to generate the national resources for funding ambitious programs in human and economic development of the nation.

Can our current leadership do it? Their past record is not reassuring. However, if they make a serious effort toward it, and start to show some results, I am confident they will find real support for their efforts in Pakistan. Results from good governance by the politicians will be the best guarantee for the survival of democracy in Pakistan.

Related Links:

Haq's Musings

Pakistan's Decade of 1999-2009 in Review

ASEAN Architect Suharto Passes On

NRO and Corrupt Democracies in South Asia

Malaysia National Front Suffers Setback

Musharaf's Economic Legacy

Pakistan's Corruption Indexes

Return to Bad Old Days in Pakistan

Shaukat Aziz's Economic Legacy

Daily Carnage in Pakistan

Thursday, January 28, 2010

Creative Financing of Pakistan's Energy Projects

Cash poor and energy-starved Pakistan should consider tapping into the London-based global carbon trading market to fund its renewable energy projects. The carbon market is about $6 billion now, and it is projected to exceed 50 billion dollars after the US joins carbon trading. Here is how I understand it:

Let's take the example of a hypothetical big European company XYZ faced with the problem of large carbon emissions that must be reduced or offset by one million ton under the Kyoto protocol. To satisfy the international treaty requirements, XYZ company has the option of either installing carbon-capture equipment to reduce its emissions by a million ton, or retrofit the plant to cut its carbon emissions or buy carbon offsets from a carbon trader for a project in a developing country like Pakistan that offsets its emissions by a million ton. It is a business decision that often leads companies such as XYZ to fund cost-effective carbon offsets in developing nations by buying carbon credits on the open market. Such carbon offset projects could vary from planting mango orchards in Pakistan to absorb a million ton of carbon, or it could be a hydroelectric dam or a wind farm or solar electricity project that replaces a planned fossil fuel project.

This is not just a fantasy. The carbon offset market is real. Major investment bankers, including Goldman Sachs and Citibank, are already heavily involved in the business through their carbon trading desks in London. And new players, such as Eco securities, are being formed to take advantage of this new opportunity.

The industry to generate and verify carbon offsets has seen explosive growth in recent years largely because of the Kyoto treaty, under which nations agreed to impose limits on carbon emissions. The treaty allows United Nations regulated companies to purchase credits produced from these offset projects to meet a portion of their emissions-reductions targets set by the international program. More than 300 million credits, each representing the equivalent of one metric ton of carbon dioxide, have so far been created, and these credits are traded on commodities markets. In February, 2010 issue of Harper magazine, Mark Shapiro, of Berkeley, Calif.’s Center for Investigative Reporting, says up to 2 billion new credits could be drawn from offset projects if a cap-and-trade program similar to the proposals now before U.S. Congress were to become reality. Though the carbon price is determined by market and it is always changing, the current price is about $20 per metric ton. At this price, the expected 2 billion new credits would create an additional $40 billion global carbon trading market.

There are successful examples of the use of trading to cut acid rain from sulfur emissions in the United States. The program allows polluters to figure out their own way to cut emissions rather than mandating a particular kind of technology to reduce emissions like a scrubber on a power plant, rather than forcing them to stop burning coal. It gives the companies a yearly target.

The proposed U.S. House of Representatives bill cuts carbon emissions by 17 percent in the United States by 2020, and it's up to the corporations to figure out how to do it. They can do it by buying offsets from other companies, or by shutting down coal plants, or by efficiency measures, etc.

Carbon credits trading reinforces the idea that pollution in one part of the world affects all of the inhabitants of the planet. And any measures taken in one part of the world, such as planting of trees or building renewable energy projects instead of fossil fuel based plants, help the entire globe. This realization is expected to help transfer billions of dollars in funds from the rich to the poor nations to deal with the common threat of the global climate change. But these funds will only help those who proactively seek them, and build renewable projects to effectively cut global carbon emissions.

As a signatory of the Kyoto Protocol, Pakistan is eligible to benefit from any project under Clean Development Mechanism (CDM) and exploring carbon credit potential in different industries. Pakistan's ministry of environment is the Designated National Authority for CDM tasked with raising awareness and participation by Pakistani companies in CDM. At least one Pakistani company, Pak-Arab Fertilizers (Pvt.) Ltd., Multan, has earned $ 13 million through the sale of CERs (Certified Emission Reductions) in 2008, the first year of the launch of CDM. The total cost of the project is $18 million, according to a report published in The Nation newspaper.

Several cities, including Islamabad, are launching carbon credit projects such as greenhouse gas emission reduction s from sources ranging from landfills to vehicles. Seoul City in Korea will begin test-operating a carbon emission trading system in April in a bid to reduce greenhouse gas emissions. Malaysia is planning carbon-neutral cities. Asia is the center of a lot of activity with CDM projects registered with the United Nations Framework Convention on Climate Change (UNFCCC).

In neighboring India, Delhi Metro became the first rail network in the world to get a UN certificate for cutting over 90,000 tonnes of carbon dioxide release into the atmosphere. The certification report, given by Germany-based validation organization TUV NORD which conducted an audit on behalf of the UN Framework Convention on Climate Change (UNFCCC), found that the DMRC stopped the emission of 90,004 tonnes of carbon dioxide from 2004 to 2007 by adopting regenerative braking systems in the metro trains. Media reports indicate that India is emerging as the one of the most active seller of carbon credits worldwide, with many of the country's firms investing in green projects. India currently has close to 500 projects registered with the United Nations, second only to China's 680. However, in terms of CERs, India's share is just 11.63 per cent, while China's is 58.75 per cent. The Indian government has approved more than 1,455 CDM projects which can potentially make Rs. 28,000-30,000 crore in export earnings, according to a Rediff report. With only a few dozen CDM projects approved to date, Pakistan is significantly behind India and China in taking advantage of the opportunity offered by Kyoto.

A number of consulting companies, such as Carbon Services and Carbon Asset Management in Pakistan, are claiming to guide clients through the process of selling carbon credits to set up clean energy projects. There have been some allegations that middlemen are ending up with huge chunks of the proceeds from carbon credit sales.

Carbon services has arranged seminars with Pakistan's Ministry of Environment to educate businesses about what CDM is, what projects are being done and what can be done within their countries, according to a report in Computerworld. "We try and bring in examples from India, China, Brazil etc about what their industries have done and disseminate that information to local industries," Omer Malik of Carbon Services told Rabia Garib of Computerworld. "The Ministry of Environment's department that looks after this is Designation National Authorities (DNA) is extremely active and very proactive towards promoting CDM in Pakistan"

This is an opportunity for Pakistani government, businessmen and entrepreneurs to seriously pursue creative ways of financing renewable energy projects in Pakistan, including sales of carbon credits, to effectively deal with the current crippling energy crisis in the country. It is also an opportunity to help reduce the impact of climate change on Pakistan. At 8 feet below sea level, Pakistan's financial capital Karachi shows up on the list of world's mega-cities threatened by global warming. Other South Asian cities likely to come under rising sea water in the next 100 years include Mumbai, Kolkata and Dhaka. And it's not just the big cities in South Asia that will feel the brunt of the climate change. The rural folks in India are already seeing rising crop failures, increasing poverty and frequent farmer suicides.

Addressing a regional conference in Islamabad last year, Dr Rajendra Kumar Pachauri, chairman of the Inter-governmental Panel on Climate Change (IPCC), said Pakistan was witnessing severe pressures on natural resources and environment.

He said: “Climatic changes are likely to exacerbate this trend. Water supply, already a serious concern in many parts of the country, will decline dramatically, affecting food production. Export industries such as fisheries will also be affected, while coastal areas risk being inundated, flooding the homes of millions of people living in low-lying areas.”

“The fact that global warming was unequivocal and there is no scope for scientific questioning, Pakistan faces potential environmental catastrophe,” said Dr Pachauri, who has been awarded the Nobel Peace Prize (on behalf of the IPCC) along with former US vice-president Al Gore.

