Agnipath: Fiscal relief to help boost capital expenditure

Agnipath, India’s novel push to lower the median age of its armed forces, will have a salutary impact on government finances in the medium term, creating more space for much-needed capital expenditure.

With so-called Agniveers, military recruits under the initiative, expected to make up half the 1.2-million-strong army in about a decade, it will help lower pension and wage bills.

The Centre’s finances have come under even more stress since the coronavirus pandemic hit in 2020, pushing up borrowing costs, especially now as global and domestic monetary policies tighten.

At the same time, India has been seeking to boost domestic manufacturing across sectors, including defence, offering a slew of incentives.

Fiscal impact  

Under Agnipath, the armed forces will recruit 46,000 people this year, who will each have a four-year service tenure. Up to 25 percent of each batch of Agniveers could be enrolled in the regular cadre of the armed forces.

Recruits under Agnipath will be paid Rs 30,000 per month, including benefits. The salary will rise to Rs 40,000 in the fourth year. The government will also contribute between Rs 9,000 to Rs 12,000 per month per recruit as its contribution to the so-called Agniveer corpus, which will be paid out at the end of four years. No gratuity or pensionary benefits will be offered.

Recruiting a high number of people will be a tough task, but if the targets are achieved, “it will have a significant fiscal impact,” said Sunil Kumar Sinha, principal economist at India Ratings & Research.

The armed forces’ pension bill has ballooned, rising four-fold over the past decade. For the current financial year, the government has budgeted Rs 1.2 lakh crore for defence pensions, or 23 percent of the total allocation for the ministry of defence.

Army's preeminent 

The Army makes up most of the pension bill. For this current financial year, the Rs 1.03 lakh crore budget allocation for the Army is 17 times that for the Navy and nine times that for the Air Force.

As recruitment under Agniveer takes off, the incremental pay and allowances bill could also ease.

Again, the Army makes up a bulk of the pay and allowances bill, with a Rs 1.07 lakh crore allocation for 2022-23, followed by Rs 18,345 crore for the Air Force and Rs 9,133 crore for the Navy.

Also read: Agnipath, mass recruitment drive reflect Modi government’s commitment to job creation

Capital outlay 

Note that the three forces also employ civilians whose wage bills are in addition to these.

On the other hand, the targeted capital outlay for the ministry of defence in the current financial year stands at Rs 1.52 lakh crore, only double what it was 10 years ago.

In a tweet on June 14, Finance Minister Nirmala Sitharaman wrote that the nation “will benefit from the availability of a well-disciplined & skilled youth with military ethos in civil society, which will go a long way in nation-building.”

Whether or not that is actually the case, the Agnipath scheme could go a long way in easing fiscal pressures and help in redirecting government expenditure to what it may consider more productive spending.