Five non-Bharatiya Janata Party (BJP)-ruled states — Chhattisgarh, Rajasthan, Jharkhand, Himachal Pradesh, and Punjab — have reverted to old pension scheme (OPS) after about 15 years. Andhra Pradesh has provided an option for guaranteed pension equal to 33 percent of last pay. The BJP states, also facing the heat, have skirted the issue thus far though with considerable unease.
The Centre is on the horns of a dilemma. It has refused the demand of states reverting to OPS to return the accumulated National Pension System (NPS) corpus. The Finance Minister, however, was constrained to announce on March 24 the formation of a committee under the Finance Secretary to look into the issue of improvement of NPS.
Are there really any options to improve the NPS? If not, will the Centre hold the ground or cave in like it did on farm laws?
OPS Is Employees’ Darling, State’s Fiscal Nemesis
For government employees, the OPS is a bonanza — 50 percent of last pay as pension with DA thereon. Pension is revised upward every 10 years. They also get their contributions back as General Provident Fund (GPF). For government, it is a fiscal sell-out with undefined and open-ended liabilities.
The NPS has spartan benefits. Contribution of 10 percent (or 14 percent) of pay is the government’s total cost. Employees contribute an equal amount. The total accumulation, with returns, is the employee’s pension wealth; a part of which is annuitized as pension. The NPS was not designed to yield a pension equal to the OPS. No dearness allowance (DA). No revision with pay commission awards.
The OPS is about three times more beneficial to employees than the NPS with an equal downside for the government.
NPS Part Of Wider Fiscal Responsibility Package
India was in a fiscal mess in 2003-04. Most states used to survive on overdrafts from the Reserve Bank of India (RBI). Treasuries were routinely closed; Assam treasury remained closed for about 240 days in 2003-2004.
The NPS was introduced in 2004 by the BJP-led National Democratic Alliance (NDA) government, as part of larger fiscal responsibility package, which included the Fiscal Responsibility and Budget Management (FRBM) Act 2003, and swap of states’ costlier debt. The Congress-led United Progressive Alliance (UPA) government continued with the reforms, and nudged states to adopt fiscal responsibility laws and fiscal discipline.
The NPS system got implemented in almost all the states, and the States’ finances transformed. Despite shocks of the 2008 global financial crisis and the 2020 COVID-19 pandemic, the States managed to live within fiscal deficit limits for almost 15 years.
OPS Will Squander Fiscal Gains
Orders issued by governments for reverting to the OPS repeal the NPS and restores the OPS with retrospective effect. Employees’ contributions get redirected to their individual GPF accounts. Governments have also stopped making pension contributions to the NPS making their OPS pension commitments unfunded again.
Reversion to the OPS curiously improves states’ cash position in short-term as governments stops making their NPS contribution. This saves cash expenditure of about Rs 500 crore a year per 100,000 NPS employees with monthly average salary of Rs 30,000.
States will, however, have to pay the OPS pensions through their noses when these employees retire which will undoubtedly overwhelm them.
Stop Impending Disaster
The OPS is politically tempting as the NPS employees now exceed 8.3 million (states about 6 million). Each state acting alone is also highly vulnerable. It can be overcome only if the Centre and all state governments — the real double engines without party divisions — stand and face it together.
The Centre will have to assume leadership adopting a carrot and stick approach. All state governments are bound by their FRBM laws. The Centre also has a big lever in fixing their borrowing limits.
The Centre must make it clear to the states that unfunded OPS pension obligations would be counted as borrowings and reduce their borrowing limits to that extent. This will neutralise transient cash advantage states have while reverting to the OPS.
The Centre must also review its policies which have made Opposition-ruled states lose trust in the leadership and fairness of the Union government. There are onerous conditions imposed on borrowings. The government has also resorted to reduction of borrowing limits for numerous reasons. There are many issues in release of Centrally Sponsored Scheme (CSS) funds.
The Centre will have to display the kind of leadership which Manmohan Singh showed in mainstreaming the NPS and (late) Arun Jaitley exhibited in getting the states adopt the Goods and Services Tax (GST). The Centre will have to offer a fair fiscal package with a reasonable borrowing regime and the NPS as a necessary component.
It will require a lot of hard work and persuasion to make it work. Some states may not still agree to walk back from the OPS. Perhaps, such states, can be allowed to offer a guaranteed 50 percent of last pay as pension (without DA or Pay Commission revisions) keeping current contributions of both employees and government in the NPS account with individual retirement corpus managed as it is currently done. Such states must also create a fund for top-up the shortfall, which actuarially evaluated, must be deducted from their borrowing limits every year.
Employees, of course, would have to be dealt with firmly.
Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘Explanation and Commentary on Budget 2023-24’. (Twitter: @Subhashgarg1960)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.