by Pranab Dhal Samanta

GoI's step to amend the terms of reference of the 15th Finance Commission (FC) so as to address “serious concerns regarding the allocation of adequate, secure and non-lapsable funds for defence and internal security of India” is unprecedented. It has opened doors to previously unchartered territory — the raising of funds from other sources for India’s defence.

Until now, things were fairly straightforward. The Centre was responsible for India’s defence and would, come what may, meet the necessary needs. It was never enough. There was continuous haggling as financial stress increased with growing demands of acquiring state-of-the-art weapons and a bulging pension bill.

For a military that depends on imports for most of its cutting-edge weaponry, capital acquisition costs are usually prohibitive. The Indian defence-industry complex, for all its little successes, has failed to emerge as a credible option. And the private sector has only just been allowed to enter this pristine space. So, what we have are incredible sums of money becoming increasingly difficult to apportion.

Consider some numbers. There’s been a consistent 25% shortfall between allocations and defence ministry projections. The total projection for both capital and revenue expenditure in 2017-20, according to the defence ministry’s calculations made after changes in the FC’s terms of reference, was a little over Rs 13.4 lakh crore. What it has actually got, taking into account the last three budgets, was about Rs 8.39 lakh crore. This is an approximate shortfall of Rs 5 lakh crore.

The annual committed liabilities for all three services and joint commands, based on capital acquisition contracts signed until April 1, 2019, work out to about a little over Rs 4.91 lakh crore over next five years until 2024. And, by defence ministry estimates, the defence plan projection, both revenue and capital, for 2020-25 would be around Rs 33.8 lakh crore, while the finance ministry’s medium-term expenditure framework caters for Rs 20-21 lakh crore.

More A Cantonmint

So, it’s clear that a cumulative shortfall amounting to about Rs 13-14 lakh crore over a five-year period is imminent. To add to this, there’s the financial burden of the One Rank, One Pension (Orop), the Ex-Servicemen Community Health Scheme (ECHS), and the pressing requirements of residential quarters for married soldiers and officers.

GoI, particularly the finance ministry, will need to be pragmatic. The armed forces are, for instance, sitting on big real estate, acquired largely during British rule. These were mostly cantonment land located well outside city premises. But cities have expanded, and these cantonment areas are now prime real estate — be it in Delhi, Mumbai, Chennai, Pune, Bengaluru or Kolkata. There is a legitimate view that the military should give territory for civilian and industrial purposes. But who will get the booty?

North Block believes it belongs to the Consolidated Fund of India (CFI). South Block, particularly the forces, contest this view. They cite examples like buying armoured personnel carriers (APCs) for the Indian contingent posted at the UN Peacekeeping Force (UNPKF) in Congo. While the purchase is made from the defence budget, the UN compensation apparently doesn’t come back to the forces.

So, where to begin? What’s available upfront are huge tracts of land with military farms, which the armed forces are now shutting down. But the armed forces will resist the idea of transferring this land for civilian purposes. This stalemate will be difficult to resolve politically unless there’s an incentive built into the process.

Can the money raised from auctioning this land not be used for the military’s benefit? Back-of-the-envelope calculations suggest that up to Rs 25,000 crore can be raised from this effort. This is a healthy corpus, which could be invested in secure financial instruments, if possible.

Come to think of it, the army is assigned about Rs 10,000 crore annually for ammunition servicing as well as accommodation. This corpus could be utilised more for building accommodation for married officers and soldiers. Also, the three wings of the armed forces may want to combine their living space to occupy lesser land. It’s impractical, and constitutionally unfeasible, to think that state budgets will reflect defence expenditure.

Much as the Indian armed forces may build their case on providing security to state government assets, the fact is, it’s embarrassing for the Centre to ask states to pay up for their defence and security.

Similarly, the idea that GoI could levy a 0.5% defence cess on taxpayers may, first, require a constitutional amendment. Security is the duty of any nation state and the first right over taxes collected. Second, it’s just bad for perception. What could be done is to set aside the amount required for defence and then get the FC to devise a formula to apportion the remainder of the money between Centre and states.

Unlock The Land Bank

These are tricky questions with constitutional ramifications and may not be easily resolved. Which is why recognising the unique colonial legacy — in terms of land rights — of the Indian armed forces, and permitting them to leverage it to raise resources through, say, a special purpose vehicle (SPV) may just provide the way forward.

Considerable amount of homework has gone into this line of thinking. At a time when the government stares at a resource crunch, this may be best way to start unlocking a huge amount of real estate while addressing India’s security concerns.