Pakistan's participation in the carbon market is a win-win for Pakistan and the buyers of carbon credits in the West. It helps Pakistan deal with its energy and climate crises, and helps the western companies meet their goals of cutting global carbon emissions. The best way to make it happen is for the government, educational institutions and industry groups to educate the candidates about going through the United Nations CDM process set up under the Kyoto Protocol.

Related Links:

Going Through the CDM Process

Pakistan's Energy Crisis

Renewable Energy for Pakistan

Pakistan Inks Hydroelectric Power Deals

Carbon Offsets Under Fire

The Politics of Climate Change

Cap and Trade and The New Carbon Economy

Electric Power Crisis Worsens in Pakistan

Light a Candle, Don't Curse Darkness

Social Entrepreneurs Target India and Pakistan

Grameen Shakti Solar For Pakistan

Climate Change Worsens Poverty in India

Carbon Trading: Opportunity For Pakistan

Pakistani Entrepreneurs Survive Downturn

Water Scarcity in Pakistan

Factor AG and Carbon Services Pakistan Presentation

Wednesday, January 27, 2010

Bhutto Documentary at Sundance Film Festival

The life of Benazir Bhutto (1953-2007) is the subject of a documentary film "Bhutto" by Jessica Hernandez and Johnny O'Hara at a major independent film showcase in the mountains of Utah in the United States. The film compares the glories and tragedies of the Bhutto family with the story of the Kennedys in America.

The two-hour documentary shows her tragic story in the broader context of Pakistan's troubled history since independence in 1947.

The Bhutto family, sitting left to right in back row: Nusrat, Shahnawaz, Zulifiqar Ali, Sanam. In front, Murtaza and Benazir.

Fitting it in two hours "was the most difficult thing -- making sure that we are giving you an enormous amount of information," co-director Hernandez told AFP. "And to make it entertaining was the only way to do that."

The film captures the unusual story of success and failures, and the controversial, feudal legacy of Pakistan's first woman prime minister, with ultra-slick editing, dynamic music and graphics, animation -- to captivate the audience. As "Bhutto" producer Duane Baughman put it, "You mention the name of Bhutto, in Pakistan especially, and you will have no shortage of people who hate her and of people who love her".

"Her legacy will be debated for the generations to come," Baughman told AFP.

Here's a short movie trailer:

Here's another video discussing Benazir Bhutto's Legacy:

Here are some spontaneous reviews of the documentary from viewers at Sundance:

Here's a documentary on Islam narrated by Benazir Bhutto:

Related Links:

Ode to Feudal Prince of Pakistan

Acquittals in Murtaza Bhutto Case

Bilawal Partying at Oxford

Political Dynasties and Assassinations

Grandchildren of Zulfikar Ali Bhutto and Ziaul Haq Speak Out

NRO, Democracy and Corruption in South Asia

Pakistan's Intelligence Failure Amidst Daily Carnage

Zardari Corruption Probe

Tuesday, January 26, 2010

Karachi Tops List of World's Largest Cities

With rapid urbanization in Pakistan, Karachi has become the world's biggest city with a metro area population of 18 million people, according to Citymayors stats published recently.

Karachi (Urdu: کراچی, Sindhi: ڪراچي, Karāchi) is followed by Mumbai, Delhi, Buenos Aires, Seoul, Jakarta, Manila, Sao Paulo, Shanghai and Istanbul making up the top 10 list. Bangladesh capital Dhaka is at number 12, barely missing a top 10 slot. Of these, Mumbai, Dhaka and Delhi also have the dubious distinction of making Mercer's list of world's dirtiest cities. In another survey, Mercer has ranked Karachi as the fourth cheapest city for expatriates.

The list of the world’s largest cities, by land area, is headed by New York Metro, with a total area of 8,700 square kilometers. Tokyo/Yokohama is in second place with almost 7,000 square kilometers, followed by ten cities from the United States. Mumbai (Bombay), with a population density of almost 30,000 people per square kilometer, is the world’s most crowded city. Kolkata (Calcutta), Karachi and Lagos follow behind.

In 2008, the US based NPR radio did a series on Karachi titled "Karachi: The Urban Frontier". It highlighted the following facts about Karachi:

1. Karachi is built along a natural harbor facing the Arabian Sea, and this central location between the Middle East and India has made Karachi an important trading port for hundreds of years.

2. Karachi encompasses both its old seafront district and a sprawling web of commercial and residential development that covers almost 1,400 square miles. Its contemporary landscape spans skyscrapers, posh golf resorts, congested roadways and sprawling squatter colonies.

3. The Port of Karachi handles 60 percent of Pakistan's cargo, and the Karachi Stock Exchange is one of Asia's most active trading markets (The data for 1999-2009 shows that Karachi share market significantly outperformed Hong Kong, Mumbai and Shanghai markets). The city's main industries include shipping, trade, finance, banking, information technology, manufacturing, real estate, media and education.

4. Like any big city, it has its share of problems. Pollution, crime, corruption and political volatility are just some of the issues confronting the 12 million to 18 million "Karachiites" who call this overcrowded city home. Karachi is 60 times larger than it was when Pakistan was created in 1947. And with the population growing at an annual rate of 6 percent, one of the biggest challenges for city officials is managing the tensions and violence that often flare along ethnic and religious lines.

5. Karachi is growing so fast that estimates of its population range from 12 million to 18 million. The country's financial capital is also a city where about half the population lives in illegal houses.

Here are some figures for Karachi population I received from the editors of

YEAR Urban Population
1856 56,875
1872 56,753
1881 73,560
1891 105,199
1901 136,297
1911 186,771
1921 244,162
1931 300,799
1941 435,887
1951 1,068,459
1961 1,912,598
1972 3,426,310
1981 5,208,132
1998 9,269,265
2006 13,969,284
2007 14,500,000

Since Karachi population has been growing at about 4-6% a year recently, the 18 million figure for Karachi in 2009 makes sense.

The mayors of the world’s twenty largest cities are each responsible for more people than most national prime ministers. For example, London, ranked 20th in the world, has more residents than nations like Paraguay, Denmark, New Zealand or Ireland, and if Karachi, globally the largest city, was a country it would rank above Greece, Portugal or Hungary. The combined population of the world’s eight megacities - cities with more than 10 million inhabitants - comfortably exceeds that of Germany.

Urbanization is not just a side effect of economic growth; it is an integral part of the process, according to the World Bank. With the robust economic growth averaging 7 percent and availability of millions of new jobs created between 2000 and 2008, there has been increased rural to urban migration in Pakistan to fill the jobs in growing manufacturing and service sectors. The level of urbanization in Pakistan is now the highest in South Asia, and its urban population is likely to equal its rural population by 2030, according to a report titled ‘Life in the City: Pakistan in Focus’, released by the United Nations Population Fund. Pakistan ranks 163 and India at 174 on a list of over 200 countries compiled by Nationmaster. The urban population now contributes about three quarters of Pakistan's gross domestic product and almost all of the government revenue. The industrial sector contributes over 27% of the GDP, higher than the 19% contributed by agriculture, with services accounting for the rest of the GDP.

A 2008 report by UN Population Fund says the share of the urban population in Pakistan almost doubled from 17.4 percent in 1951 to 32.5 percent in 1998. The estimated data for 2005 shows the level of urbanization as 35 per cent, and CIA Factbook puts it at 36% in 2008. An expected positive consequence of the increasing urbanization of society in Pakistan will be the creation of over 100 million strong middle class by 2030, making Pakistan's grass roots democracy more viable and responsive to the needs of the people. This large urban population will not only create a domestic market for goods and services, but it can create a skilled work force that can be the engine of economic growth and source of innovation.

According to the 1998 census, Sindh is the most urbanized province with 49 percent percent of the population living in urban centers. NWFP is the least urbanized province with only 17 percent of its population living in urban areas.

With Pakistan already the most urbanized country in South Asia, Karachi's population has been growing at a rate of over 4 percent a year for decades, according to the editors at Karachi now accounts for about 12 percent of the nation's population, and Mustafa Kamal as its mayor is accountable to a larger population than the presidents or prime ministers of many nations of the world. As the nation continues to experience increasing rural-to-urban migration, the jobs of the big city mayors in Pakistan, particularly Karachi and Lahore, are becoming significantly more important and challenging than generally recognized. How these mayors deal with these challenges will largely determine the fate of the nation, in terms of education, health care, housing, transportation, industrial and service sectors' growth, job growth and overall economic activities, as well as the future of democracy.

