Finance Ministry eyes new ways to boost non-lapsable defence fund

The ministry said FFC recommendations are against good parliamentary practice

The finance ministry has rejected the funding pattern of the non-lapsable defence fund recommended by the Fifteenth Finance Commission (FFC). It is instead exploring new means of funding. The ministry is of the opinion that putting money directly into a non-lapsable fund — as suggested by the FFC, bypassing annual Parliament scrutiny - is against good parliamentary practice.

“The commission’s recommendations on defence have not been accepted. The government is not likely to agree to put money from the Consolidated Fund of India into a non-lapsable fund. Traditionally, a non-lapsable fund is based on some earmarked revenue, such as goods and services tax compensation cess or health care or health and education cess. It is against good parliamentary practice that you take a vote from Parliament and keep it aside in a separate box. Every year, we must go and get that approval. It is good parliamentary discipline. But to keep an assurance of funding, we will look for an alternative mechanism to give assured funding,” said a senior finance ministry official.  

The FFC had recommended to constitute in the Public Account of India a dedicated non-lapsable fund called the Modernisation Fund for Defence and Internal Security. The intent was to bridge the gap between projected budgetary requirements and budget allocation for defence and internal security. The indicative size of the proposed MFDIS over a five-year period till 2025-26 was pegged at Rs 2.4 trillion, of which the commission recommen­ded that Rs 1.5 trillion be transfe­r­red to the MFDIS from the Consolidated Fund of India ov­er the award period of the commission.

In an amendment to the terms of reference of the FFC, the government in July 2019 had asked it to “examine whet­her a separate mechanism for funding of defence and internal security ought to be set up and, if so, how such a 

mechanism could be operationalised".

Since defence procurement and acquisition involve long gestation periods and funds allocated for capital acquisition in a particular fiscal year are returned if not exhausted that year, a non-lapsable fund is expected to ensure assured supply of funds when needed.

The main purpose of the non-lapsable fund as proposed by the FFC was modernisation of the armed forces to counter the threat of a two-front war from a belligerent Pakistan and a more assertive China. This would mean that the fund would primarily be used for capital expenditure (capex).

The idea has been mooted by the Parliamentary Standing Committee on Defence repeatedly through its various reports. While the defence ministry was initially not in favour of the proposal for constituting a 'non-lapsable defence capital fund account', it agreed to the proposal in 2017.

However, the Parliamentary Standing Committee on Defence in its report for 2018-19 stated that the finance ministry did not agree to the proposal by the defence ministry.

“It requires Parliament sanction through the Demands for Grants of the Ministry of Defence for being spent on defence capex. Hence, the mere creation of non-lapsable funds yields no additional advantage to the MoD and could rather induce complacency in incurring expenditure," it added.