Implementing the DMF would be tantamount to duplicating prevalent budgeting procedure, but expecting a different outcome.
THE issue of instituting a rollover
or non-lapsable Defence Modernisation Fund (DMF) to upgrade India’s three Services, mooted in 2004, remains a work in progress 19 years later. Replying to a question in the Lok Sabha last month, Minister of State (Defence) Ajay Bhatt stated that a ‘special mechanism’ was underway to operationalise the DMF, but did not elaborate when this long-promised undertaking would be put in place.
The decision to introduce a Rs 25,000-crore non-lapsable DMF was first announced by then Finance Minister Jaswant Singh in the NDA government in his interim 2004-05 Budget, to ensure ‘committed availability’ of monies for materiel procurements. At the time, Jaswant Singh had argued that a DMF would ‘commit availability of adequate funds’ as the process of defence procurement often extended to over three years. The fund was to be operationalised from the ensuing financial year.
But the NDA lost the General Election soon after, and the DMF provision was summarily dropped in the Budget presented by Jaswant Singh’s successor from the Congress-led UPA that assumed office in mid-2004.
This should have sounded the death knell for the DMF, but it captured the imagination of successive Parliamentary Standing Committees on Defence (SCoDs), which continued to doggedly pursue it and demand its imminent establishment. The SCoDs insisted on a DMF with ‘committed allocations’ for a five-year period since ‘lapsing of funds year-after-year (had) greatly hampered (the) procurement of defence equipment and modernisation of the defence forces’.
The proposal for creating a non-lapsable DMF had emerged following the Services’ inability to annually expend their capital budget allocated for modernisation which, between 1999 and 2004, had cumulatively amounted to Rs 20,217 crore, or nearly 22 per cent of the overall outlay committed to this end. This lapse, however, was due primarily to the military’s ineptness in fast-tracking acquisitions, of which their vast ‘overreach’ in equipment specifications was one of the several culpable shortcomings.
But badgered over years by an influential number of serving and veteran military personnel, the SCoDs erroneously and somewhat naively assumed that this ‘surrender’ of unspent balances at the end of each fiscal could be circumvented by transferring these amounts to a non-lapsable DMF. This prospect also excited the armed forces, who too mistakenly believed that such a fund could be dipped into at will, much like an ATM, to effect acquisitions over and above the allocated annual defence outlay.
This belief, however, remains flawed for multiple systemic reasons.
Constitutionally, all revenue from taxes, loans, disinvestment and analogous sources, aggregated by the Government of India, accrues to the Consolidated Fund of India (CFI), and no monies can be appropriated from it, even for beefing up non-lapsable funds, without parliamentary approval. This is how other non-lapsable funds, like the one for the northeastern states, work and the reality is that Parliament cannot be bypassed to replenish, access or establish such funds at will.
These contrary arguments were presented by the Defence and Finance Secretaries to the SCoD between 2004 and 2006, but to no avail, and the latter continued to insist on founding the DMF. In fact, in 2017, the SCoD reiterated that it was ‘imperative’ to institute such a fund ‘for enhancement and heightened operational preparedness’ of India’s military.
Thereafter, PM Narendra Modi’s BJP-led government responded by referring the matter to the Fifteenth Finance Commission (FC), which too recommended the DMF’s formation in its 2020 report, but its implementation obviously stands deferred. This is so probably because the DMF’s overall rationale and utility were still being internally debated, even though there was no legal impediment in its founding.
The FC had also recommended that though the bulk of the DMF’s corpus would be sourced from the CFI, it would marginally be supplemented by disinvestment in Defence Public Sector Undertakings (DPSUs) and via monetisation of surplus defence land, with an annual cap of Rs 51,000 crore on all such transfers. But analysts pointed out that since DPSU disinvestment and land monetisation could not be a regular revenue source, the burden of underwriting the proposed DMF would then inevitably fall to the CFI which, ironically, was the original source for annual budgetary allocations anyway, bringing matters back to square one.
In the meantime, the original rationale for launching the DMF had become infructuous, as the Ministry of Defence (MoD) had largely been expending its annual capital outlay, as evident from the available data for three successive years between 2019 and 2022. This, in turn, obviated the requirement for introducing a rollover account.
Alongside, elementary monetary logic too dictated that if the CFI, in the first instance, was capable of financing the non-lapsable fund, surely it could afford to make budgetary allocations of comparable amounts each year without routing it through a DMF, considerably complicating matters by adding yet another layer of bureaucracy to an already hidebound structure.
While deposing before the SCoD in 2006, then Finance Secretary Adarsh Kishore had summed up the DMF conundrum by stating that though no major conceptual problem existed in setting it up, the armed forces would not be ‘particularly happy’ if it was initiated, as all existing procedures that related to the yearly budget would, perforce, apply to operate it since Parliament could not be bypassed in this regard. Therefore, implementing a DMF would be tantamount to duplicating the prevalent budgeting procedure, but miraculously expecting a different outcome in its add-on DMF avatar.
Hence, it’s little wonder that the DMF proposal remains stillborn, as few in the government have any inkling regarding its final contours. But it’s immutable that DMF in any form would have limited, if any, use as the bulk of its finances would inevitably come from the CFI and their utilisation would always be subject not to MoD’s discretion, but to parliamentary sanction.
In short, the DMF is not the panacea for the problems concerning India’s military modernisation, but something more fundamental is — addressing the enduring financial resource crunch.