When visitors see a squatter city in India or Pakistan or Bangladesh, they observe overwhelming desperation: rickety shelters, little kids working or begging, absence of sanitation, filthy water and air. However, there are many benefits of rural to urban migration for migrants' lives, including reduction in abject poverty, empowerment of women, increased access to healthcare and education and other services. Historically, cities have been driving forces in economic and social development. As centers of industry and commerce, cities have long been centers of wealth and power. They also account for a disproportionate share of national income. The World Bank estimates that in the developing world, as much as 80 percent of future economic growth will occur in towns and cities. Nor are the benefits of urbanization solely economic. Urbanization is associated with higher incomes, improved health, higher literacy, and improved quality of life. Other benefits of urban life are less tangible but no less real: access to information, diversity, creativity, and innovation.

In a recent interview published by Wired Magazine, Stewart Brand, "the pioneering environmentalist, technology thinker", and founder of the Whole Earth Catalog focused on the positive aspects of urban slums. Brand also made a counterintuitive case that the booming slums and squatter cities around the major urban centers in the developing world are net positives for poor people and the environment. Brand's arguments make a lot of sense, as long as there are representative city governments responsive to the growing needs of the new and old city residents.

Here's a video clip of Indian environment minister Jairam Ramesh saying "if there was a Nobel Prize for dirt and filth, India would win it hands down":

Related Links:

Karachi Tops Mumbai in Stock Performace
Eleven Days in Karachi
Citymayors website

Pakistan Most Urbanized in South Asia

Karachi: The Urban Frontier

Do Asia's Urban Slums Offer Hope?

Orangi is Not Dharavi

Climate Change Could Flood Karachi Coastline

Karachi Fourth Cheapest For Expats

Karachi City Government

Karachi Dreams Big

Sunday, January 24, 2010

Mobile Phones For Mass Literacy in Pakistan

A pilot program in Pakistan has demonstrated the effectiveness of pushing mass literacy through the use of cell phone text messaging capability. The five-month experiment, initiated by United Nations Educational, Scientific and Cultural Organization (UNESCO), targeted 250 females aged 15 to 24 years old in three districts of Pakistan's Punjab province. In this pilot project which successfully concluded last month, the participant who have just completed the basic literacy course, were given a mobile phone each. They received three text messages a day in the local language. They were required to practice reading and writing the messages in their work book and reply to their teachers by text.

The success of this mass literacy initiative augurs well in a country like Pakistan, where the mobile phone penetration is among the highest in the developing world, and the number of mobile subscribers has rocketed from less than 2 million to more than 94 million (58% penetration) from 2002 to 2009.

It is also significant because Pakistan also has the dubious distinction of having the fourth largest number of illiterate adults in the world, after India, China and Bangladesh, according to a recently released UNESCO report. India and Pakistan also have the worst gender gaps in literacy rates, exceeding 22%.

The Daily Galaxy website has reported that a project, called Celedu, is starting its work in some rural villages in India, but hopes to expand far beyond that. Its initial offerings include cellphone-based games and quizzes that can teach basic literacy skills. For example, a child in India can play a game of Snakes and Ladders on the phone by answering multiple-choice questions about which words begin with a particular letter in the Hindi alphabet. Each correct answer allows the child's marker to advance through the game board, providing a fun and competitive approach to learning the written language.

"The biggest disease in India is illiteracy," which affects 400 million people there, says team member Rafael de Cardenas of Sloan. A PC-based version of the program, called Tele Akshar, "has already taught 54,000 women in 300 villages," he says, and the cellphone version should be able to reach far more people, according to Daily Galaxy.

In addition to education and healthcare, access to financial services has been fairly limited in Pakistan, particularly for the rural poor. The total banking sector serves around 6 million borrowers and 25 million depositors, implying a penetration rate of 3.6 percent and 15 percent respectively. In terms of access to microfinance, which means the availability of small loans, micro deposits and micro-insurance services to low income households, the current penetration rate is only 10 percent. In other words, 85 percent of Pakistan's population does not have access to any financial services at all, which inherently creates an uneven and an inequitable economic world, where the majority of people are financially marginalized. This situation drives the poor to rely on informal sources of funding like the unscrupulous moneylender, where the calculus of the relationship works to the detriment of the borrower. Well regulated banking and microfinance sectors are, therefore, absolutely necessary to give hope to the poor in breaking the vicious cycle of dependence and poverty.

Now, a number of telecom operators have now joined hands with financial institutions to extend the reach of financial services to the previously un-served masses, according to Babar Bhatti who operates "State of Telecom Industry" website. A successful example is Easypaisa, a telenor and Tameer Microfinance Bank joint offering that offers quick and easy remittance capability for the migrant workers wanting to send money to their loved ones.

The dramatic growth of cell phone usage in the developing world has created tremendous opportunities to deliver some of the basic ingredients of human development to the people, including education and health care. It has spawned a whole new field of research called "Information and Communication Technologies For Development" abbreviated as ICT4D. The UNESCO female literacy pilot helps establish some credibility for the advocates of ICT4D.

At MIT's Legatum Center, whose director Iqbal Quadir was the founder of Bangladesh's GrameenPhone, improving the delivery of health care in rural areas has been one major focus of their research efforts. Patients in a remote village, for example, now may have to spend a whole day or more traveling to the nearest clinic in order to be tested, diagnosed and receive treatment or a prescription drug for their health problems. But a new open-source software system developed by students who formed a nonprofit company called Moca could provide a faster way, according to a report in Daily Galaxy.

Using a menu of questions downloaded to a cellphone - and, if necessary, a picture taken with the phone's built in camera - a patient can transmit enough information to a doctor or nurse in a remote location to get a preliminary diagnosis, and to find out whether the condition warrants a trip to the clinic or not. "In developing countries, 80 percent of all physicians are in urban areas," while most of the people live in the countryside, according to Moca team member Richard Lu, an MIT graduate student in biomedical informatics.

A GSM Association study conducted by Deloitte and Touche in 2007 estimated that the mobile industry created 220,000 high-paying jobs in Pakistan and accounted for 5% of its Gross Domestic Product (GDP) and approximately 6% of the total taxes collected by the Central Board of Revenue. The study also found that Pakistan’s economy and society is benefiting from rising mobile phone usage and low tariffs, which lowers the cost of doing business and improves productivity, while helping families and friends to connect to each other at home and abroad.

Several studies by ICT4D researchers in Pakistan and other developing nations have concluded that the use of cell phones have helped reduce poverty and improve incomes of small vendors and service providers, such as beauticians, fishermen, taxi drivers, delivery people and small shopkeepers.

As the mobile broadband roll-out with WiMax, 3G and EVDO takes off in Pakistan, the mobile internet can become a reality, opening up vast opportunities for delivering more advanced capabilities for education, health care and business for the ordinary people. The availability of more powerful and inexpensive entry level smart phones and applications will help as well.

One example of telemedicine efforts is a Cisco project in Pakistan, where a trial combines satellite and WiMAX connectivity to mobile units to provide earlier cancer screening to rural patients.

Many critics and cynics have long dismissed the growing use of cell phones in Pakistan as just a waste of time and money. Based on the efforts of ICT4D believers, however, it is becoming increasingly clear that the mobile phone in developing world could prove to be a an extremely useful tool providing a huge boost for human development, productivity and prosperity of the people at the bottom of the pyramid.

