Military should fund its own modernisation

Source: Business Standard  

Relevance: The issue justifies a case of modernization of the military by itself.

Synopsis:

The threat of a two-front war creates an urgent situation to modernize the military which requires enhancement of the defence budget. The additional revenue can be generated by levying a military modernization cess, leasing military lands, or disinvesting some ordnance factories.

Background:

• The intrusion of Chinese soldiers across the Line of Actual Control (LAC) in 2020 brought the Indian military inched closer to its worst-case security contingency. It was on the verge of a two-front confrontation with both China and Pakistan.
• There is a situation of peace after the renewal of the ceasefire agreement on the India-Pakistan Line of Control. Further, the PLA is also quiet after largely achieving its operational objectives in Ladakh.
• Nonetheless, the threat of a two-front war is still looming, which creates an urgency to modernize the military. However, this can be done only with an enhanced defense budget.

Pattern in the allocation of defense budget:

• There is a dire shortfall of funds for capital purchases. The government has been allocating fewer resources for capital expenditure than demanded by the military since 1992.
• Each year, the military calculates its Capex requirements for the coming year and projects its requirement to the Ministry of Defence (MoD). 
• The MoD projects this onwards to the Ministry of Finance (MoF). Then, without assigning reasons, the MoF slashes the military’s requirement and allocates a smaller capital budget instead.
  • The current defence budget was presented in the backdrop of an ongoing conflict between Indian troops and the PLA in Ladakh. 
  • The MoF still slashed the military’s Capex projection of Rs 199,553 crore by a whopping 38 percent (Rs 76,553 crore), allocating just Rs 123,000 crore.

Why is there a cut on defence expenditure every year?

• First, governments have operated on the assumption that a full-scale war was highly unlikely and, therefore, equipment modernization was wasteful. 
• Second, Border conflicts, such as the 1999 Kargil war, the 2017 Doklam confrontation, and the ongoing Ladakh intrusions are not serious enough to make equipment modernization an imperative. 
  • If things go wrong, such as in Kargil where the army was caught without 155-millimeter artillery ammunition for its Bofors guns, we rely on friends like Israel to bail us out. 
• Third, the political-electoral calculus favors the spending of thousands of crores on vanity projects such as Sardar Vallabhbhai Patel’s statue in Gujarat and the redevelopment of the Central Vista in New Delhi. 

Need to increase defense expenditure:

• First, the revenue heads, which include salaries, pensions, and the forces’ operating expenses, are already catered for before allocating money to the capital budget head. 
  • Therefore, any increase in the defence budget would be an increase in the capital budget. 
• Second, making a capital purchase usually requires only 10-15 percent of the total cost to be paid up-front. The remaining amount is disbursed over a five to seven-year period, as the product is manufactured and delivered.
  • Therefore, the army, navy, and air force can fill critical deficiencies of fighter aircraft, artillery guns, and submarines with just 1/10th of the total amount.

Ways to generate revenue for incurring greater expenditure:

• First,  Goods and services tax (GST) could be increased by 1 percent in all slabs as a military modernization cess. 
  • Further, much of the education cess on income tax remains unutilised. It can be reduced by a percentage point and a 2 percent cess for military modernization could be levied. 
• Second, if increasing taxation is unacceptable, the defence services could monetise some of its 17 lakh acres (2,833 square kilometres) of defence land. 
  • However, real estate has created a chequered history of controversies involving senior generals. Such as scandal in Sukhna in 2008 and the Adarsh Housing Society scam in Mumbai in 2011.
• Lastly,  MoD can do disinvestment in the 41 factories of the Ordnance Factory Board (OFB). The factories produce arms, ammunition, and equipment for the military worth about Rs 12,000 crore annually.
  • In the UK, selective privatisation has transformed a moribund public defence sector into vibrant and productive private entities. London has conveyed its willingness to share its experience and expertise with India.