Military Spending, Terrorism, and Economic Growth Vinculum in India: An Empirical Morphology of the Post-Reform Period

Introduction

The words of John Anderson kind of sums up the controversy surrounding military expenditure and the resulting impact on economic growth. It is actually a macroeconomic trilemma that the government faces, i.e. increasing military expenditure will mean some kind of a budget deficit and to make up for that deficit there has to be a rise in the tax rates or a curtailment of subsidies. There is no unambiguous answer to whether military expenditure is productive or unproductive in the context of economic growth. It varies from country to country and critically hinges on the macroeconomic parameters like tax rates (direct and indirect), inflation rate, savings propensity, budget deficits, current account deficits, various monetary policy parameters like bank rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), etc. and the policies undertaken by the government in relation to these parameters.

Different schools of thought have explained the concept of military expenditures from different angles. Given the changing socio-political and economic environment across the world, the last decade has witnessed a plethora of research based on exploring impact of military expenditure on economic growth. Empirical studies, up until now, can be classified into two schools of thought. The first school of thought makes use of single regression equations in order to test the impact of military expenditure on growth either following the supply driven Neo-classical (technological trickle down effects, positive externalities from infrastructure, etc.) or demand based Keynesian (pulling away resources from the more productive sectors of the economy) approaches. Whereas the supporters of the other school of thought believe in the application of simultaneous equation models by integrating both the demand and supply sides and therefore estimating the impact. Till today, the findings are somewhat controversial and are partially responsible for the way research has taken place in this regard. Some researchers argue that military expenditures can work as a catalyst in promoting a country’s economic growth prospects through the repercussion effects spinning off from the defence sector to the other sectors of the economy while the advocates of the other school believe just the opposite. Their argument follows indirectly from the fact that higher is the level of military expenditure, higher will be the tax rate and as a result a depressing effect on the savings ratio. In this context, estimating the net effect of the defence spending on economic growth is a subject of investigation in the Indian situation.

A third dimension to this subject is the incorporation of terrorism threats and attacks. Coming to some recent facts, in 2015, a total of 11,774 terrorist attacks happened across the globe, resulting in deaths more than 28,300 and roughly 35,300 people got injured. The total number of terrorist attacks reported in 2015 was 92 but interestingly, it was geographically concentrated in certain regions with more than 55 per cent of all attacks and roughly 74 per cent of all the deaths taking place in five countries, viz., Iraq, Afghanistan, Nigeria, Syria, and Pakistan (Marcu & Balteanu, 2014). Shifting our focus to the developing world, military expenditure has amplified on account of the domestic security situation. Consider Sri Lanka, the Sri Lankan Government has poured in US$1.5 billion in recent years to crush the rebel movement of the Liberation of Tamil Tigers Eelam (LTTE as it is referred to). Pakistan’s attempt to combat al-Qaeda and Taliban forces on the domestic front is a reason for militarization. India, Nepal and Bangladesh in the recent years have been forced to step up their defence spending to counteract the rebellion of the Maoists (Vadlamannati & Pathmalal, 2010). Coming back to the case of India, there has always been a debate regarding whether we are going for productive or unproductive military expenditures.

Figure 1 compares India’s military spending (first part of the diagram) with that of the entire world (second part of the diagram) and clearly there is an increasing trend throughout the world with India’s recent military spending standing at 55630.70 Million US$ in the year 2015.