Related Links:

Poverty Reduction Through Telecom Access

Pakistan's Telecom Boom

Pakistan Tops Text Message Growth

WiMax Rollout in Pakistan

Mobile Internet in Pakistan

Low Literacy Threatens Pakistan's Future

Gender Gap in South Asia

Mobile Financial Services in Pakistan

Financial Services in Pakistan

Distance Learning in Pakistan

Top 5 ICT4D Trends in 2010

ICT4D in Pakistani Hospital

ITCN Asia 2010 Conference in Karachi

State of Telecom Industry in Pakistan

Friday, January 22, 2010

India Tops in Illiteracy and Defense Spending

I have just published on my blog, Haq's Musings, a guest post by Colonel Pavan Nair, a retired Indian Army officer, a detailed analysis of the Indian defense spending in the context of the nation's growing needs for social spending on food, education and health care. Col Nair prefaces his analysis by lamenting that "defense economics has not been a subject for serious study or debate in Indian academic or military circles. Little or no literature is available with the exception of a few books in the area of defense accounts. Economists and activists have long argued that defense related expenditure needs to be curtailed. Opinion is clearly divided between the developmental lobby and strategic thinkers who wield influence with the political leadership."

Nair then goes on to accept the challenge of defense economics in India by laying out his case with lots of data and sources, and concludes with the following:

Besides external defense, internal security and human-development form a vital part of the overall security and well-being of the nation. Is the rupee being spent wisely? The answer is in the negative both in terms of quantum and efficacy. DE has risen to unsustainable levels in the last decade primarily on account of dependence on imports and nuclearization. There is a trade-off between defense and developmental spending specifically in the area of health which becomes visible in poor human-development parameters like infant mortality rates and child malnutrition. Bangladesh is well ahead of India in these parameters. Internal security has been neglected for too long. There is a need to balance overall expenditure to meet the challenge of the emerging economic and strategic scenario. Force levels need to be reviewed. Like obsolete equipment, obsolete organizations should be dispensed with. The army has become equipment and staff oriented. It also remains manpower-intensive with too few junior officers and a large tail. The Thirteenth Finance Commission could look into aspects of internal and external security to come to a reasonable limit for both. It would also be expedient if the Commission specifies what constitutes defense spending and whether Defense Services Civil Estimates should form part of defense expenditure. DE must be capped at current levels.

I agree with Col Nair's conclusion, and would like to see similar detailed analysis of Pakistan's defense expenditures. Though the problems of poverty and hunger in Pakistan are a bit less serious than in India, Pakistan suffers from high illiteracy and low levels of human development that pose a serious threat to its future.

India has the dubious distinction of being among the top ten on two very different lists: It ranks at the top of the nations of the world with its 270 million illiterate adults, the largest in the world, as detailed by a just released UNESCO report on education; India also shows up at number four in military spending in terms of purchasing power parity, behind United States, China and Russia.

Not only is India the lowest among BRIC nations in terms of human development, India is also the only country among the top ten military spenders which, at 134 on a list of 182 nations, ranks near the bottom of the UNDP's human development rankings. Pakistan, at 141, ranks even lower than India.

India also fares badly on the 2009 World Hunger Index, ranking at 65 along with several sub-Saharan nations. Pakistan ranks at 58 on the same index.

Access to healhcare in South Asia, particularly due to the wide gender gap, presents a huge challenge, and it requires greater focus to ensure improvement in human resources. Though the life expectancy has increased to 66.2 years in Pakistan and 63.4 years in India, it is still low relative to the rest of the world. The infant mortality rate remains stubbornly high, particular in Pakistan, though it has come down down from 76 per 1000 live births in 2003 to 65 in 2009. With 320 mothers dying per 100,000 live births in Pakistan and 450 in India, the maternal mortality rate in South Asia is very high, according to UNICEF.

The reality of grinding poverty in resurgent India was recently summed up well by a BBC commentator Soutik Biswas as follows:

A sobering thought to keep in mind though. Impressive growth figures are unlikely to stun the poor into mindless optimism about their future. India has long been used to illustrate how extensive poverty coexists with growth. It has a shabby record in pulling people out of poverty - in the last two decades the number of absolutely poor in India has declined by 17 percentage points compared to China, which brought down its absolutely poor by some 45 percentage points. The number of Indian billionaires rose from nine in 2004 to 40 in 2007, says Forbes magazine. That's higher than Japan which had 24, while France and Italy had 14 billionaires each. When one of the world's highest number of billionaires coexist with what one economist calls the world's "largest number of homeless, ill-fed illiterates", something is gravely wrong. This is what rankles many in this happy season of positive thinking.

It is time for major South Asian nations to deal with the urgent need for careful balancing of their genuine defense requirements against the need to spend to solve the very serious problems of food, education, health care and human resource development for securing the future of their peoples.

Related Links:

UNESCO Education For All Report 2010

India's Arms Build-up: Guns Versus Bread

South Asia Slipping in Human Development

World Hunger Index 2009

Challenges of 2010-2020 in South Asia

India and Pakistan Contrasted 2010

Food, Clothing and Shelter in India and Pakistan

Introduction to Defense Economics

India's Arms Buildup: Guns Versus Bread

Guest Post: Col.(Retd) Pavan Nair

Considering the large size of our population, its high rate of growth, and millions living below the poverty line, the Government faces serious challenges of resource mobilization to provide adequately for satisfying even the minimum needs of our people. It is apparent that significant increases in allocations for defense in the future can be envisaged only by constricting the flow of funds to the social development sectors.

26 August, 1996, N. N. Vohra, Former Defense Secretary

(In a Foreword to ‘India’s Defense Budget and Expenditure Management’ By Amiya Kumar Ghosh, Lancer Publishers, New Delhi, 1996. The outlay on Defense during FY 1996-97 was Rs 29,505 crores)

The Kargil Review Committee Report, Para 9.21. - - - Some questions have been raised about the impact of declining defense expenditure on the nation’s capacity to counter effectively the Kargil intrusion and, in particular, the preparedness of the jawans for high altitude conflict. The evidence available to the Committee does not show that a paucity of resources was per se responsible for any lack of preparedness for the Kargil conflict.

Para 9.24. It is obvious, however, that over the years actual defense expenditure has been below the amount required by the defense forces to perform efficiently the tasks allotted to them. This has affected the process of modernization and has also created some unacceptable operational voids. Given the country’s resource constraints, the scope for enhancing defense outlays is somewhat limited without tightening up fiscal discipline elsewhere and ensuring a high growth rate of 6-7% for the economy. Hence, the defense Services must seek to extract the maximum value from each defense rupee. This will call for some drastic measures like restructuring of the defense forces, improving cost effectiveness of manpower, retraining and redeployment, dispensing with avoidable and unnecessary expenditure, rigorous prioritization, and focusing resources in areas likely to enhance the effectiveness of the defense forces in meeting the emerging challenges to the country’s security. In other words a total reform of defense structure, its interface with civil government, defense production and procurement is called for.

(Kargil Review Committee Report 1999, emphasis added. The outlay on Defense during FY 1999-2000 was Rs 45,694 crores)

The Mumbai terror attacks have given an entirely new dimension to cross-border terrorism. A threshold has been crossed. Our security environment has deteriorated considerably. In this context, I propose to increase the allocation for Defense, which is a part of non-plan expenditure to Rs.1,41,703 crores. This includes an amount of Rs 54,824 crores for capital expenditure. Needless to say, any additional requirement for the security of the nation will be provided for.

16 February 2009 Pranab Mukherjee


Defense economics has not been a subject for serious study or debate in Indian academic or military circles. Little or no literature is available with the exception of a few books in the area of defense accounts. Economists and activists have long argued that defense related expenditure needs to be curtailed. Opinion is clearly divided between the developmental lobby and strategic thinkers who wield influence with the political leadership. This paper will attempt to make a realistic assessment of current levels of defense spending by evaluating the efficacy and intensity of military expenditure. Indeed, some arguments have been made before but bear repetition in the current scenario. Parliament passes the defense budget with little or no discussion. The media is largely ignorant or chooses to ignore the issue of defense spending. The view across the political spectrum and indeed the strategic community is that any exercise to limit defense spending amounts to compromising national security and is therefore not a viable consideration. Whilst it is true that development cannot take place in an insecure environment, defense expenditure (DE) in a developing country directly impacts the outlay on social spending. The "guns versus butter" argument is valid especially when the guns (and missiles) are not buying the security the country needs against asymmetrical threats from within and without.

