India's Defence Budget is drowning in pay, pension and policy paralysis

This was published in The Economic Times on 7th Feb 2019

As usual, defence found mention in interim finance minister Piyush Goyal’s budget speech earlier this month. Behind the rhetoric, though, the rot in defence finances is all too visible. While the anaemic 6% rise in the headline allocation to defence in 2019 is understandable — given the interim nature of the budget and electoral considerations — the allocations bring to sharp relief the composition of defence spends.

For starters, India’s defence budget is much higher than what goes under the rubric of ‘defence budget’. Goyal announced that it crossed Rs 3 lakh crore for the first time this year. Actually, that landmark took place in 2016. The missing jigsaw lies in pensions, an expenditure head that was taken out of the defence budget several years ago.

It is now reported under a different head, defence pensions. With pensions added, India’s total outlay on defence is Rs 4.2 lakh crore. To put the expenditure into perspective, this is more than 11% of GoI revenues, and the single-largest allocation in the Union Budget after debt servicing.

More tellingly, it is four times the allocation to education and seven times the allocation to health. So, is defence underfunded as the popular narrative goes? Not by a long shot. The devil lies in the composition of expenditure. 56% of the budget comprises salaries and pensions, especially pensions, which constitute 27% of the entire budget, up from 18% in 2014.

India’s nominal GDP in rupee terms has grown around 87% in the last five years. The overall defence budget has grown by around 68%. However, salaries within this component have grown 75%, while pensions have by a whopping 146% in the same period.

Unsurprisingly, capital expenditure budget has grown only 30%. Effectively, India’s defence budget is being wrecked from within by its pension liabilities.

Unfortunately, the issue is structural. Military pensions (and any other publicly funded ones) are sovereign liabilities — they cannot be rescinded once committed. Unlike Europe, India dodged a massive public financing bullet on public sector pensions in 2004, when all civilian public servants moved to a defined contribution (DC) pension from the old defined benefit (DB) one.

The military, however, remained under the older DB plan, and with the implementation of ‘One Rank, One Pension’ (Orop), the liabilities have ballooned exponentially. Add to it, the very wide coverage of pensions in India (70% of all defence personnel get covered by pensions, compared to about 25% in the US military).

The mathematics of the programme lends itself to a continuing growth that would, more often than not, outstrip reasonable growth in fiscal revenues. In that context, the pension budget for this year (estimated at a 5% growth) seems quite understated.

At the core of the structural issue is the manpower-intensity of the Indian Army. India is the only major military in the world that has seen a growth in its standing strength in the last decade.

This is the period when most modern armies such as the US, Russia and, most recently, China embarked upon radical restructuring of their militaries, premised upon material reduction in numbers. India, in the same period, raised two new mountain divisions and embarked on raising a mountain strike corps.

Despite much discussion and debate, there has been little movement even on the chief of defence services (CDS) reforms. Large sections of the military are ambivalent — or even hostile — to it. The political leadership, however, does not seem to have the courage to push through the changes required, despite Opposition from the services. Consequently, expenditure patterns remain inefficient.

Recently, the Indian Army placed an order for six Apache attack choppers, costing nearly $1billion, just as the Indian Air Force (IAF) is preparing to take the first deliveries of the same chopper (under a $3 billion order placed a couple of years ago). Here’s a case of a turf war eating away scarce budgets in absence of modern joint decisionmaking structures if there were one.

While there is no dearth of committee reports on what to do, there seems to be little political (or military) will to implement radical change.

The biggest security threat to any country is a bankrupt sovereign. With multiple competing demands from an aspirational, impatient India, budget constraints are a reality of our times.

The clamour for ‘more money for defence’ is not only unrealistic, but also self-defeating. We have a crisis on our hands. But it would seem that those who should be most heavily engaged with the same have run out of imagination and ideas.