India needs to spend more on its armed forces, especially for modernising its strike capability. This calls for more money. But to say that that money should be found at the expense of the states is wrong.

No army of any nation with an economy that has the size and complexity of India’s imports so much of its defence equipment as India does.

The Union Cabinet has cleared a change to the terms of reference of the Fifteenth Finance Commission (FfFC), to get it to recommend apportioning a share of the Centre’s tax collections to defence procurement, and to share only what remains with the state governments, see the report by Dinesh Narayanan in the Economic Times. This would reduce the resources available to state governments and concentrate state power even more, eroding India’s federal nature.

The story also brings out how the Finance Commission and even the finance ministry had rejected such a proposal earlier, both on statutory grounds and on the inadvisability of locking up public resources in a fund awaiting finalisation of defence contracts to be spent, even as other sectors of the economy are denied urgently required funds.

The Centre’s move to truncate the divisible pool of resources to be shared with the states in the name of strengthening the nation’s defence forces projects a trade off between making funds available to the states and making funds available for defence. This projection is false.

Certainly, India needs to spend more on its armed forces, especially for modernising its strike capability. This calls for more money than is currently being spent for such purposes. But to say that that money should be found at the expense of the states is wrong.

This is wrong on account of multiple reasons. The Constitution apportions certain responsibilities to the Centre, certain responsibilities to the state governments and certain others jointly to both levels of government, described in the Seventh Schedule and its three lists, the Union List, the State List and the Concurrent List. The Constitution also lays down the revenue sources for the Centre and the States, which they should tap to discharge the responsibilities assigned in the Seventh Schedule.

Defence is the Centre’s responsibility and it should be financed from the Centre’s resources. The states have lots of things to look after, such as health (education is a concurrent subject), public order and the police, social welfare.

The Centre has, over time, encroached into the States’ domain and spends large amounts of money on state subjects. The sensible and the right thing to do is for the Centre to stick to its own remit and let the states spend on theirs. If the Centre retracts from some incursions into the states’ domain, it would be able to find additional funds for its own responsibilities.

But isn’t the Centre showering generosity on the states by allowing 42% of its revenues to be devolved to them, after the recommendation of the 14th Finance Commission? There is no Central large heartedness involved. Certain taxes are best collected at a national level and distributed across the states, because the underlying revenue base is not specific to the state or states from where the Centre collects the tax but could involve all the states.

Take a large fast-moving consumer goods company, like Hindustan UniLever or ITC, or automobile company with sales across the country. Its revenues come from consumers across the land. But it will pay its income tax in the state where it has its registered headquarters. Does the state where the taxes are collected but contributes only a fraction of its revenues have any superior entitlement to those collections?

An industrialist in Madhya Pradesh imports power turbines, which are unloaded at Mumbai, where the customs duty on the turbines is also paid. The power plant sells power to utilities in, say, three other states. Should the customs duty go to Maharashtra alone, or to MP, or be shared among all the states involved in the import? The states involved in the import would go beyond the five states enumerated, if we also take into account the geographical distribution of the customer base served by the direct consumers of the utilities in question, to service whom the turbines are imported.

Income taxes and import duties are best collected by the Centre and shared with the states. How much should be shared with the states and how large the share of each state in the shareable pool of taxes should be are determined by the Finance Commission appointed every five years, as per the Constitution. The monies the Centre devolves to the states do not represent the Centre’s benevolence but the outcome of a rational way of collecting some taxes and distributing them across the land.

But wasn’t the 42% recommended by the 14th FinComm a big step up from past practice? Not really. The period of the 14th FinComm started when planning was abandoned and the item of central transfer to the states called the Centre’s support to state Plan disappeared. If we add up devolution from the shareable pool of taxes and central Plan support to the states in the pre-14th Finance Commission period, that came close to 42% of the taxes collected by the Centre.

The proposal to truncate the divisible pool by setting aside a share of the taxes for defence and sharing with the states only what remains violates the constitutional scheme of dividing responsibilities and revenues, to the detriment of the states. 

Don’t the states gain from national security? Further, a part of the central security expenditure is on internal security. So, why shouldn’t they share the cost of financing the security forces?

The Centre would be perfectly justified in billing the states for the expenditure on paramilitary forces deployed in the states at the request of the state government. The Election Commission does this, when conducting elections. But the Centre should raise the finances for shouldering the responsibilities assigned to it in the Constitution, of which Defence is one.

By modernising the defence forces and changing service rules, the government can save a lot of money, and the savings can be used to augment the budget for equipment purchase.

A beginning has to be made with slashing the pension bill. Salaries and pensions eat up the bulk of the outlay on defence, leaving not enough for buying tanks, missiles and ships.

The system of army officers being waited on hand and foot by orderlies, ordinary soldiers who often cook for the officers, walk their dogs, tend to their gardens and run personal errands, is a colonial hangover. Dispense with it. Our officers can polish their own boots — Abraham Lincoln is reported to have inquired of a visiting dignitary, who expressed surprise at the president shining his own shoes, as to whose shoes the dignitary polished, if not his own.

The Prime Minister recently called upon the three forces to act in a more integrated fashion. This is the trend all over the world. The way modern warfare is conducted calls for unified command of land, air and naval forces. If we conceive of our armed forces as not three separate wings, each an independent republic of its own, but as different strike capabilities of a single force, we would enhance our fighting capability and eliminate huge bureaucracies and associated cost padding.

China has reduced its troop strength significantly, by half, according to some reports, not as a gesture of disarmament, but as part of enhancing strike capability, by integrating command and freeing up funds from personnel to armament.

Indian defence expenditure is disproportionately on pay and pensions, and too little on equipment. The way to reduce this imbalance is not to squeeze the states’ ability to spend on health and clean drinking water, but by switching the defence forces to a contributory pension scheme and reducing the service life of non-commissioned soldiers to seven-eight years. During this crucial early period of their working life, the recruits should pick up valuable skills that would stand them in good stead when they enter the civilian workforce. The government could, further, institute a scholarship scheme for soldiers leaving the force, for them to acquire additional education and training. Their pension pot, given an initial boost by government contributions, would grow steadily thereafter, according to the kind of work they join.

No army of any nation with an economy that has the size and complexity of India’s imports so much of its defence equipment as India does. Start advanced defence production in India, in the public sector, the private sector and in joint ventures. This would cut the cost of procuring kit significantly, and give a technological boost to civilian industry as well.

Reform on these lines calls for political courage and imagination. Robbing states of their rightful resources is the easy way out.