In the Indian context, DE pertains to the external defense of the country by the regular armed forces. Expenditure on internal security, law and order, border management and fencing, coastal security and intelligence comes under the purview of the Ministry of Home Affairs. Border roads are taken care of by the Ministry of Surface Transport and the Indian Coast Guard comes directly under the Ministry of Defence (MoD). The defense budget forms the single largest item of discretionary expenditure. The outlay on defense has seen more than a three-fold hike in the decade after the war in Kargil from Rs 45,694 crores in 1999-2000 to Rs 1,41,703 crores in 2009-10 (All figures pertaining to DE have been taken from and are budget estimates unless otherwise stated). During this period there has been no accretion in force levels except for the raising of an additional corps and command headquarters from within the manpower ceiling of the army and a few units and formations for manning missile systems which can be used to deliver nuclear warheads. Two mountain divisions have recently been sanctioned for deployment in the North-East but the financial impact will be felt only when the formations complete raising. Force multipliers like UAVs (Unmanned Aerial Vehicles) and satellite imagery have become available. Electronic surveillance has become available down to unit level. The import route has been used extensively for modernization of the three services. It is contended that excessive dependence on imports and exercising the nuclear option in 1998 has taken military related expenditure to unsustainable levels.

The three-fold increase in expenditure in the last decade is not in real terms since inflation and the depreciation of the rupee have to be taken into account. In real terms, this amounts to a 75% rise assuming an average annual inflation rate of 12% and depreciation of 10.5%. This is a substantial hike considering the fact that the decadal growth of military expenditure worldwide in constant 2005 US dollars till 2008 was 45%. This includes the expenditure on the global war on terror which has raised US defense related expenditure to its highest level since the Second World War (Stockholm International Peace Research Institute [SIPRI] Military Expenditure Database 2009,

India is in the top-ten list of military spenders while it stands at number 128 out of 177 countries in the 2008 UNDP Human Development Index. China, the second lowest in human-development in the military-spending list is ranked at number 81 ( Human security must surely form a part of national security. The situation on the internal security front has deteriorated considerably. This can be attributed at least in part to the poor human development parameters affecting hundreds of millions of citizens who eke out an existence at sub-human levels. India has the dubious distinction of being home to the largest number of indigenous terrorist organizations. State police forces are ill-equipped to handle insurgency or terror. The Naxalite threat no longer remains just a menace and needs to be dealt with at various levels and not merely as a law and order problem. Coastal security is practically non-existent. . This has become apparent after the unhindered ingress of terrorists using the sea route. There are several dimensions of security which cannot be ignored. Defense budgets seldom meet the requirement of any military. There are always better weapon systems, heavier caliber guns and more lethal aircraft to be procured. Nuclear warheads, missiles, delivery and command and control systems are prohibitively expensive. Internal security which has remained neglected for several years can also consume a large share of available resources. There is thus a need to balance expenditure on internal and external security while keeping both within reasonable limits. This may be stating the obvious, but it needs to be stated.

Finance Commission on Defense Expenditure
In its wisdom, the Eleventh Finance Commission (EFC) which submitted its report in June 2000 laid an upper limit of up to 3% of the GDP for DE. It is worth noting that the informal NATO guideline for DE is 2% of GDP, though several countries notably the US have crossed that limit. Para 4.17 of the EFC states, “- - aggregate defense expenditure could reach 3% of GDP by 2004-05. We would emphasize that while the required resources may be provided, all possible measures for securing economy in defence expenditure should be taken.” Official DE in 2000 was at 2.3% of GDP. The EFC also noted (Para 4.15) that the fiscal deficit was expected to fall to 4.5% of the GDP by 2004-05, thereby implying that the hike in DE over the next few years had been facilitated by the improved fiscal situation and other measures suggested by the EFC to increase the availability of funds for both capital and revenue expenditure.

The specified limit of 3% has been observed only by excluding several items like the cost of the MoD and the expenditure on military pensions which by itself amounts to 15% of the total defense outlay. Several other items like the Jammu and Kashmir Light Infantry (JAKLI, a regular regiment of the army consisting of thirteen battalions) and the Coast Guard are also excluded. A substantial part of the cost of the nuclear arsenal and allied systems is excluded. All para-military forces including the ones directly involved in border management are excluded. The Parliamentary Committee on Defense spends most of its time on personnel matters and resolving issues of protocol between the service chiefs and the defense secretary. The Committee looks at DE but beyond stating that DE should be pegged at 3% of GDP, it has nothing substantial to contribute. Clearly, parliamentary oversight and control seems to be missing. For several years, DE in aggregate has crossed 3% of GDP.

The Nuclear Dimension

The expenditure on the nuclear arsenal is an additional burden on the economy. It is immaterial whether or not this cost is included in the defense budget. C Rammanohar Reddy in an article in the Hindu published in 1999 states that a poor man’s arsenal could cost anything between 0.5% and 1% of the GDP per year for about ten years till all systems are fully deployed. The capital cost of developing, testing and deploying systems over a period of say ten or twelve years could be between 6% and 10% of the GDP with a recurring and maintenance cost element to be added separately. Assuming an overall cost of 8% of GDP, the total expenditure at current levels has crossed Rs 4,50,000 crores. This cost has been split over several years between the Department of Atomic Energy (DAE), the Department of Space (DOS), the Defense Research and Development Organiation (DRDO) and the army, navy and air force for delivery systems. The amount spent by each department or arm is not visible since it is merged with overall expenditure. It is therefore not possible to compute the current cost of nuclear deterrence, which for better or for worse forms an important leg of the country’s strategic posture. An assessment will however be made subsequently to arrive at the additional amount to be added to DE which currently includes the expenditure of the DRDO which has developed missiles and the cost of their deployment in the three services. Nuclear deterrence implies deploying air, land, sea and submarine based missiles besides delivery systems and command centers with communications and built in redundancy. India has also opted for an anti-missile system. The overall cost of the nuclear triad which includes nuclear powered submarines which are under construction and procurement has directly impacted available fiscal space and subsequently developmental spending.

As per the defense minister, India imports 70% of its weapon systems. These include delivery and data acquisition systems like aircraft, ships and submarines which are accounted for under conventional DE. India is the second largest importer of arms after China. Certain systems like the Airborne Warning and Control System (AWACS) has been procured primarily to provide early warning of a nuclear as also conventional attack. AWAC systems have been around for several decades and India is in the process of developing its own system. Having gone overtly nuclear has actually spurred the procurement of additional systems which could have been developed within the country in due course. Clearly, the option to go nuclear, besides its own costs has added to the expenditure on conventional arms. Nuclear protagonists often state that conventional spending is likely to reduce when nuclear deterrence is in place. This is certainly not the case in the sub-continent and is getting reflected in Indian DE. We need to look at what constitutes DE.

Defining DE

The Stockholm International Peace Research Institute (SIPRI) defines DE as the expenditure on armed forces (including strategic forces and military space applications), ministries and government departments engaged with the armed forces (defence accounts, estates, canteen), military accommodation, land and facilities, pensions, research and development, para-militaries trained and equipped like the regular army as well as military aid in terms of peace-keeping forces and equipment given to other countries. DE excludes the cost of civil defence, disaster relief and military aid received. This definition has been accepted by most countries across all continents with minor variations and forms the basis of reporting of military expenditure.

