Treasure Troves of PSUs - something amiss?


By Lt. General P.C. Katoch (Retd)
Former Director General of Information Systems, Indian Army


How many more shocks Defence Minister Manohar Parrikar will suffer at the hands of his bureaucrats, shocking the public in turn is anyone’s guess. In March 2015, he made a startling announcement that India was paying the US Department of Defence (DoD) for new weaponry, even though US$ 3 billion which had been earlier paid by MoD was piled up and lying forgotten in a Washington account. MoD had reportedly put the said money in a Pentagon account for weaponry that was to be bought under the Foreign Military Sales (FMS) agreement. This is the shortest way of procuring weaponry from the US under which the DoD procures equipment on behalf of the foreign government from US vendors. The US opened up FMS sales to India in the immediate aftermath of the 9/11 terrorist attacks.

Though ambiguity prevailed over when the money was paid, according to the grapevine, a cheque for $5 billion was handed over to visiting President Obama by the PM Manmohan Singh in year 2010 - sorry latter missed the Nobel Peace Prize and his plan to get India to withdraw from Siachen also backfired. US$ 3 billion is not a small amount and how could it be “forgotten” if FMS procurements are supposed to be in quick time? Isn’t it intriguing that such a large amount lying unspent and earning interest money for the US was not once pointed out by the Comptroller and Auditor General (CAG)? Parrikar also discovered that this money lying in the US was not earning any interest for India. But the question is that if the CAG never pointed out this unspent money despite Defence Budget lapsing every financial year; something was obviously fishy in the accounting of Defence (Finance).

Now Defence Minister Parrikar has discovered that $8.3 billion are lying unused with public sector undertakings (PSUs) - paid as advance over the years. This is an atrocious state of affairs considering that the current annual defence budget is $40 billion. Over the past few years, the military has been starved for modernization, criticalities have been mounting and you have $3billion lying forgotten in the US and $8.3 billion unused accumulation in the PSUs. Isn’t this fit case to throw the bloated Defence (Finance) bureaucracy out of the window? The mere fact that the government has taken two years to discover such anomaly indicates the bureaucratic inefficiency in play. Wonder how many more such shocks are in store? And there is no move to reorganize the MoD anyway - so it remains a cozy nest where everyone is snug. As per media reports, financial managers (read the same inefficient bureaucrats of Finance Defence) have been asked to review the very system of providing advance payments to the PSU’s while the latter have been merrily using the interest generated from these accumulated advance payments to show profits, instead of generating revenues from their core area of expertise - and this rookery has obviously been conveniently going on for past several years, again never caught in audits. According to an internal audit, while the total amount outstanding from PSUs is 55,892 crore ($8.3 billion), most of it is (51,573 crore) with Hindustan Aeronautics Limited. “These are advance payments made since as early as 1975 which have still not been accounted for”.

Under directions of Defence Minister Parrikar, instruction have been issued that include: advances not to be a profit-making for PSUs - either they provide interest on advance drawn or interest bearing financial instruments be obtained as a guarantee against the advance given; PSUs to raise funds under provisions of Companies Act and directives issued by Sebi rather than be used as ideal place for parking of government funds released under budgetary system; all outstanding funds till year 2000 to be cleared as a first step, and; new provision to be put in place for "levy of penal interest if the advances extended to PSUs are not utilized within the given period for the purpose for which it has been released. It is commendable that the Defence Minister has discovered such flawed financial practices in the MoD. It is amazing that such practices have been continuing since at least 1975 while the Military’s critical voids have been mounting - still surprised about the MoD-DRDO-DPSU-OF nexus?

The views expressed herein are the personal views of the author.