Sunday, Sep 25, 2022

Agnipath–Heavy Hammer Perhaps, But Defence Has No Margin For Bolshoi Ballet Anymore

Given the dire state of military budget finances and the heightened challenges to national security, a radical break top-down driven approach was a necessity for yesterday

Indian Army personnel on Rajpath on 26 January 2022 PIB

“Unhappy the land that has no heroes!” –cried Andrea (Galileo’s disciple) in Bertolt Brecht’s iconic Life of Galileo. In India, the military has been canonised as a consensus hero of the nation, with a public consensus of doing whatever it takes to maintain the edge of the institution.Any change that seems to disturb the status quo, like the new Agnipath programme, invariably runs into a firestorm of controversy. 

Reality Check – Defence Budget Is Awash With Salaries And Pensions

India is one of the largest military spenders in the world, with an absolute amount that is third only to US and China. Despite such high absolute spending, they never seem to be enough to meet burgeoning national security demands. A big reason for that is the lack of informed honest conversation, very often papered over under architecture of myths. 

Myth 1 – India Spends Too Little On Defence

At a little above 2%, India ostensibly spends too little on defence. The reality is, that is pretty much the standard level globally. Most European countries are far below that level, as are most Asian countries. China is well below – at ~1.7%. countries that are conspicuously above that level – US, Russia and Israel – have large domestic military-industrial complexes that feed off the budget, unlike India’s import-dominated spends. 

The metric itself is rather skewed though, as spends are more a function of affordability than aggregate national incomes. Richer countries with higher tax bases can afford to spend more. Egypt and Indonesia, countries at India’s ballpark levels of per-capita incomes, spend only ~1% of GDP on their militaries. Already, the defence allocation takes up 13-14% of the Union Budget, the second-highest allocation after debt servicing. Any more, as is the common refrain, and a broken fisc will be inevitable. A broke economy and state represent the biggest national security threat, as the experience of the USSR clearly shows. 

Myth 2 – Defence Pensions Are Manageable, And All We Need Is A Higher Allocation For Capex

Basic numbers are in order. In the last 10 years ending FY23, India’s GDP has grown 164%. The defence budget, in the same period, has grown 172%. Within the budget though, pensions have grown 226%, while capital outlay (acquisition of new equipment and modernisation) has grown 81%. “Spend more”, beyond a limit, is rhetoric rather than strategy.

Among India’s military commentariat, dominated by retired generals, the general sense (pun entirely intended!) is Defence Budget and Defence Pension Budget are two independent variables, and funding one should not influence the funding for the other. The issue is, money is a finite commodity, and something has to give in order to fund something else disproportionately. As pay and pension have grown as a proportion of total allocation – today they account for 54% of the total defence budget, the share of capital expenditure and stores have dwindled now accounting for barely 35% of the budget.

The natural zero-sum balance is clearly and starkly visible. A remarkable point here is the proportion of stores – essentially reserves of ammunition and spares – has nearly halved as a proportion of total expenditure in the budget. No wonder, after almost every flare-up on the borders, there is a flurry of activity around “Emergency Procurements” of crucial ammunition and spare reserves, with teams dispatched to distant suppliers in Russia, Israel and Europe to stock up on the same. Competing pressures of pay/pensions and large ticket capital equipment mean the military is often not equipped enough to fight intense battles for more than a few days. 

Myth 3 – Large Part Of Pension Budget Is Paid To Defence Civilians

While data on the share of civilian staff in the pension budget stopped being published in the Union Budget documents since 2016, there is very little validity of this claim, basis data already known. As per the last published data in FY 2016-17, the civilian share was only 20% of the total pension budget.

Since then though, two things have happened. First, civilian employees have moved to the Defined Contribution NPS scheme, which caps pension liability of the government to a defined level, linear to the salaries paid to the employees. Second, military personnel have moved to the OROP scheme – a price and wage inflation-indexed Defined Benefit pension plan – that makes pension liabilities near-exponential over a period of time.

Putting both together, the share of civilians in pension would have declined substantially lower than 20% today. In a context, the share of civilian salaries is <10% of the total salary budget of the military. Ergo, there is no great slack on the civilian side of things. 

Myth 4 – Large Chunk Of The Defence Budget Is Surrendered Every Year, Unspent

One-off exceptions are not the rule. While there has been the occasional year when the actual expenditure has been less than the budgeted number, most of the time the actuals have exceeded (or remained at) the budgeted number.

As can be seen in the graph, over the last 10 years, the aggregate spends have far exceeded the budgeted spend. 

What Is The Real National Liability Of Defence Pensions?

In 2016, Prof. Ajay Shah, then of NIPFP, attempted an actuarial estimation of the debt liability arising out of the military pension, especially in light of OROP. Using a fairly realistic set of assumptions – inflation assumption of 4% (in line with RBI’s Inflation Targeting mandate), a wage growth assumption of 4%, UN Health charts on mortality and a pensionable start age of 35 years (as most personnel retire between the ages of 35 and 39 today), the national debt required to fund a pension annuity was calculated.

The results were stark –for a notional 1 rupee/day DB pension, the corpus that needs to be put away notionally to fund it is ~ Rs15,000. To put this in context, to fund roughly Rs 1.2 lakh crore of pension in FY22, the putative national debt to fund this annuity is ~ Rs 50 lakh crore. And the number increases near-exponentially over time. For context, that is 40% of the outstanding public debt of India. In short, such a runaway DB pension programme is saddling future generations with a much bigger headache than what we are encountered with today. 

Agnipath – Perhaps Not Perfect, But Time For The Search For Perfection Is Long Gone

It is quite evident, notwithstanding rhetoric on all sides, that something has to “give”, the budget has to be unburdened of its pay and pension weight. Converting the military into a mix of temporary Tour of Duty (TOD) personnel and permanent enlistments is the solution that the politico-military establishment has decided to be the most practical, today. Can there be finessing of the programme as it goes on? Absolutely. Are there gaps and loopholes in the current avatar? Most likely, like in everything else in life. Can it wait for some more time? The answer to the last question is, not if we don’t want to jeopardise India’s security irretrievably and structurally.

World over, militaries are conservative organisations, slow to adopt change. It often needs a hefty political push – The Goldwater-Nichols Act in the US to restructure the command structure of the US military is a case in point. Given the dire state of military budget finances and the heightened challenges to national security, a radical break top-down driven approach was a necessity for yesterday.

(The author is the Managing Partner and CIO, ASK Wealth Advisors. The views and opinions expressed in this article are personal.)