Centre wants states to spend on defence, moots non-lapsable fund for armed forces

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Published: July 22, 2019 7:18:40 AM

The Centre has also increased the cesses and surcharges, the proceeds of which are not required to be shared with the states.

The Centre spent about Rs 92,000 crore on central para military forces in FY19 but only 10% of that was on capital assets creation.

The Centre, it is learnt, is keen that state governments pitch in for boosting capital expenditure on defence to better equip the country’s armed forces. The desire for this radical change in defence funding, officials said, was behind last week’s Cabinet decision to widen the 15th Finance Commission’s terms of reference (ToR) “to ensure an assured allocation of resources towards defence and internal security imperatives”.

The commission was also asked to examine whether a separate mechanism for defence funding (a non-lapsable fund) ought to be set up and the ways to operationalise the same. The move may, however, face stiff resistance from states as it might lead to a reduction in their autonomous space to decide what the tax resources received from the Centre be spent on. “When the divisible pool is divided between the Centre, States and Union Territories, the Commission may see whether some amount can be set aside for the defence forces. This is the idea (behind the ToR expansion),” an official told FE.

The 14th Finance Commission (FY16-FY20) had hiked the states’ share in divisible pool of taxes to 42% from 32%. However, the Centre’s overall transfers to states haven’t since grown at a pace faster than the Central budget size or its net tax receipts did. This is because the transfers under Central-sector and centrally sponsored schemes have been slashed in recent years. The Centre has also increased the cesses and surcharges, the proceeds of which are not required to be shared with the states.

On the Centre’s mind, sources said, is a non-lapsable defence capital fund account akin to a similar fund that has been in existence since 1998-99 for the North Eastern region. The parliamentary standing committee on defence had earlier recommended such a dedicated fund in the public account for defence capex. The idea is to enhance and heighten the operational preparedness of the defence forces and ensure that procurement of equipment, arms and ammunition for them is not delayed due to lack of finances.

Even as the Centre’s budget grew on an average of 11% between FY16 and FY20BE, the defence capex has grown by only 7%, hindering/delaying crucial weapon acquisition by the armed forces. Defence capex at Rs 1.03 lakh crore was only 23.5% of defence ministry’s budget of Rs 4.3 lakh crore (includinf defence pension and civil expenses) in FY19 and 33% of total defence budget (revenue and capex) of Rs 3.05 lakh crore. The Centre spent about Rs 92,000 crore on central para military forces in FY19 but only 10% of that was on capital assets creation.

The parliamentary panel found that against a projection of Rs 1.6 lakh crore for capex for FY19, only Rs 83,434 crore, that is 50% less, was allocated in the FY19BE for the defence services (Army, Navy, Joint Staff and Air Force). After examining the past trends, the panel said the lower budgetary allocations vis-à-vis the projected amounts appear to be a norm rather than an exception, probably affecting adversely capital equipment acquisition plans by the ministry of defence.

Last year, nearly half a dozen states, including Andhra Pradesh and Kerala, had opposed the 15th FC’s ToR, which mandated the use of the population data of 2011, instead of 1971, to compute the inter-se shares of states from the central tax kitty. These states fear losing out as their population growth rate is below the replacement rate of growth.

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