Developing countries tend to report lower DE since developmental aid is linked to the quantum of such expenditure. This is achieved by showing legitimate items of expenditure under several heads outside the defense budget. Costs of ministries and accounting departments are generally excluded. Expenditure on military pensions which amounts to 10% to 15% of official DE is excluded by several countries including India (since 1985) and Pakistan (since 2000). Arms imports can be paid for by barter or off the defence budget. Pakistan excludes capital costs. The Rupee deal concluded between India and Russia during the early nineties was primarily a defence deal but was shown as a bilateral commercial agreement. Defense equipment (tanks, guns, ships, aircraft) worth ten billion US dollars (at 1990 rates) was supplied over two decades in exchange for goods exported to Russia. The entire amount was added to the external debt. The Rupee deal was negotiated under favorable terms; however a substantial amount of money was excluded from legitimate DE for several years. The Rupee deal has run its course, so higher levels of expenditure have now started showing up in the defense budget.
The cost of military pensions in the current year is Rs 21,790 crores. This was the entire outlay on defense till as late as 1993-94 and excludes the further hike in pensions announced in the budget for personnel below officer rank amounting to Rs 2,100 crores. The cost of the MoD which includes the outlay on the JAKLI and the Coast Guard, as also the defense accounts department, canteen department and its own secretariat is Rs 3,170 crores. Both these items taken together (Defense Services Estimates, Civil) are debited to several sub-heads under the General Services head. The CPMFs involved in border management, an important aspect of external security (Assam Rifles, BSF, ITBP, and the Sashastra Seema Bal or SSB) cost Rs 11,397 crores. These forces come under the operational control of the army during war just as the Coast Guard comes under the control of the navy. This cost along with the cost of other para-military forces is debited to the Police sub-head within the General Services head. As stated earlier, it is not possible to compute the cost of the nuclear arsenal but post the nuclear deal, we are aware that 35% of reactors are for military use, therefore the cost to be added to the defense budget could be assessed by adding 35% of the budget of the DAE and DOS which is also responsible for the development and testing of longer range ballistic missiles and satellites for military purposes. This amounts to about Rs 4,456 crores. This is a conservative estimate. Thus the official defense budget amounting to Rs 1,41,703 crores excludes an amount of Rs 40,813 crores or 29% of the allotment. DE in aggregate amounts to Rs 1,82,516 crores which is above the 3% GDP limit specified by the EFC. Unfortunately, defence analysts ignore this aspect when discussing the defense budget. Splitting DE amounts to obfuscation and should be avoided since it can confuse planners and parliamentarians alike.
In addition, the cost of border fencing, border roads and military aid to several countries like Afghanistan, Tajikistan, Nepal and Bhutan running into thousands of crores is shown in the expenditure of various other departments and ministries. The fiscal deficit which is expected to hit an all time high of 6.8% in FY 2009-10 is bound to rise further since defense equipment worth over 20 billion dollars or 1.65% of GDP is already in the pipeline or has been cleared for procurement using the import route.
Defense Budgeting and Classification of DE
The British abandoned the system of budgeting being followed in India a few decades ago and adopted a functional system in which accounting is done not only by service but by command functionality. Thus ‘British Forces in Iraq’ is a separate head. The expenditure in each theater of operations is visible and can be assessed. If we need to check the expenditure say in the Siachen sector or on counter-insurgency operations in the Valley, it would need a major exercise. In fact, the first head of account in the British system is ‘Strategic Nuclear Forces’ under which each aircraft, ship, submarine and missile along with warheads and manpower is accounted for.

The current system of budgeting is purely incremental and depends on how much money the Finance Ministry can make available or how much pressure the defence minister can exert on his counterpart in North Block. This has resulted in ad-hoc allotments being made to the services which individually project inflated requirements which are never met. This becomes clear by observing flat-rate increases over the previous year’s budget estimates. There was a 10% hike in the budget estimates for DE for 2008-09 (Rs 105,600 crores) from 2007-08 (Rs 96,000 crores). Similar hikes have been made for several years. The unprecedented hike of 34.2 % this year over last year’s budget estimates is mainly on account of the implementation of the report of the Sixth Pay Commission. Revenue or recurring expenditure takes care of salaries and maintenance and like pensions is a fixed cost. This can be worked out in advance. It would be better if the MoD could indicate the amount of capital funding available service wise for modernization for say five years so that the service chiefs could plan accordingly. This can also take into account the expenditure on internal security and developmental schemes over the same period. This is an exercise which the National Security Council (NSC) should undertake. Larger procurements like the 126 multi-role combat jet aircraft deal could be factored in separately. Ideally, a long term perspective plan should be accepted in advance. Such plans exist on paper but have been ignored by governments across the board since inter-service priorities cannot be decided and resource-mobiliation is always a problem. The plans remain internal projections of the services made to the MoD.

Classification of DE as a percentage of the GDP does not bring out whether the money is being spent efficiently; or given a particular force level, is adequate or inadequate. It also does not reflect the growth of DE if GDP expands over a period of time. India has seen substantial growth over the past several years. Pakistan spends a higher percentage of its GDP on defense; however when we compare the combat potential of the two armed forces in terms of manpower, tanks, ships, aircraft and artillery, Pakistan’s unit spending per combat soldier or tank or ship is much lesser. This aspect is examined in a subsequent paragraph. Besides efficacy (bang for the buck), the intensity of DE (overall share or burden) does not get reflected in its representation as a percentage of GDP. It would be better to compare DE as a percentage of the total budget rather than central government expenditure. In this case, it emerges that whereas India and Pakistan spend between 15% and 25% of the total federal outlay, China spends about 7.5% (China’s National Defense 2008, White Paper on Defense, January 2009). Defense analysts question the transparency of Chinese DE but it must be stated that China’s human indicators are way ahead of India and Pakistan and it can actually afford to spend a higher proportion of its budget on defense, which it does not. Clearly, both the efficacy and intensity of Indian DE needs review. It is not in anyone’s interest that the country has a weak or ill-equipped army, navy and air force but there is need for oversight, economy and prioritization. This was stated unequivocally by the Kargil Review Committee (KRC) in its report (Para 9.24 quoted above). Unfortunately, the Group of Ministers seems to have overlooked this aspect. The KRC was competent to make specific recommendations regarding restructuring and wasteful expenditure but chose not to do so. That the KRC stated that drastic measures were required for the efficient utilization of the defense rupee, amounts to a severe indictment of the state of civil-military affairs. It would be interesting to obtain the views of the members of the KRC on the current levels of defense spending.

The Purchasing Power Parity (PPP) Argument

Comparison of military expenditure at market exchange or current rates does not give a correct picture since the cost of manpower, equipment and training varies vastly between countries. This is especially applicable to developing countries like India where goods and services are much cheaper than the developed world. For instance, the cost of equipping, training, paying and maintaining a soldier is about a third in India compared with the US. Similarly, money spent for importing military equipment would buy a much larger basket of civil goods locally. The table below indicates DE of the top ten military spenders for 2008 at both market or current rates and PPP rates and as a percentage of national GDPs for 2007. Also included is the overall percentage share of these countries in world military expenditure and percentage expenditure within the top ten in PPP terms. Conversion to PPP rates has been done using International Comparison Program data (benchmark year 2005), available at the World Bank website,

CURRENT(2008) % GDP(2007) % SHARE(World) PPP % SHARE (Top 10)
1. USA 607.0 4.0 41.5 1.USA 607.0 46.0
2.China 84.9 2.0 5.8 2.China 201.8 15.3
3 France 65.7 2.3 4.5 3. Russia 130.1 9.9
4. UK 65.3 2.4 4.5 4. India 90.2 6.8
5. Russia 58.6 3.5 4.0 5. Saudi Arabia 59.4 4.5
6. Germany 46.6 1.3 3.2 6. France 57.2 4.3
7. Japan 46.3 0.9 3.2 7. UK 55.3 4.2
8. Italy 40.6 1.8 2.8 8. Germany 41.9 3.2
9. Saudi Arabia 38.2 9.3 2.6 9. Japan 39.3 3.0
10. India 30.0 2.5 2.1 10. Italy 37.3 2.8

TOP TEN TOTAL 1083.2 74.0 1319.5 100.0
WORLD TOTAL 1464.0 2.4 100.0

Source, SIPRI Military Expenditure Database 2009 for market rates, percentage of GDP and share of world expenditure. Data pertains to expenditure for 2008 and includes military pensions and allied costs as estimated by SIPRI. SIPRI is of the view that using PPP data for military expenditure has limited relevance. DE for India for 2009 including Defence Services Estimates (Civil) and defined military costs is about 38 billion dollars at current exchange rates.

