The magical 2%

How much should India spend on defence?

While it is true that India’s defence expenditure has been rising over the past two decades, it is falling as a fraction of GDP. Headline defence expenditure is set to drop from 2.29% of GDP this year to 2.14% of GDP next year. Furthermore, the share of capital expenditure is set to drop from 34.7% to 33% — more than two-thirds of the defence expenditure is on “revenue” or operational expenses. Then there’s the money that the defence ministry returns back to the treasury because it is unable to spend it. Pavan Srinath points out that actual defence expenditure is 1.6% of GDP.

For many analysts 2% of GDP is a magical figure, an anchor, that is used to benchmark whether we are spending more or less that what we should.

Image: Wikimedia/Indian Navy

So where does this 2% come from? What’s its significance?

It comes from NATO. The alliance came up with that number to ensure that each member of the alliances pays its fair share of the costs of defending the West. The United States was especially keen that NATO member states do not free ride on its own contributions. I’m not sure how the 2% figure was arrived at, but it’s usefulness lay in the fact that each member-state had to spend a minimum amount on (collective) defence. (James Mattis, the new US defence secretary, has just warned NATO that many of its members have not met this target)

Clearly, it does not follow that India must spend 2% on defence. However, because spending has been around that mark for several years, it has ended up becoming a traditional norm. So we have the absurd situation where our defence spending levels are anchored to an arbitrary 2% of GDP that lacks a sound analytical basis.

The problem is that we do not yet have a better way to do decide how much to spend on defence. In theory, an approach based on making long-term strategic threat assessments, and working backwards to identify what capacities are required and when they must be acquired appears to be the most sensible one. We are yet to develop this into a real policy alternative that defence and finance ministries can consider. Until that time, it will be more or less than 2% of GDP.