Draft cabinet note based on ministry’s comments is undergoing inter-ministerial consultations, but Department of Military Affairs had said selling land alone wouldn’t be enough

New Delhi: The Ministry of Finance has pegged monetising defence land as the only way to generate revenue for the proposed non-lapsable modernisation fund.
According to government sources, a draft cabinet note on setting up the defence modernisation fund is currently undergoing inter-ministerial consultations, and a final decision is expected soon, following which it will be placed before the Narendra Modi cabinet for approval.

The Controller General of Defence Accounts (CGDA) and the Directorate General, Defence Estates (DGDE) have also been entrusted to carry out the task of a realistic assessment of surplus defence land available for monetisation, the sources said.

The concept of a non-lapsable defence modernisation fund is not new. In the interim budget of 2003-04, then Union finance minister Jaswant Singh had announced such a fund of Rs 25,000 crore, which would be made available to the defence ministry. However, in the subsequent years, the finance ministry had repeatedly objected to setting up the fund.

The fund has now been recommended again by the 15th Finance Commission, which made its report public on 1 February this year. The same month, Finance Minister Nirmala Sitharaman said her ministry had agreed in-principle to the fund. “The modalities and the structure will be worked upon,” Sitharaman had said in the Lok Sabha.

Only One Source of Revenue Recommended

The Finance Commission had suggested several sources of revenue, including disinvestment proceeds of defence public sector enterprises (DPSEs) and receipts from defence land — to be transferred to state governments and for public projects in future — for this new fund.

The sources said other avenues discussed in the government included levying a defence cess for a certain period, defence bonds, proceeds from defence exports, tax on certain strategic projects, and reimbursements from aid to civil authorities, among others.

However, the sources said the other suggested sources of revenue are unlikely to be included, as the finance ministry has only recommended monetisation of defence land.

The finance ministry has said all proceeds from defence land monetisation will be received in the Consolidated Fund of India, the sources said. Half of such receipts will be transferred every year to the non-lapsable fund, it has recommended.

The new fund, the ministry has said, will be created in a public account and transfer of money will take place after parliamentary authorisation through ‘Demands for Grants’ by the defence ministry.

The finance ministry also said the money from the modernisation fund would be spent on modernisation projects only after the allocated capital budget is exhausted. Whatever is left over after deducting the amount for modernisation projects will be used for construction of family accommodation for defence officials, purchase of indigenous defence stores and logistics, a defence source said.

Alternative Funding Sources Could Be Needed

A senior government official familiar with the matter said just monetising surplus defence land is unlikely to keep the fund going in the future, and other sources of revenue need to be considered.

“Defence land is a finite source of funding, and the roll-on fund needs to keep going even after the defence land is exhausted,” the official said.

“Moreover, the majority of defence land belongs to the Army, whereas the proposed modernisation fund is for all the three services,” the official pointed out.

The Department of Military Affairs, headed by Chief of Defence Staff Gen. Bipin Rawat, had told the government last year that that proceeds from defence land monetisation would be barely adequate to meet the armed forces’ requirements, a defence source said.

The DMA had also highlighted that the capital budget of the defence forces is inadequate to meet their committed liabilities, and objected to 50 per cent of the funds from defence land monetisation going to the CFI.

“DMA also suggested that the condition that such funds will go back to CFI in case of non-utilisation in three years also needs a relook since defence planning and acquisition takes time,” the source said.

Other recommendations made by the DMA included setting a minimum limit for the fund at Rs 65,000 crore, and include alternate sources. However, a second official justified the finance ministry’s recommendation, saying monetising defence land is just a start, and that other suggested sources of revenue are also not infinite.

“There is no point in parking additional money in the fund if the existing corpus is not utilised. The idea is to start with defence land monetisation first, which itself will be a long and tedious procedure,” the second official said. “Other recommendations like cess are not an option, as states would object to it.”

The first official quoted above said while a blanket defence cess is not a good idea, the government could explore cess on customs duty or defence exports to boost self-reliance in defence.

Why Defence Modernisation Fund Is Needed

The fund was recommended keeping in mind the emerging needs for modernisation of the defence services, in the wake of a consistently-declining defence budget in the last few financial years. For 2021-22, the defence budget stands at Rs 4.78 lakh crore — way short of the three services’ budget projections based on their committed liabilities.

The Navy, which had projected a requirement of Rs 70,920.78 crore for 2021-22, was allotted less than half — Rs 33,253.55 crore.

The Army had projected a need for Rs 51,492 crore for modernisation, but got only Rs 36,531 crore, while the Air Force, with a projection of Rs 77,140 crore, got Rs 53,214.77 crore.