Military should fund its own modernisation: What are the options?

 

By Ajai Shukla

Business Standard, 2nd July 21

 

With thousands of People’s Liberation Army (PLA) soldiers infiltrating across the Line of Actual Control (LAC) in Eastern Ladakh last year, the Indian military inched closer to its worst-case security contingency: A two-front confrontation with both China and Pakistan. A combination of hubris and strategic short-sightedness led New Delhi to miscalculate Beijing’s response to the dismantling of erstwhile Jammu & Kashmir; and Beijing was further provoked by Home Minister Amit Shah’s bluster about regaining the disputed Aksai Chin area. Fortunately, temperatures have cooled somewhat, with a ceasefire in place since February on the India-Pakistan Line of Control (LoC) and the PLA quiet after largely achieving its operational objectives in Ladakh. Even so, with a two-front confrontation likelier today than at the start of 2020, defence planners in New Delhi are experiencing a renewed urgency in the need to modernise India’s military.

 

The problem, as always, is money. There is a dire shortfall of funds for capital purchases. In all eight budgets presented by the Bharatiya Janta Party government there has been a consistent pattern: Each year, the military calculates its capex requirements for the coming year and projects its requirement to the Ministry of Defence (MoD). The MoD projects this onwards to the Ministry of Finance (MoF). Then, without assigning reasons, the MoF slashes the military’s requirement and allocates a smaller capital budget instead.

Governments are entitled to a “peace dividend” when they manage to end conflict. They can reduce defence spending and divert savings to politically rewarding heads such as education, healthcare and subsidies to voters. New Delhi, however, has tried to reap a peace dividend even in troubled times. While preparing the budget for financial year (FY) 2018-19, just months after a serious clash between Indian and PLA soldiers in Doklam, at the China-India-Bhutan border tri-junction, the military projected a capex requirement of Rs 157,963 crore. The MoF unilaterally lopped off 47 per cent (Rs 74,529 crore) and allocated just Rs 83,434 crore. In the current defence budget, which the government presented even as Indian troops were confronting the PLA in Ladakh, the MoF slashed the military’s capex projection of Rs 199,553 crore by a whopping 38 per cent (Rs 76,553 crore), allocating just 123,000 crore.

 

This has been the pattern since 1991-92. Successive governments, featuring political parties of every stripe, have operated on the assumption that a full-scale war was highly unlikely and, therefore, equipment modernisation was wasteful. Border conflicts, such as the 1999 Kargil war, the 2017 Doklam confrontation and the ongoing Ladakh intrusions are not serious enough to make equipment modernisation an imperative. If things go wrong, such as in Kargil where the army was caught without 155-millimetre artillery ammunition for its Bofors guns, we rely on a friend like Israel to bail us out. Meanwhile, the political-electoral calculus favours the spending of thousands of crores on vanity projects such as Sardar Vallabhbhai Patel’s statue in Gujarat and the redevelopment of the Central Vista in New Delhi, over building up our military to be capable and equipped to handle the confrontations and conflicts that loom large in our security matrix.

 

Boosting the military’s capital budget does not require a great deal of money. The revenue heads, which include salaries, pensions and the forces’ operating expenses, are already catered for before allocating money to the capital budget head. Therefore, any increase in the defence budget would be an increase in the capital budget. If the current year’s defence budget of Rs 478,196 crore were to be increased by Rs 47,000 crore – a 10 per cent increase – this would all be added onto the Rs 137,711 crore capital head, increasing the modernisation budget by an out-of-proportion one-third.

 

The benefits of such an increase in capital allocations becomes even more apparent when one considers that making a capital purchase usually requires only 10-15 per cent of the total cost to be paid up-front, with the remaining amount disbursed over a five-to-seven year period, as the product is manufactured and delivered. Provided this year’s hypothetical capex increase of Rs 47,000 crore is matched by similar increases in following years, the military could immediately conclude defence equipment contracts worth up to Rs 470,000 crore, with Rs 47,000 crore paid as advance this year. In foreign exchange, this $63 billion would allow the army, navy and air force to fill critical deficiencies in operational equipment such as fighter aircraft, artillery guns and submarines.

 

The question then is: From where is this annual Rs 47,000 crore to be generated (actually the amount progressively reduces as the defence budget rises in tandem with the Gross Domestic Product)? The choice is between monetising some of the military’s existing resources (Ordnance Factories, land banks) on the one hand; and adding a military modernisation cess on the other. For example, Goods and Services Tax (GST) could be increased by one per cent in all slabs as a military modernisation cess. Assuming that economic activity revives and GST collections rise to Rs 120,000 crore per month, a one per cent cess would generate Rs 14,400 crore per year. In addition, the Securities Transaction Tax (STT), levied at the rate of 0.01 per cent, collects some Rs 13,000 crore each year. Doubling STT would yield another Rs 13,000 crore for defence modernisation. Finally, income tax has a three per cent cess for education and one per cent for health, each one per cent amounting to Rs 7,500 crore per year. Much of the education cess reportedly remains unutilised; reducing it by a percentage point and adding a two per cent cess for military modernisation would generate another Rs 15,000 crore. 

 

If increasing taxation is unacceptable, the defence services could monetise some of its 17 lakh acres (2,833 square kilometres) of defence land, which is increasingly a headache for military units and formations to safeguard. Adding annual parcels of defence land to the real estate and housing construction sectors would create the resources for a military modernisation fund, while also boosting economic activity and employment. There are, however, well-justified questions over whether such land sales could ever be kept corruption-free. Even within the military, real estate has created a chequered history of controversies involving senior generals, in land scandals such as the one in Sukhna in 2008 and the Adarsh Housing Society scam in Mumbai in 2011.

 

That leaves the option of MoD disinvestment in the 41 factories of the Ordnance Factory Board (OFB), which produce arms, ammunition and equipment for the military worth about Rs 12,000 crore annually. Given the OFs’ notoriously low productivity and quality, a Group of Ministers is already considering a proposal to “corporatize” them. Merely imposing a corporate structure, however, is unlikely to transform a jalopy into a racehorse and the MoD should consider “privatisation” instead. In the UK, selective privatisation has transformed a moribund public defence sector into vibrant and productive private entities. London has conveyed its willingness to share its experience and expertise with India. This must be explored as a means of raising both capital and productivity.