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Can Fifteenth Finance Commission Resolve Funding Problems of Defence?

Mr Amit Cowshish is a former Financial Advisor (Acquisition), Ministry of Defence and former Distinguished Fellow, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for Detailed Profile
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  • July 24, 2019

    While extending the term of the Fifteenth Finance Commission till November 30, 2019,1 the Union Cabinet has also amended its Terms of Reference to “address serious concerns regarding allocation of adequate, secure and non-lapsable funds for defence and internal security of India.” To that end, the Commission has been tasked to examine whether a separate mechanism could be created for such funding.2 The report, due to be submitted by November 30, will cover the period 2020 to 2025.

    Inadequate allocation for defence has been a matter of serious concern for several years. What lies at the root of the problem is the difficulty in raising sufficient resources through taxation, borrowing and other means to meet the requirement of defence (and internal security) without compromising on the socio-economic agenda of the government. Arguably, the Constitution of India does not expect the Finance Commission to find a solution to this problem.

    Article 280 of the Constitution requires the Finance Commission to make recommendations regarding (a) distribution of the net proceeds of taxes between the Centre and the States, (b) the principles to be followed for providing grants-in-aid to the States, (c) the measures to be taken to augment the Consolidated Fund of the States to supplement the resources of the Panchayats and the Municipalities, and (d) any other matter referred to it by the President in the interests of sound finance.

    This constitutional provision sets the limit within which the Finance Commission can examine appropriateness of the requirement of funds projected by the armed forces, take a normative view about what would constitute ‘adequate’ budget outlay for them, and suggest how to ensure the recommended level of funding, especially if it entails a substantial increase. This limitation is reflected in the recommendations made by the previous two Finance Commissions, which too had to deal with similar concerns.

    In the face of a strong pitch made by the Ministry of Defence (MoD) for higher allocation and the Commission’s own assessment that there was a need to “provide for some real growth in defence revenue expenditure, to allow for adequate depreciation and maintenance”3, the Thirteenth Finance Commission (2010-15) could do no better than to accept the Ministry of Finance’s (MoF) projection of 8.33 per cent annual growth in the defence budget.

    In similar circumstances, the Fourteenth Finance Commission recommended increase in defence revenue expenditure at the same rate as the rate of growth of the GDP, in the belief that it would be ‘’substantially higher than the past growth of defence revenue expenditure” but also adding that "(m)uch of the demand on resources from the Ministry of Defence has been in the nature of capital expenditure, which is beyond the scope of our assessment”.4

    The efficacy of these recommendations is questionable when judged against the background of a persistent gap between the requirement of funds projected by the armed forces and the actual allocation made in the Union Budget, which increased from approximately Rs. 23,000 crores in 2010-115 to approximately Rs. 1.12 lakh crores in 2018-19.6

    Given the limitation of the constitutional mandate and the history of recommendations made by the previous two Finance Commissions, it will take some doing on the part of the Fifteenth Finance Commission to make specific and actionable recommendations as regards what would constitute ‘adequate’ funding for defence and internal security.

    In the context of defence, the Fifteenth Finance Commission will also have to find some way of dealing with the issue of inadequacy of the capital outlay which the Fourteenth Finance Commission considered to be beyond its scope. This is crucial as modernisation of the armed forces is largely funded from the capital outlay, which is largely seen as grossly inadequate. In 2018-19, the capital outlay was more than Rs. 76,000 crore less than what the services had asked for.

    This is because the actual resource allocation will always be influenced by the competing demands from various sectors, unforeseen crises and the overall resources that the government is able to generate in a particular year.

    Given the uncertainty about resource generation, it is intriguing that the Fifteenth Finance Commission has also been asked to look into the feasibility of setting up a separate non-lapsable funding mechanism for defence and internal security. This is not a new idea. Setting up of a non-lapsable Defence Modernisation Fund was announced in the interim budget speech for the year 2004-05, but it was not followed up – and, for good reason. The issue has also been raised in vain by the Standing Committee on Defence several times since then.

    The MoF has consistently questioned the feasibility and utility of creating a non-lapsable funding mechanism and even the MoD has not always been keen on the idea,7 though lately it has warmed up to it. Be that as it may, the fundamental issue is that the resources will have to be raised in the normal course through taxation and other means, whenever required by the armed forces. Seen in this perspective, it makes no difference whether the money is made available through the annual budget or the mechanism of a non-lapsable fund.

    This brings the issue back to the ability of the government to raise substantially higher resources, primarily through taxation, to provide adequate funds for defence and internal security, as indeed for other sectors like health, education, agriculture and infrastructure development. It is more a matter of political consideration than a problem to be resolved by the Finance Commission.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.