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Home >Opinion >Columns >The challenge of ballooning defence pensions in India

The Union budget was rightly praised for its honesty and transparency, for its boldness in ignoring the largely unfounded fear of a sovereign credit rating downgrade, and also for its clear articulation of a privatization strategy. Of course, much euphoria was on account of the relief of no new taxes, not even a covid cess, nor a wealth tax on the super-rich. But as the dust and euphoria settles, a sober examination of the budget is necessary. Can the large deficit be funded without causing interest rates to go up? Will its fiscal stimulus have a multiplier effect on aggregate growth?

In the aggregate, the increase in total spending is hardly 1% over the previous year’s. So the budget is not really fiscally expansionary. Of course, its sub-component of capital spending on infrastructure has gone up considerably, which will catalyse private investment spending. But this increase has been made possible by cuts in its allocation for fertilizer subsidies and the rural employment guarantee scheme.

More worryingly, the allocation for defence is nearly stagnant at a time when we face Chinese aggression on the border. Pensions are the fastest-growing component of defence spending. In the past 10 years, the share of India’s defence budget going toward pensions has risen from 18% to 28%, and is slated to be nearly 1.15 trillion next financial year. Even this number is probably under-provisioned, as the Centre may be deferring certain pension obligations till future years. As the pension burden has ballooned, one casualty has been capital spending on modernization and the procurement of hardware, tanks, aircraft and ships. The share of capital spending on hardware in the defence budget has gone down from 27% to 19% in 10 years, almost a reverse trend of pension payments. Quite possibly, the present defence budget pays more to retirees than personnel in active service.

Pension reform is hard even at the best of times. But when it comes to defence personnel, it is harder, since it becomes an emotive issue. India has the world’s largest volunteer army. The military force has 1.4 million active personnel and 2.1 million in reserve. Every year, more than 60,000 personnel retire. Most of them are in the 35-45 years age bracket, with a possibility of 20-30 years of active service ahead of them, if gainfully employed. This is because unlike other professions, the armed forces allow you to retire with full pension benefits after 20 years of service. Less than 3% of the personnel are commissioned officers who make it to the senior-most ranks. Even among officers, there is a steep and narrow pyramid of career progression. Many among them choose to retire well before they hit their late 50s. Thus, most of the retirees are a young cohort.

This cohort constitutes a valuable pool of strong, relatively young, disciplined, trained and dedicated personnel. They can be loyal and highly productive employees or successful entrepreneurs. Given an opportunity, they could be successful in wide-ranging careers, such as general administration, management, even sales and marketing. Alas, most recruiters see them as potential personnel for security duties only. This is the bane of most retirees (jawans) from the Indian armed forces.

It is worth remembering that the ‘One Rank One Pension’ (OROP) plan was approved by the Union cabinet back in September 2012. This had been a long-standing demand of ex-servicemen. This meant that personnel retiring at the same rank with the same length of service would get the same pension, irrespective of their date of retirement; and any future rise in the pension rate is automatically passed on to all past pensioners.

In many ways, this becomes an open-ended and perpetual obligation, and will form an ever-increasing share of the defence budget. The charter of the 15th Finance Commission had included a requisition to make a provision for a non-lapsable fund that could be rolled on from year to year. But this too would not solve the problem.

Many countries, especially the ageing societies of the West, and even those like China, are struggling to find a pension system that is adequately funded. For developed economies, the large size of the government’s budget is nothing but social security payments, which are recycled from the working young to the retired elderly. India has had a reasonably good national pension scheme since 2005, which is based on a defined contribution. But for defence personnel, given the peculiarity of retiring at a relatively young age, the problem is acute.

A very effective and workable solution is proposed by Lt. Gen. (Dr.) Prakash Menon and Pranay Kotasthane in their paper titled ‘A Human Capital Investment Model for India’s National Security System’ (September 2019). It involves lateral and circular flows of servicemen from internal security forces to the armed forces and back. Army personnel can be deployed for the ever-increasing needs of internal security too. These could also be agencies such as the National Disaster Response Force, Civil Defence Corps or the Home Guards, all of which are severely understaffed.

The authors show that the present value of pension savings could be more than 1.2 trillion, which could go a long way in meeting the challenge. This well thought out solution does not entail reducing benefits in accordance with the age of retirement, as is currently being contemplated. It is high time that our fiscal authorities bite this pension reform bullet.

Ajit Ranade is chief economist at Aditya Birla Group.

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