No Further Increase in Defence Outlay: Need to Move On

It is pointless bemoaning that there was no reference to defence in the Finance Minister Nirmala Sitharaman’s speech and that she did not further enhance the allocation in the union budget presented by her on July 05. The total allocation under all the four demands for grant of the ministry of defence (MoD) thus remains at Rs 4,31,010.79 crore. It includes Rs 1,12,079.57 crore on account of defence pensions.

There is no reason why expenditure on pensions, for which a separate demand for grant is presented to the parliament, should not be considered a part of the defence budget. Keeping it out of the reckoning would not help defence ministry garner more funds for the armed forces as all funds anyway come from the single pool of central government receipts.

For the record, the total defence outlay works out to 2.04 per cent of the gross domestic product (GDP) and 15.47 per cent of the total central government expenditure (CGE) envisaged in the budget presented by the finance minister. That there has been a decline in the defence outlay as a percentage of the GDP and CGE is not in dispute. It is also not in dispute that defence requires larger outlays.

The question at this stage, however, is whether it was possible for the finance minister to provide additional funds beyond what was allocated in the interim budget in February this year. Probably she could but, going by the estimates of receipts and expenditure presented on Friday, it could not be a substantial amount.

The budget estimates show that there is an increase of just Rs 2,149 crore in the total receipts of the central government over the amount projected in the interim budget. Even if this entire amount were to be diverted to defence, the increase in the outlay would have been a little less than 0.50 per cent.

No one can seriously argue that more taxes could be imposed, higher disinvestment targets could be set, funds allocated for various social sector schemes could be cut down, or the government could resort to higher borrowing which, broadly speaking, are the only other ways in which more receipts or savings could be generated and additional funds could be made available for defence.

There was a gap of more than Rs 1.12 lakh crore in the requirement projected by the armed forces alone (both on account of revenue and capital expenditure) and the allocation actually made to them during 2018-19.1 Assuming that the gap this year is half of that, the armed forces would require Rs 50,000 crore. In the face of this, passing on Rs 2,149 crore to defence would have only invited ridicule.

Significantly, the finance minister refrained from making routine declaration of the government’s commitment to security of the country and making platitudinous promises of providing additional funds, if required. Except those who are prejudicially opinionated, no one ever seriously doubts the government’s commitment. As for additional funds, it is better not to make a promise that cannot be kept.

Talking of promises, it is just as well as that the finance minister did not announce setting up of a non-lapsable pool of funds for modernisation – an idea that she was supportive of earlier as the defence minister. This idea has been discussed and debated ad nauseum in the past and has been found to be impractical and of little use for speeding up modernisation of the armed forces.

There is no wisdom in taking any step without fully considering its consequences and working out the modality of its implementation down to the last detail. A case in point is the decision taken in the past to withdraw custom duty exemption on import of defence items by the defence public sector undertakings and the ordnance factories.

That single decision had put enormous extra burden on the defence budget. Withdrawal of customs duty in this year’s budget on import of equipment that is not manufactured in India will marginally reduce the burden on the defence budget without upsetting the level playing field between the public and the private sectors.

This is not to suggest that there is no need for a higher level of funding for defence. The armed forces, a dominant section of the defence analysts, and even the standing committee on defence feel that the defence budget should be pegged at three per cent of the GDP. There is no clarity though on how this can be done.

It would be nice to see the defence ministry setting up a task force to examine this burning issue and submit actionable recommendations which could be considered by the finance minister while deciding the defence outlay next year. The only alternative would be for the armed forces to make financially viable defence plans.

Views expressed are of the authors and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. Standing Committee on Defence (16th Lok Sabha), Forty second Report, Para 1.3.