Non-Lapsable Modernisation Fund for Defence Forces

 By Kanchana Ramanujam

Defence Forces are a Premier Public Good shared by Centre and States for provision of National Security. Indian Army has been at the fore front as the guarantor of territorial integrity, sovereignty and freedom against any kind of external aggression and internal threats. National Security is a top priority and is non- negotiable and therefore the undisputed need to empower the military with credible deterrence to handle two active fronts as also the internal security requirements. The security of a country should not be treated as commodity; it is a service for sure, nine out of ten times the ultimate service.

An additional compulsion for India being a Net Security Provider in South Asia, with an expanding commitment in South East Asia, needs concomitant commitment of resources. Indian Army by virtue of its geographical spread, deployment in the most inhospitable terrain and in extremes of weather, wherein, many areas remain cut-off for months at length; sustenance of troops, maintenance of weapons and equipment becomes achallenge. Equipping in time to modernise is thus a quintessential requirement especially when the technology is fast paced and is becoming the vital battle winning factor.

Defence expenditure is the amount of financial resources dedicated by a nation to raise and maintain its Armed Forces. However, there has been a progressive decline in allocation of effective budget to the defence forces and Army in particular over last few years resulting in surmounting Committed Liabilities. Defence expenditure has reduced from 11.6% of the CGE in 2018- 19 to 10.9% of CGE in 2019-20. Defence planning and capability building is a long lead activity which requires long term commitment of funds. To facilitate realistic planning which is aligned with the likely resource availability, certain predictability/ certainty in budgetary allocations is essential.

Complex procurement procedures and insufficient availability of funds over a prolonged period of time has resulted in voids in critical defence equipment and increased hollowness in arms and ammunition stocks. Indian Army’s requirement for modernisation can be meaningfully met if there is certainty in commitment of financial support to it, based on approved modernisation plans, at least for a period of five years. It is a well-known fact that despite increased employment of Indian Army in live situations along borders and counter terror environment, there seems to be a wide gap between realistic needs and plausible funds allocations. Assurance, availability, simplification of procurement procedures, resolve to support a meaningful modernisation program are the desired aspects that the defence forces look forward to. It must be appreciated that modern wars cannot be fought with vintage technology weapons and equipment.

The Parliamentary Standing Committee on Defence (SCOD), in 2003, had recommended  setting up of a Non Lapsable  Funding Mechanism  for  defence  and  internal  security  and  the  same was articulated in the interim budget presented in the Parliament in 2004-05. Thereafter, on many occasions the SCOD has flagged the issue but the idea has failed to find favour with the Ministry of Finance (MoF) though the Non Lapsable Fund was considered imperative for modern and combat ready Defence Forces. However, of late the MoD has seen the logic of building the corpus for defence modernisation and provide assured allocation to projects from inception to fruition. The term of the Fifteenth Finance Commission has been extended till November 30, 2019 and the Union Cabinet has also amended its ‘Terms of Reference’ to “address serious concerns recording allocation of adequate, secure and non-lapsable funds for defence and internal security of India.”

Creation of a ‘Non Lapsable Modernisation Fund’ would ensure procurement of equipment, arms and ammunition that is in the pipeline and are at various stages of fructification, do not get delayed because of lack of funding due to technicalities  of  rules, regulations and imponderables of financial years. The concept of a Non Lapsable Defence Modernisation Fund is premised on the assumption that the system of ‘Annual Budgetary Allocations’ and existent ‘Mid Term Review’ is not the best model to be applied to the Defence Forces. Procurement of modern defence equipment involves a long drawn out and cumbersome procedure. The requirements have to be qualified, quantified, the equipment put through comprehensive trials in summers and winters, in ‘the icy heights of Siachen as also the deserts of Rajasthan. Finally, the negotiations have to be conducted with the shortlisted vendors, which is followed by the finalisation of suppliers, placing of orders, delivery of equipment and payments to the suppliers.