The top-ten countries incur 74% of total military expenditure. Within the top ten-countries, there is a vast variation of expenditure in absolute terms as well as GDP terms ranging from 0.9% to 9.3% of national GDP. Typically, smaller middle-east countries incur much higher expenditure in GDP terms. World military expenditure has been hovering at about 2.5% of GDP; however the US contribution is very high (41.5%) and boosts the average GDP figure. Thus, military expenditure for the rest of the world amounts to 1.85% of GDP. Indian DE for 2007 at 2.5% of GDP is much higher than this figure. Current spending is at 3.15%. At current market rates, India is at number ten in the list whereas at PPP rates, India is at number four which is in keeping with the fact that it has the third largest army, the fourth largest air force and a blue water navy. India’s DE for 2008 is 90 billion dollars at PPP rates and is touching 115 billion dollars in the current year. Whether this level of expenditure is justified is a matter for civil society including the strategic community to consider. Indian DE amounts to 2.1% of world military expenditure. Within the top ten countries, this amounts to 6.8%at PPP rates and 12.65% if US spending is ignored. Analysts point out that India’s per-capita military expenditure is very low, in fact the lowest in the list above. This is true for current as well as PPPP rates but is considered a specious argument when Indian DE is compared with other items of public spending.

Priorities in Public Spending

The Human Development Report 2008 ( indicates the level of public spending in the areas of health, education and defence. The expenditure includes federal as well as regional or state expenditure. The table below indicates expenditure of selected countries as a percentage of GDP under the three major heads. All figures have been extracted from Table 19 of the UNDP report. To compare the data, intra-country ratios of the three major heads have been calculated. The BRIC group of countries has been included besides figures for USA and UK. Argentina has been included as a special case being a country which graduated from medium to high human development. The countries are listed in descending order of rank in the Human Development Index (HDI).


Country HDI Rank Health(H) Education(E) Defence(D) Total H/E H/D E/D

USA 12 6.9 5.9 4.1 16.9 1.16 1.68 1.43

UK 16 7.0 5.4 2.7 15.1 1.29 2.59 2.00

ARGENTINA 38 4.3 3.8 1.0 9.1 1.13 4.30 3.80

RUSSIA 67 3.7 3.6 4.1 11.4 1.02 0.90 0.87

BRAZIL 70 4.8 4.4 1.6 10.8 1.09 3.00 2.75

CHINA 81 1.8 1.9 2.0 5.7 0.94 0.90 0.95

INDIA 128 0.9 3.8 2.8 7.5 0.23 0.32 1.35

Data for health pertains to 2004. Data for education and defence expenditure pertains to 2005. The expenditure on health in India is still at about 1% of GDP, federal expenditure being 0.4%. Aggregate expenditure on defence in the current year has crossed 3% of GDP.

There is considerable variation in public spending on health, education and defence between the developed countries (USA and UK) and BRIC countries. This is primarily due to the higher cost of goods and services as discussed in the paragraph on PPP rates above. However ratios between heads can be directly compared. The health to education (H/E) ratio is near or above unity for all countries excluding India which indicates that equal and more often higher weightage has been given to health over education. In the case of India, the ratio is abysmally low. China which is the next lowest is 400% higher. It is apparent that health expenditure as compared to education expenditure needs a substantial hike. The health to defence (H/D) ratio varies considerably between countries. The higher developed countries have a much higher ratio indicating that allocation for health is several times more than the allocation for defense. In the case of India, the ratio is not only the lowest but also about a third of the ratio of the next lowest that is China which is also the next lowest in the list in human development. Health expenditure needs to be hiked by three hundred percent to about 3% of GDP to reach the levels of China. It appears that expenditure on health has been suppressed due to much higher allocations made to both education and defense. The education to defense (E/D) ratios also vary considerably. India is at number five of the seven countries in the list. This perhaps indicates that there is a need to reduce DE since the spending on education seems adequate. There is a pronounced imbalance in public expenditure between the three heads which needs to be corrected. The total per-capita expenditure on health (central as well as state expenditure) is about a third of the per-capita expenditure on defence. This low level of funding is the prime reason for poor health parameters which in turn keeps a large proportion of the population in perpetual debt and poverty. The UN millennium development goals pertaining to mortality rates and poverty are not likely to be achieved mainly on account of poor spending and delivery in the health sector. The Finance Minister in his budget speech has stated that the proportion of poverty would be halved by 2014. This will involve lifting about 100 million people above the poverty line in five years if we use Planning Commission norms. This seems highly unlikely at current levels of health expenditure. The fresh allocation for federal spending on health in the current year is Rs 22,641 crores or merely 0.4% of GDP.

The India-Pakistan Equation

The armed forces of both the countries are organized, trained and equipped in a similar fashion; hence defense related expenditure which is a function of combat power can be compared by a comparison of force levels. Force levels evolve over a period of time depending on threat perceptions. India has vaster land and sea frontiers to guard and therefore needs greater combat power in terms of manpower, tanks, guns, ships and aircraft. The table below indicates manpower levels and major items of armament of the two countries (Source, Indian Defense Yearbook, 2009, Natraj Publishers, Dehra Dun).



Active Manpower 1.288 million 0.619 million ~ 2:1

Tanks 4059 2461 1.65:1

Guns 4500 1629 2.75:1

Combat Aircraft 565 360 ~ 1.6:1

Ships/Submarines 26/16 6/8 3:1

It will be seen that though the ratios vary between 1.6:1 and 3:1; it would be prudent to take an overall figure of 3:1 since larger armed forces have larger establishments, inventories and tails. This will also be erring on the safe side. Weightage between different items is being ignored though the overall allocation to both armies is much higher than the other two services. This is an indicative ratio which also covers several other items like aircraft carriers, infantry fighting vehicles, naval aviation, transport and training aircraft, helicopters, self propelled artillery and nuclear capabilities not included above. An alternative methodology would be to compare the number of combat units like infantry battalions, armoured and artillery regiments and combat squadrons. This would however yield a comparatively lower ratio since inventories and establishments have a financial impact.

The table below shows the heads of military expenditure of the two countries. DE in Pakistan is much less transparent and excludes several items including capital costs, pensions and nuclear related costs. In addition, foreign military aid which adds to defence capability is excluded. An assessment has been made of these items. Current exchange rates have been used to convert respective currencies into US dollars. Information of Pakistan federal spending has been taken from the website



Federal Budget Rs 10,20,837 crores ($ 212.67 billion) Rs 2,48,230 crores ($ 31 billion)

Defence Budget 09-10 Rs 1,41,703 crores ($ 29.52 billion) Rs 34,300 crores ($ 4.28 billion)

Capital Expenditure Rs 54,824 crores included above $ 2.14 billion (50% of above)

Military R and D Included in DE (3.3% of DE) $ 0.24 billion (3.5% of DE)

Pensions Rs 21,790 crores ($ 4.53 billion) $ 1.02 billion (15% of DE)

Foreign Military Aid Nil $ 0.7 billion

TOTAL $ 34.05 billion (16% of Federal Budget) $ 8.38 billion (24.7% of Budget)

% GDP 2.7% 4.5%

The ratio of DE between India and Pakistan works out to about 4:1 when their combat ratio is at 3:1. Though Pakistan is spending a much higher proportion of its GDP on defense, it is getting more bang for the buck. Please note that costs of the MoD, para militaries and nuclear systems have been excluded for both countries. If India were to spend at the rate of Pakistan, it would result in a saving of 8.9 billion dollars or Rs 42,700 crores. This is a significant sum of money amounting to 0.74% of GDP and is nearly double the allocation for federal spending on health. A saving of even half this amount would be significant. The reason for a higher rate of expenditure per combat soldier, tank or ship needs to be assessed. Larger inventories, too many headquarters and establishments, ceremonial units, bands and air display flights of fixed and rotary wing aircraft are only a few areas which need to be looked at. In addition, manpower utilization and rationalization needs examination. Pensions have been rising exponentially. If the retirement age of soldiers subject to their being medically fit is raised to 45 years, a significant amount of money could be saved. Pensions should be payable only after completing 20 years of colour service. In the US army, the age of retirement from active service for enlisted soldiers which was 55 years has now been raised to 62 years. However this has also been done to enable late entrants to complete 20 years of pensionable service. It is interesting to note that the official allocation for the Pakistan defense budget falls short of the expenditure on military pensions paid by India even though the overall percentage spending on defense is much higher. The entire outlay of the Pakistan budget is well below India’s outlay on defense spending. Using the $ 1.25 a day norm, poverty rates in Pakistan are significantly lower at 22.6% compared to 41.6% for India ( Clearly, military spending and muscle has not improved the lot of the common Indian citizen.

