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‘Crisis’ in defence expenditure is not really about budget allocations

By Somnath Mukherjee

Another Union Budget, another round o..

By Somnath Mukherjee

Another Union Budget, another round of recriminations on "inadequate" allocations to Defence. Had it not been for the criticality of the subject, deja vu and ennui would have been the dominant emotion. Unfortunately, the issue is important, and the narrative is dominated by largely uninformed hypotheses. As a result, putative solutions are often quite way off the mark.

First things first, on the key assumptions — do we spend too little on defence? The correct answer is — we don't know. Sans a comprehensive national defence policy in place, that lays down key national security objectives and building blocks required to achieving them, any number is a shot in the dark.

We do have the annual report of the ministry of defence, as well as various perspective plan documents brought out by individual service arms. More often than not though, they represent wish-lists rather than actionable plans. As a result, it is tough to really ascertain how much is enough.

So we take the next-best approach, of relative comparisons. Is India underfunding defence, compared to other countries? Do we really spend, as is breathlessly claimed all the time, "only 1.6 per cent of GDP" on defence? The simple answer to both is — not at all. To start with, our defence expenditure is not 1.6 per cent of GDP, it is around 2.2 per cent of GDP. It has never fallen below the 2 per cent benchmark. Further, at 2.2 per cent, we are not an outlier compared to the rest of the world. On the contrary, this is quite on par with the rest of the world on defence spending.

As can be seen, India spends more than China on defence (as percentage of GDP), and on par with South Korea and Turkey — both of whom face challenging security scenarios. Further, India spends around 16-17 per cent of the total central budget on defence, a fiscal stretch that is higher than many countries. It is on par with the United States, but unlike India, US defence expenditure provides large numbers of jobs locally – hence it is economically accretive.

For India, the toss-up between guns and butter is truly reflective, as we import most of our guns, and hence get little economic benefit out of it. In a somewhat sorry representation of priorities, defence happens to be the largest expenditure line in the Union Budget, after debt servicing. Ergo, the charge of spending too, less stands on tenuous legs.

So what accounts for the perception gap? It is, unfortunately, the mainstreaming of wrong data — repeated ad nauseam. As the old chestnut goes – Garbage In, Garbage Out. The widely quoted "1.6 per cent of GDP" number excludes defence pensions, which, in the last five years, has been the fastest-growing line in the defence budget. Thanks to the government implementing One Rank One Pension (OROP), the growth rate has been further hastened. While total defence expenditure has broadly kept pace with growth in national income, a steep J-curve in defence pensions has drawn resources away from capital expenditure.

As can be seen in the chart, while total defence expenditure has kept pace with growth in GDP (around 60 per cent) in the last five years, pensions have grown at more than double that rate, at around 140 per cent. Globally, defence pensions are part of defence budgets, and quoted as such. Insisting upon a factually lower number is a self-serving lament, but does nothing to identify the real issue.

To make things worse, the issue doesn't lend itself to easy answers anymore. Pension commitments are sovereign liabilities, and cannot be rescinded. Given increased lifespans, a still-growing manpower profile of the Army and the principle of "price and grade inflation"— indexation in OROP — pensions are expected to continue its rise in geometric proportions. FY19 would be the third straight year running when pension spends would be higher, in absolute terms, than capital expenditure in the defence budget.

Can things get better? Not by a whole lot. India's nominal GDP growth has settled into a trendline of 9-11 per cent. While tax-to-GDP ratios will keep improving, the contest over fiscal space among competing priorities will only get tighter. Ergo, it would be very difficult for defence expenditure as proportion of GDP to go up in material terms. Now, it can be safely deduced from recent trends that pensions would grow at levels at least 50-75 per cent faster than headline growth in GDP (and overall defence expenditure). With pay and benefits to serving personnel keeping pace with GDP growth, the growth rate in capital expenditure is destined to remain at a pace that is lower than overall expenditure.

This is the plausible reality. Unfortunately, the general narrative of the strategic commentariat is a never-ending complaint about inadequate allocations. This hasn't changed for many decades now, with commentators constantly referring to defence allocations equivalent to 3.3 per cent of GDP in the mid 1980s (forgetting India quickly went bankrupt at the end of that decade!).

The situation is critical, and requires radical solutions. We perhaps need to revisit our NFU (No First Use) posture on nuclear weapons. Maybe bandwagon ourselves into formal military alliances with the US. One point though is clear — there is no room for old thinking, either in actual policymaking or in its critique!

(The author is head-investment advisory & strategy, products and international business at ASK Wealth Advisors. Views expressed are personal.)

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