Saturday, August 13, 2022

Financing Defence Forces: Can a new Indian Defence Finance Corporation offer a solution?

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New Delhi: India is one of the largest defence forces in the world and maintaining plus upgrading such a huge Army is not an easy task, especially in terms of finances. Over the years, the defence budget has been shrinking. In fact, the Defence Ministry budget (minus pensions) for the running fiscal is the lowest since the 1962 India-China War. 

Let us try to understand the defence budget for FY21. On February 1, incumbent Finance Minister Nirmala Sitharaman allocated Rs 4.71 lakh crore to the Ministry of Defence (MoD). The MoD budget has three components which include Defence Services Estimates (DSE), Defence pension and MoD (civil). The DSE primarily deals with the expenses of the three armed forces and the Defence Research and Development Organisation (DRDO) and is considered as the country’s de facto defence budget. 

On breaking up these components, the allocation for FY21 stood at Rs 3.23 lakh crore for DSE (69 percent of the total defence budget), Rs 1.38 lakh crore  (28 percent) for Defence pension and Rs 14,500 crore for MoD civil (3 percent). If we compare the last three years since FY19, it can be deciphered that the share of DSE, which manages the operating expenses and capital needs of the defence services, has tanked while the component of defence pension has jumped in percentage terms. This essentially means lesser money for the defence forces for its operating expenses and, more importantly, its capital needs. 

Now let’s shift our focus to MoD’s resource requirement against allocation. Since FY14, MoD’s gap between resource requirement and allocation, which temporarily contracted from a high of 27 percent in FY14 to 14 percent in FY16, has increased to 30 percent in FY19 and 25 percent in FY20. This means there is a huge gap in what the defence forces are asking and the actual amount they are getting to fulfill their requirements. This lack of budget allocation severely cripples the ability of India’s defence forces. For instances, the capital budget allocation for Indian Air Force, which had a tough time after the Balakot airstrike in containing Pakistan Air Force’s attack on February 28, 2019, has been cut by Rs 1,200 crore, clipping its wings to go for further upgrades. 

Is there a way out for the MoD to ramp up finances on its own? Possibly Yes. To understand how, we need to go back to history. The Indian Railways was also facing a similar problem in the 1990s. Being the cheapest mode of travelling, Railways was expanding to every corner of the country and was desperately in need of funds. The Finance Ministry’s inability to fund the expansion of Railways prompted the ministry to create Indian Railway Finance Corporation (IRFC) with the objective to “mobilise resources through market borrowings from domestic as well as Overseas Capital Markets at the most competitive rates & terms.”  Former HAL Chairman RK Tyagi also bats for this idea. He says, “The time has come to create an Indian Defence Financial Corporation (IDFC), in line with IRFC, to mitigate the financial woes of the defence forces. In past, Railways had the same problem of lack of funds for which they created IRFC.” 

He further adds, “The model could also be similar to IRFC, where it raises money from the market at a cheaper rate via selling bonds. It funds the Railways’ capital expenditure and charges a nominal fees.” On being asked about the sources of funds for IDFC, Tyagi said, “Banks are sitting on huge piles of cash. Data shows that Indian Banks have parked around Rs 8.42 trillion with the Reserve Bank of India as on April 30. The appropriate usage of funds would not only help the defence forces ramp up its finances but also support MSMEs and create jobs.” 

(PSU Watch– India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy is now on Telegram. Join PSU Watch Channel in your Telegram and stay updated)

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