When the Parliamentary Standing Committee on Defence meets this week to discuss the Budget allocations made by Finance Minister Nirmala Sitharaman, we hope to get some clarity on the provisions made towards India’s national security. That’s because on defence, the Union Budget for FY2021-22 hides more than it reveals. Not only was ‘defence’ conspicuous by its absence in the finance minister’s Budget speech for the second consecutive year, the component-wise budgetary allocation also raises more questions than answers.
As the Committee examines the Demand for Grants of the defence ministry, we believe there are at least four important questions that the panel should ask.
Rising threat, declining expenditure
What explains the reduction in total defence expenditure even though the threat posed by China hasn’t gone away?
Despite the rhetoric, defence expenditure for FY2021-22 is estimated to be 1.35 per cent lower than the Revised Estimates for FY2020-21 in absolute terms. The Revised Estimates themselves increased by a marginal 2.3 per cent (~Rs 13,000 crore) over what was proposed in the last Budget. Total Ministry of Defence (MoD) expenditure as a proportion of GDP continues to languish at the 2.15 per cent mark. In a year that saw the economy contracting because of the pandemic and China adopting a confrontational posture on India’s borders, these numbers do not inspire much confidence. The Committee must ask the defence ministry if the Union executive is exploring all possible options to prioritise defence financing.
Money to modernise
Does the government have the financial headroom for modernisation of defence going ahead?
The Committee in 2019 had observed that the Budget allocation for modernisation, covering both committed liabilities and new schemes, did not meet even the committed liabilities. This has been the case since 2016-17, forcing the Committee to observe that inadequate allocation for committed liabilities could lead to India defaulting on contractual obligations. Long before the pandemic, even the financing of existing schemes was not guaranteed, leave alone new schemes for modernising the armed forces.
The government did course correct last year by increasing the capital outlay on defence (of which modernisation is also a part) by nearly Rs 20,000 crore during the pandemic, the Budget document revealed. Many post-Budget news reports subsequently claimed that this increase reflected emergency purchases of precision-guided munitions and drones to counter China. However, an increase of Rs 20,000 crore cannot be explained by these purchases alone. Major defence equipment isn’t available off the shelf and their payments are made over many years. So, where did the money go?
It’s more likely that the higher capital outlay was on account of payments for equipment purchased in the past. The budgetary allocations attest this claim to some extent. Of the Rs 20,000 crore increase, the Navy under the line items ‘naval fleet’ and ‘aircraft and aero engines’ accounts for nearly Rs 9,000 crore and the Air Force under ‘other equipment-air force’ accounts for another Rs 10,000 crore. Since the Budget documents don’t make any distinction between new schemes and committed liabilities, the Committee must ask the MoD to come clean on the modernisation plan.
Drop in defence pension expenditure
What explains the sudden drop in defence pension expenditure by nearly 13 per cent?
The Revised Estimates for FY2020-21 are lower than the Budget Estimates for the same year by nearly Rs 18,000 crore. This is surprising for two reasons. One, personnel expenses such as pensions are quite predictable. Two, after the introduction of One Rank One Pension, or OROP, pension outgo has been rising with a cumulative annual growth rate of over 17 per cent.
In such a situation, an absolute decline in pension expenditure is not possible without a sudden decrease in the number of retirees or a reduction in each retiree’s pension.
This sudden decline in pension outgo has sparked wild speculations. Some reports claim this reduction is due to a government proposal to increase the retirement age of officers, thereby decreasing the number of retirees. However, this move alone would still not explain a fall of nearly 13 per cent because the bulk of the pension expenditure is for personnel below officer ranks (PBORs). Moreover, this explanation still doesn’t account for a reduction in pension expenditure in the Revised Estimates of FY 2020-21.
Another claim being made is that a freeze in dearness allowance, in force since the pandemic, has caused a reduction in the pension outgo per personnel. This explanation is unsatisfactory because a decrease would have affected pay but not the pension amounts already fixed for the last year.
A third speculation is that previous years’ payments included arrears that have been compensated for already and hence the reduction in pension outgo. If that were the case, why did the Budget Estimates for FY 2020-21 include these arrears? This information is quite predictable and would have been available even before the FY 2020-21 Budget was made.
A final explanation for lower pension outgo is that the government is trying to book pension commitments over multiple years in light of the fiscal situation.
With speculations flying around, it is now up to the Committee to get the MoD to set the record straight on pensions. While reducing pension expenditure over the long term must remain an important goal, going back on existing statutory pension commitments would be counterproductive.
What are the MoD’s plans to raise revenues on its own?
The government has given an in-principle nod to the 15th Finance Commission’s recommendation for creating a non-lapsable defence fund to finance modernisation. Three of the four sources for populating this corpus are under the domain of the MoD — disinvestment of Defence Public Sector Enterprises (DPSEs), monetisation of defence land, and transfer of defence land to state governments and public projects. The Committee must drive urgency in the MoD for raising revenues through these routes. It should ask the MoD to immediately identify DPSEs that need to be disinvested.
The Parliamentary Standing Committee on Defence can bring some much needed clarity to critical issues concerning India’s national security. What the Committee does will indicate whether legislative oversight over a powerful executive can work in the Indian setup.
Lt Gen (Dr) Prakash Menon is Director, Strategic Studies Programme, Takshashila Institution, Bangalore. Pranay Kotasthane is Research Fellow at the Takshashila Institution. Views are personal.