Internal / External Security

During the tenure of the NDA government, a separate head of accounts was created for police-modernization. It had become clear that state police forces were neither equipped nor trained to tackle terrorism. Law and order being a state subject, it was rightly appreciated that resources available with states were inadequate to meet the requirement of procuring automatic weapons, as also bomb-disposal and protective equipment. This was reinforced in a big way when terrorists struck Mumbai. Lathi wielding policemen had to grapple with terrorists armed with automatic weapons. It has become obvious that allocations made over the years were inadequate to meet even minimal requirements. The amount allocated during FY 2008-09 was a mere Rs 1,340 crores. Even this amount was not fully utilized. Post Mumbai, this was increased to Rs 1,385 crores in the interim budget and to Rs 1,815 crores in the budget announced on 6 July. DE was hiked by thirty five thousand crores. Police modernization continues to be neglected.

Coastal security has been ignored at the country’s peril. In 1993, the sea route was used to land explosives for the Bombay blasts. In 1994, under the United Nations Convention on the Law of the Sea, EEZs of littoral countries were extended from 100 to 200 nautical miles. India ratified UNCLOS III in 1995. The Coast Guard which is responsible for the EEZ was thus required to cover a much vaster area with the same resources. Over the years, ships and aircraft have been acquired but with some eighty vessels and fifty aircraft, guarding an EEZ of over two million square kilometers is a near impossible task. The Navy being the senior service should have been given this responsibility with the resources of the Coast Guard under its command. A blue water navy is of little use when the seaboards remain unprotected. The resources of the states and the local marine police need upgrading. The concept of making the marine police entirely responsible for waters which extend to five nautical miles (9.25 km) needs a re-look. There is a need for integration between internal and external security and defense on both the land and sea frontiers.

Force levels of CPMFs have been rising steadily and it is expected that a million men will be under arms by the end of the next financial year (2010-11). The threat posed by the Naxalite insurgency has been gaining momentum. Merely deploying additional forces will not resolve the issue and will result in militarization of the state. Development of infrastructure, creation of employment and improving health parameters should be undertaken on priority. CPMFs deployed in these areas must also have access to resources which can be used to win over hearts and minds by constructing schools and health centers. Op-Sadbhavana conducted by the army in Ladakh and Jammu and Kashmir is an excellent example of security forces getting involved in development.

Defense Production and the Arms Bazaar

India with the third largest Army in the world, the fourth largest Air Force and a blue water navy is today a doubtful regional power due to its weak economy and dependence on imports of armaments. - - - The danger is that with the thaw in our relations with the USA and our craze for new gadgetry, we could easily fall into the laps of salesmen. Hard thinking is necessary before we keep changing our technology base.

Coonoor 1994 Sam Manekshaw
Field Marshal
(In a foreword to ‘Indian Arms Bazaar’ by Maj Gen Partap Narain, Shipra Publications, New Delhi, 1994)

Defense production and procurement is a major area of concern. There are thirty nine Ordnance Factories and eight public sector undertakings (PSUs) employing over 300,000 workers producing ships, tanks, guns, helicopters and fixed wing aircraft besides ammunition, boots and tents. Yet, we import the bulk of our cutting edge weaponry. Production capacities are not being utilized. The cost of items is borne by the services from within the defense budget. Some items produced by Ordnance Factories are more expensive than the cost of import. The Arjun tank powered by a German engine, developed by DRDO and now being manufactured at Avadi is one such item. The Light Combat Aircraft or LCA, when inducted will be another. Defense PSUs like BEL and BEML make higher profits since their products are used by sectors other than defence; however defence PSUs even while showing nominal profits need heavy capital investment which comes from the PSU pool. Thus the real cost of defense production does not get reflected in DE. Some of the Ordnance Factories can be closed down and the equipment can be manufactured by the private sector. This is difficult to implement since defense workers form a fair-sized vote bank and have strong unions. The state therefore continues to subsidize the inefficient use of resources at the cost of developmental spending.

The Defence R and D establishment (DRDO) needs major overhaul. The P Rama Rao Committee has made several recommendations. Large establishments not producing worthwhile results need to be pruned. There have been a few success stories like the Agni series of missiles. The DRDO works in isolation and the services tend to disregard its capabilities. Some laboratories could be merged to make the organisation more cost effective. This is a subject for evaluation after the implementation of the Rama Rao Committee Report. The DRDO takes up Rs 4,757 crores which is 3.3% of the defense budget. In addition, an amount of Rs 3,723 crores has been charged to capital expenditure which is a combined head for the three services for equipment development and delivery. Like the DRDO, the quality-control and inspectorate organization is bulky and seems to have too many overheads.

The forces prefer import to indigenous production for a variety of reasons including the inability of the DRDO to meet qualitative requirements (QRs) and the inordinate delay in the production of the equipment. The forces themselves must take a part of the blame for projecting unreal requirements. This does not happen when the import route is used since QRs are formulated to conform to the range of equipment available. Weapon systems have a life cycle of about 20 years which gets written down if it takes ten years to produce the equipment. Politicians and bureaucrats, both civil and military, prefer the import route especially from western countries for extraneous reasons. The Defense Procurement Procedure (DPP) has been streamlined, yet an important aspect like offsets has yet to yield the required dividends. The problem of middlemen has been resolved by foreign suppliers opening offices in New Delhi. There has been a proliferation of defense glossies supported directly or indirectly by arms manufacturers. India has become a hub of the world’s arms bazaar. Little wonder that foreign manufacturers want a hike in the 26% FDI limit imposed on joint ventures in the defense sector.


Besides external defense, internal security and human-development form a vital part of the overall security and well-being of the nation. Is the rupee being spent wisely? The answer is in the negative both in terms of quantum and efficacy. DE has risen to unsustainable levels in the last decade primarily on account of dependence on imports and nuclearization. There is a trade-off between defense and developmental spending specifically in the area of health which becomes visible in poor human-development parameters like infant mortality rates and child malnutrition. Bangladesh is well ahead of India in these parameters. Internal security has been neglected for too long. There is a need to balance overall expenditure to meet the challenge of the emerging economic and strategic scenario. Force levels need to be reviewed. Like obsolete equipment, obsolete organizations should be dispensed with. The army has become equipment and staff oriented. It also remains manpower-intensive with too few junior officers and a large tail. The Thirteenth Finance Commission could look into aspects of internal and external security to come to a reasonable limit for both. It would also be expedient if the Commission specifies what constitutes defense spending and whether Defense Services Civil Estimates should form part of defense expenditure. DE must be capped at current levels.

The effects of the global recession are still to play out. Oversight, therefore, needs to be exercised in all areas of government spending. There is no scope for empire building. The plan to send two men into space at a cost of Rs 12,500 crores is an example of incorrect priorities. The defense forces form an important part of the nation’s fabric, yet they must not be a drain on its limited resources. For the armed forces, the country comes first, always and every time and they will rise to the occasion as always. The political leadership must therefore take the service chiefs into confidence with regard to the fiscal situation. With global warming on the horizon; floods, droughts and severe cyclonic storms will occur with increasing frequency. Water is going to be in short supply. These are only some of the challenges which the country and its armed forces will face in the not too distant future. Wars as we have known them will more often be avoided. Hence the need for a lean armed force, a well equipped and trained police force and state policy which will deter a potential aggressor from posing a conventional, nuclear or asymmetrical threat. Only then can the war against poverty and hunger be won.

Colonel Pavan Nair, the author of this guest post, is an engineer by training, and a retired Indian Army officer who has served with distinction in Bangladesh, Kashmir and Sri Lanka. His email address is

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