Raising Defence Expenditure

Why in news?

Demands for increasing the defence expenditure to at least 3% of GDP has come from various quarters.

What is the current scenario?

• India’s defence expenditure currently stands at 1.49% of GDP, stated to be at its lowest ever.
• This is even lower than what it was prior to the disastrous 1962 war with China.
• But this figure of 1.49% does not include defence pensions and Defence Ministry spending.
• If both are included, the total defence expenditure rises to 2.16% of GDP.
• Data for the past decade show that this figure, too, had been falling (2.78% in 2009-10).

How relevant is GDP a metric?

• The defence expenditure is currently 16.6% of the central government expenditure (CGE).
• This has been stable in the range of 16-18% over the past decade.
• But defence expenditure as a percentage of GDP has been falling.
• This is because CGE as a percentage of GDP has come down from 16% to 13% over the past decade.
• This makes GDP, possibly, a misleading metric for fixing defence expenditure.

What are the constraints in raising the expenditure?

• Capital - Raising the defence budget to 3% of GDP would mean an increased allocation of around 23% of CGE.
• The increase would necessarily have to be on the capital side of the defence budget.
• As, salaries, pensions and other operating expenses have full fund allocation, with little scope to absorb extra funds.
• But defence capital expenditure is 33% of the government’s total capital expenditure in 2018-19.
• Raising the defence capital expenditure to the tune of the proposed 3% would increase this ratio to 85%.
• This would leave the government with very little money for other capital spending.
• Notably, it includes that for infrastructure and asset creation, outside of the procurement for the defence services.
• Import - Most defence equipment is procured from foreign countries.
• So an increased capital budget would increase the defence import bill.
• This could, in turn, add to the current account deficit.
• Tax - The existing allocation for defence for 2018-19 is 27% of the total tax revenue.
• This would shoot up to 38% if the allocation is raised to meet the target of 3% of GDP.
• This will require either an increase in the current tax rates, or a widening of the tax base.
• Logically, both of these are difficult to achieve in the short term.
• It will thus not be feasible to substantially augment government’s non-borrowing revenues.
• Allocation - So if revenue collection is not increased, defence expenditure can go up only if allocation to other heads is reduced.
• But there is already very little for education, health, police and public infrastructure.
• Notably, India is at a juncture of increasing the socio-economic expenditure manifold.

What are the concerns?

• An increasingly large share of resources is going towards human resources costs.
• This, resultantly, leaves very little for defence modernisation.
• With One Rank One Pension and the new Pay Commission, defence pensions have risen.
• This has increased from around 18% of defence spending in 2013-14 to 27% in 2018-19.
• This stands unfavourably high in comparison with total civilian pension.
• Overall, the share of manpower costs (pay and allowances, and pensions) in the total defence expenditure has increased.
• It has gone from 44% to 56% between 2011-12 and 2018-19.
• This increase has largely come at the cost of capital procurement going down from 26% to 18% of defence expenditure.

What is to be done?

• The challenge is to optimise the existing defence allocations, instead of a quantum jump in funds.
• A solution probably lies in fixing the current imbalance in the defence budget.

Source: Indian Express