Not fair to cut defence pay, pensions and inject funds in airlines, banks

Defence Minister Rajnath Singh at a meeting with CDS Gen. Bipin Rawat, the three service chiefs and other officials (for representation) | Photo: ANI

We must do something. This is something. Therefore, we must do this.”

This logical fallacy, derisively labelled as the politician’s syllogism, accurately explains the recent attempts to contain defence expenditure in the wake of Covid-19. Striking a balance between development and defence priorities is a tough act even in the best of times. But the unprecedented economic aftermath of Covid-19 has meant that a range of solutions — symbolic, radical, and ill-advised — are all now on the table.

First came the Tour of Duty (ToD) proposal in May, which would allow entry of young persons in the armed forces for short tenures, following which they will be released without any post-retirement benefits. In October, news reports suggested that measures like doing away with Army Day parades and Canteen Stores Department (CSD) for units in peace stations were being considered. Recently, another trial balloon went up — apparently, the Department of Military Affairs (DMA) wants to increase the retirement age of military personnel, along with a simultaneous reduction in pensions for those seeking premature retirement.

As expected, all these solutions have come under heavy fire from the armed forces community, and mostly for good reasons. This tug-of-war between the civilian and military stakeholders masks the fact that India’s defence expenditure problem cannot be solved by the Ministry of Defence (MoD) alone; it requires a whole-of-government approach in which both civil and military stakeholders need to eschew their stubbornness.

How did we get here?

Creating enough fiscal space for the defence of a developing country is an unenvious task. Judging by the government’s expenditure preferences over the last two decades, two things seem clear.

One, despite growing geopolitical challenges, defence ranks low on the priority list. We say this because defence expenditure, as a proportion of both Union government expenditure and GDP, has decreased in the last 10 years. In 2009-10, defence expenditure was 2.8 per cent of the GDP and 17.6 per cent of the Union government expenditure, which has decreased to 2 per cent and 15.5 per cent respectively, in 2019-20.

Two, the defence expenditure has been skewed towards personnel rather than modernisation. The capital outlay as a percentage of defence expenditure has declined over the last 10 years from 32 per cent in FY11 to 24 per cent in FY21 (Budget Estimates). The main reason is the Narendra Modi government’s decision to implement the One Rank One Pension (OROP) scheme. In 2015-16, before the OROP was introduced, defence pension expenditure was at Rs 54,000 crore. By FY21, it had more than doubled to Rs 1,33,825 crore, rising at a nominal CAGR, or compound annual growth rate of ~22 per cent, much higher than Indian economy (13 per cent) and the MoD’s own expenditure (12 per cent).

On the other side of the aisle, the armed forces community refused to grasp the consequences of a slowing economy. OROP was made into an emotive issue and all economic arguments were dismissed. The idea behind OROP — that veterans retiring in the same rank with the same length of service should get the same pension irrespective of when they retire — committed the government to a perpetually growing liability regardless of its earnings. Moreover, this came at the direct expense of an equivalent drop in expenditure on modernisation and stores.

Economists Renuka Sane and Ajay Shah estimate 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. Despite its apparent unsustainability, the OROP issue has become a matter of faith. The long-term solution of moving all incoming armed forces personnel to the National Pension System (NPS) is not even on the table.

What can be done now?

There is an immediate need to bridge the trust deficit between the two stakeholder communities. The Chief of Defence Staff’s position is well-placed to bring the two sides (government and the defence community) to the table. Once that is done, the contours of a solution that doesn’t compromise India’s key national interests can be worked out.

First, the government must acknowledge that the MoD cannot solve the problem on its own. All MoD’s reforms — sale of unutilised assets, moving cantonments, or switching to NPS in the future — will accrue savings in the long run, but cannot address the short-term problem posed by a slowing economy.

Second, the short-term solution lies in a whole-of-government approach. The government must commit to prioritise defence expenditure in line with future threat projections, even if it means that government expenditure in other areas needs to be rolled back. Defence is the first item under the Union List in the Constitution’s seventh schedule and perhaps the most important responsibility. The inability of successive governments to provide sufficient funds for this function needs to be corrected immediately.

It’s not as if an increase in defence expenditure can only come at the expense of health, education, and infrastructure. All governments’ spending combined is nearly 26 per cent of India’s GDP. Of which, ~2.1 per cent of GDP is allocated towards MoD, ~1.4 per cent is public health expenditure, and ~4.6 per cent is the total expenditure on education. That’s a total of 8.1%. It’s the remaining expenditure, ~18 per cent of GDP, which needs more scrutiny. Reducing fertiliser subsidies, better directing food subsidies, and strategic disinvestment — all need to be fast-tracked. It is unconscionable to cut defence pay and pensions while injecting funds in airline companies and banks.

Third, the unsustainable pension burden and inadequate budget allotment need to be addressed to improve India’s military effectiveness and defence preparedness. Both demand long-term solutions and not short-term fixes. A unique and practical solution of inversely rotating manpower between the military and other agencies of the government, especially the central and state police forces or other agencies of government, was recommended by the Standing Committee on Defence in 2017. We have previously proposed a way to operationalise this recommendation. Whether it’s the rotation of manpower or moving incoming personnel to NPS, these are long-term solutions requiring action and approval today.

The predicament of the MoD is a national security issue that requires intervention at the level of the National Security Council and the Cabinet Committee on Security. The current strategic myopia is intolerable at a time when the enemy is already at our gates.

Pranay Kotasthane is Fellow and Faculty at the Takshashila Institution. Lt Gen Prakash Menon is Director, Strategic Studies Programme, Takshashila Institution, Bangalore. Views are personal.