Prof. SN Misra
The Union Budget 2021-22 has come in the backdrop of a severe economic crisis induced by Covid-19 pandemic. The Indian economy, whose growth was already decelerating in 2019-20, seems to be witnessing a major contraction of by 7.7%, as assessed by the Economic Survey. The CMIE has assessed the unemployment figure as 122 million, including 12.8 million in the organised sector. China has been making belligerent moves on the border. The Defence Services have been clamouring for more funds to upgrade its combat capability. In this backdrop, defence outlay in the general Budget was keenly watched.
An analysis of MoDs overall expenditure during 2011 to 2021 would reveal that it has increased at a compound annual growth rate of 9.2%, of which the hike in pension and pay and allowances contribute 71%. On the contrary, the capital Budget has increased by a mere 13%.The FM has made an allocation of $65.6 billion to the MoD, accounting for an increase of 1.4% over the last year’s Budget and around 2.38% of India’s GDP and 14% of CGE.
However, the major surprise has been accepting a major recommendation of the 15th Finance Commission to create a Non-lapsable Defence Capital Outlay Fund. This has been a recurring demand by the Defence Services, in view of a perception that the requirement of modernisation for the three Services has not kept pace with the allocation made by the Ministry of Finance. Army is the biggest spender (54%), followed by IAF and Navy. DRDO spends around 6% of defence expenditure for building prototypes and improving India’s capability for producing major weapon system.
Capital expenditure accounts for nearly 35% of total defence Budget unlike the general Budget where it is of the order of only 15%. IAF is most capital intensive with a share of 44%, followed by the Navy and Army. It is a matter of satisfaction that there is a significant increase in capital expenditure by IAF and Navy at the RE stage. However, a comparison of the funds asked for by MoD and approved by MoF would reveal that India is the second highest importer of conventional arms.
The SIPRI report (2020) brings out how the global share of five major countries playout in terms of global share of export and imports. Of the total world military expenditure of $1917 billion, USA has the largest share (43%), while China accounts for $261 billion and India around $70 billion. It works out to 2.2% of world GDP. As against this India’s defence expenditure is around 2.3%. Import of military hardware results in the country losing out on the multiplier effects on the economy and spin offs in terms of technology and innovation.
In July 2019 the government had tasked the 15th Finance Commission to address the severe resource constraints being faced by the Defence and Home Affairs ministries in their modernisation efforts. It had also asked the Commission to examine if a “separate mechanism for funding of defence and internal security ought to be set up and if so, how such a mechanism could be operationalised”. In view of the charter, the Commission has made several vital recommendations that have the potential to mitigate the shortages of resources required for security sector modernisation.
The Commission, in its report, has asked the government to create in the Public Account of India Rs 2,38,354 crore non-lapsable Modernization Fund for Defence (MFDIS) to bridge the gap between projected requirement and Budget allocations for the MoD for 2020-21 to 2025-26. The Commission has suggested the following three broad sources to generate resources for the non-lapsable MFDIS: (a) Transfer from the Consolidation Fund of India at the rate of one per cent of the Central government’s annual gross revenue receipts (Rs1,53,354 crore or 64 per cent in five years) (b) Disinvestment proceeds of Defence Public Sector Undertakings (DPSUs) (Rs40,000 crore or 17 per cent) (c) Monetisation of defence land (Rs 45,000 crore or 19 per cent).
While suggesting the creation of the non-lapsable fund, the Commission has also urged the MoD, the bigger beneficiary of the proposed MFDIS, to”take immediate measures to innovatively bring down the salaries and pension liabilities”. In this connection it would be pertinent to observe that the manpower cost, the major elements of which are salaries and pension, has increased significantly from less than 50 per cent of the MoD’s budget to over 60 per cent in a time span of 10 years ending 2020-21. During the same period, the share of modernization expenditure has declined from 27 per cent to 19 per cent.
The 15th Finance Commission has also urged the MoD to reduced pendence on defence import. In this respect, the Commission has recommended to the Ministry of Finance to incentivise the MoD to work on a time-bound action plan for progressive increase in the share of indigenous arms in India’s defence procurement. The Commission hopes that a calibrated roadmap should enable the MoD to source not more than 30 per cent of its arms requirement from the foreign vendors by the end of 2025-26. This brings to memory the Kalam Committee report of 1993, which enjoined upon the India’s Defence manufacturing complex to improve Self Reliance Index (SRI) from 30% to 70%, in a decade’s time, which has remined a pipe dream.
Victor Hugo, the celebrated French poet wrote, “No force on earth can stop a moment whose time has come”. Despite stubborn opposition by MoD mandarins, CDS is now a critical component of MoD’s decision making. Similarly providing a non-lapsable fund for modernisation of the Defence Services is a major structural reform which will ensure that the services are no longer starved for funding modernisation plans. However, it needs to mesh up with Long Term Defence Capability Plan and our indigenous capability plans, duly factoring the capability of our bellicose neighbours. Besides, the services need to tighten and shorten their cycle time for acquisition, cut down on interminable delay in time taken for trials and drawn up realistic QR.
The writer was an Addl. Financial Advisor with MoD.