Under the best circumstances, this can rarely be done during a single budget period. Further, delays occur due to cautious attitude of officials/ decision makers, as also due to election time – the dance of democracy- when everything nearly comes to a standstill. Secondly, India still imports large proportion of its defence weapons and equipment. Defence deals involve large sums of money; hence it is natural to expect exhaustive deliberations. The purchasers have to assess whether the seller would be able to maintain the supply of spares during useful life of the equipment. All this further lengthens the process of defence purchases and increases the time needed for fructification of a procurement proposal. The intent behind the proposal for establishing a ‘Non Lapsable Modernisation Fund for the Defence Forces’ is for ensuring that the money allocated for a particular item is spent on that specified item only, not necessarily in the same Financial Year.

A successful model of ‘Non-Lapsable Central Pool of Resources (NLCPR) Fund’ for development of infrastructure in NE States is already in place since 1998-99.  Ministry of Development of North Eastern Region (DoNER) gets annual budgetary allocation from MoF for funding the projects under NLCPR, Scheme. Funds under the scheme are provided by the Central and State Governments on 90:10 basis. The approved funds under the scheme are released in three instalments in the ratio of 40:40:20 for the projects sanctioned prior to the revised guidelines of 2016 based on the commensurate physical and financial progress of the projects. Adequate monitoring mechanism by constituting Empowered Committees, mile-stone based release of funds have been put in place to discourage parking of funds and fast-tracking the entire process from conceptualisation to completion of projects.

A processor arrangement for generation of funds for modernisation and development of infrastructure for defence can be conceived in consultation with the states as the states are also responsible for defence and internal security of the country. One way of generating the corpus could be by establishing a Defence Fund through contribution from the States – as security provided to the nation by the Defence Forces is not only the Centre’s responsibility, but states as well. A mechanism akin to NLCPR can also be explored by Centre and State Govts to build up a corpus. The Indian Army’s contribution towards building of the Rohtang Tunnel and many other infrastructure projects along Northern Borders which provide connectivity to the local populace can be leveraged. A toll tax kind of mechanism on these infrastructure assets can be adopted to generate additional capital for defence modernisation.

Critics not in favour of creation of a Non-Lapsable Defence Modernisation Fund may tend to argue by highlighting the perennial underutilisation of the capital outlay. The present-day realities betray this argument, since FY 2016-17 to FY 2018-19, the capital set aside for modernisation was fully utilised.  Many a times, the under utilisation may perhaps be a result of deliberate delays at the level of various Competent Financial Authorities beyond the Defence HQ.  Critics also contend that a Parliamentary approval will be prerequisite every time a withdrawal is envisaged from the corpus. This, at best, is a procedure which may have to be undertaken, if required.  The very fact that the allocation of resources under Capital Budget for the year 2019-20, which is not even sufficient to service committed liabilities at hand, leaving alone the new projects and other capital requirements strengthens the case for creation of a corpus as ‘Non Lapsable Fund’. However, any delay in procurements due to complexities involved in procedures as also due to dynamic security situation in the region that may force a change to the acquisition plan, thereby imbalancing the financial plan that may lead to under spending, should not be seen as reason for unnecessary parking of fund in non lapsable accounts. Necessary checks need to be put in place for MoD to ensure that ‘no’ funds should lie idle for more than two to three years, failing which the same can be transferred to Consolidated Fund of India (CFI) for utilisation for other priority central schemes. There is need to induct a far more superior and simpler procedure within procurement process. There is a need for policy that would take into account the Defence Forces’ needs in terms of medium and long term objectives. It is in this context a Roll On/ Non Lapsable availability of funds becomes crucial instead of prevailing year on year system.

Quoting Winston Churchill, the former British Prime Minister, “The Armed Forces are not like a limited liability company to be reconstructed from time to time as money fluctuates. They are not inanimate things, like a building to be piffled down or enlarged or structurally altered at the caprices of the tenant or the owner. They are living things, if they are bullied, they sulk, if they are unhappy, they pine, if they are harried, they get feverish, if they are sufficiently disturbed, they will wither and dwindle and almost die, and when it comes to this last serious condition, it is only revived with lots of time and lots of money”. (Churchill in the House of Commons 1923) unquote.

Building a corpus upwards of Rs 20,000 Cr will go a long way in providing impetus and continuity to the modernisation endeavours and help eliminate the prevailing uncertainty in providing adequate funds for various defence capability development and infrastructure projects.