Is India’s rising defence pension bill affecting modernisation of military? 5 myths busted

Business as usual is no longer an option. India must tackle the rising defence pension bill.

Army personnel during a parade | Representational image | Photo: Suraj Singh Bisht | ThePrint

The defence pensions debate in India has become a big policy debate.

When India’s first Chief of Defence Staff (CDS) Bipin Rawat recently drew attention to the issue of “unsustainable” defence pensions, predictably a number of enduring myths propped up to justify the status quo.

We bust five such myths.

Myth 1: The defence pension bill is still manageable; all it needs is tweaking defence expenditures and revenues

This first myth refuses to acknowledge the severity of the problem itself. The rationale is that if we could go on with the current system for so long, we can surely continue to do more or less the same thing for the next decade too, without any significant negative impact on the effectiveness of our armed forces. This is a myth because it fails to take into account the recent increases in the pension bill on account of One Rank One Pension (OROP) disbursements.

Being a defined benefit scheme that resets periodically based on current employee compensation, the Narendra Modi government has committed itself to a perpetually growing liability by agreeing to OROP. Since its implementation, the fiscal implications are already making their mark: in 2015-16, before the OROP was introduced, defence pension expenditure was at ₹54,000 crore. By FY 2020-21, it had more than doubled to ₹1,33,825 crore.

Such a rapidly expanding expenditure faces the imminent risk of becoming unserviceable. Economists Renuka Sane and Ajay Shah say that the implicit pension debt (expressed in terms of Net Present Value of all future pension disbursements) may be nearly 50 per cent of the GDP, a fiscally unsustainable burden. This is likely to rise even further as life expectancies increase. So, doing more of the same is no longer an option.

Myth 2: The defence pension bill does not affect the effectiveness of the military instrument

The rationale here is that the rise in defence pensions does not amount to a decrease in defence preparedness; all the government needs to do is make even higher allocations for capital procurement. This is a myth because the rise in the pension bill has been accompanied by an almost equivalent drop in the expenditure on capital expenditure this decade. Laxman Kumar Behera and Vinay Kaushal, researchers at the Institute of Defence & Analysis (IDSA), write:

“…the entire increase in the pension’s share (from 2011-12 to 2020-21) has come at the cost of the capital procurement, which together with Stores has dwindled by 11 percentage points from 36 per cent in 2011-12 to 25 per cent in 2020-21. In other words, the fast rise in the pension expenditure has a significant crowding out effect on stores and modernisation, two major components that determine nation’s war-fighting ability.”

Moreover, it is unlikely that there will be any dramatic rise in the priority accorded to overall defence expenditure in a developing country that has many other competing demands. The implication is clear – the rapidly rising pension bill’s direct casualty is the modernisation of the Indian armed forces.

Myth 3: Defence civilians contribute disproportionately to the pension bill rise

A picture doing the rounds in the WhatsApp groups of veterans is that defence civilians account for more than 45 per cent of the total defence pension expenditure. The solution implied is to just reduce the number of defence civilians to reduce the defence expenditure.

Figure 1: A WhatsApp forward doing the rounds that 45 per cent of defence pension expenditure goes into paying pensions of defence civilians

This is a myth because based on the last available data from 2016-17, defence civilians’ pensions was only 20 per cent of the total defence pensions expenditure. This is not to say that the number of defence civilians are low. In fact, the Indian military’s ‘tooth-to-tail’ ratio of about one soldier to 1.15 civilians is considered quite high and any proposed change to this ratio again needs to be on the basis of operational requirements. However, even if that’s done, the impact on total defence pension outgo will not be significant. Moreover, unlike the OROP for defence personnel, new defence civilians have now been made a part of the National Pension System (NPS), so the pension expenditure incurred per civilian by the government will go down over the years. Thus, blaming defence civilians alone for the rising pensions bill is both unfair and inaccurate.

Myth 4: National Pension System (NPS) for armed forces personnel is a political feasibility

NPS is a “defined contribution” scheme – the employee creates a corpus using their own savings and the pension is paid out of that. Such a mechanism helps reduce government’s own expenditure. Moving incoming defence personnel to the NPS is perhaps a long-term solution. However, the myth is that it is possible to make this shift under the current political circumstances.

In fact, the political feasibility of such a move is extremely low. Not only were defence personnel first left out of the NPS implementation, they were later brought under a new defined contribution scheme called One Rank One Pension (OROP) in 2016. The 2019 manifestos of both the Congress and the BJP claimed credit for OROP implementation. Given this reality, watering down the OROP to reduce pension amounts or replacing it with NPS will face massive resistance due to the endowment effect involved.

Myth 5: Lateral Induction cannot work because of conflicting organisational ethos

Lateral induction of armed forces personnel in other fighting forces within the government has long been proposed as one of the solutions to reduce the defence pension bill. The Standing Committee on Defence (SCOD) as part of its 33rd report to the Lok Sabha also highlighted this solution when it dealt with ex-servicemen issues. But it could not take off because of vehement opposition by the Ministry of Home Affairs. The opposition stems from a deep-seated perception that armed forces personnel are culturally unsuited for internal security duties.

This is a myth because it ignores the fact that a robust training mechanism can mould human capital, and that skills and organisational culture attributes are malleable. A few studies in other countries have even shown that police officers with prior military experience may be better prepared for the stress of police work.  Earlier, we proposed a way to operationalise lateral induction in a way that addresses the worst fears of all security agencies. Instead of rejecting lateral movement altogether, the Narendra Modi government should implement the recommendations of the SCOD.

Finally, contemporary national security imperatives beg for measures to alleviate the burgeoning defence pension outflow.  Our aim in highlighting these five myths is to bring urgency to resolving this problem. Business as usual is no longer an option for India.

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.