Way to Bankruptcy

NPS was a saviour of the sinking public finances and all state governments expect West Bengal have adopted the NPS one by one, the last being the then left-ruled state of Tripura in 2015. NPS had restored some discipline in public finances and contributed to making the states generate surpluses in their revenue accounts. Now the backward march will certainly take the states and the nation to the brink of financial disaster

Way to Bankruptcy

Representational Image: iStock

After Rajasthan, Chhattisgarh, Jharkhand and Punjab, another state has now joined the determined march of opposition-ruled states towards unfettered populism. Himachal Pradesh in which Congress has just scored a narrow victory with 40 seats over the BJP’s 25 in a 68-member Legislative Assembly is the latest to reintroduce the Old Pension Scheme (OPS) in which the government will pay all retired employees 50 per cent of their lastdrawn salary as pension till their death and thereafter to their spouses and unmarried daughters, making the liability an openended one.

This is going a significant step backwards, discarding the much-needed reform introduced by the Centre in December 2003 when it replaced the OPS with the New Pension Scheme (NPS) applicable to all government employees except the armed forces, in respect of whom the OPS still continues.

The NPS had replaced the open-ended nature of the pension liability by making pension a contribution-based payment in which each Government employee makes a monthly contribution at the rate of 10 per cent of salary and a matching contribution is paid by the government for its employees, thus limiting the government’s liability only till the employee retires, instead of extending the government largesse indefinitely even beyond the employees’ death.


For the Central Government, the employer’s contribution has been enhanced to 14 per cent with effect from the financial year 2019-20. NPS was the absolute need of the times to save our public finances from bankruptcy as the Government’s pension liability was increasing exponentially with steady increases in the life expectancy of people and thereby shrinking elbow room for any budgetary maneuvers.

NPS was a saviour of the sinking public finances and all state governments ~ expect of course West Bengal where populism always scores over financial prudence ~ have adopted the NPS one by one, the last being the then left-ruled state of Tripura in 2015. NPS had restored some discipline in public finances and contributed to making the states generate surpluses in their revenue accounts.

Now the backward march will certainly take the states, and along with them the nation ~ to the brink of financial disaster, at the cost of providing uncalled for benefits to a small cross-section of voters ~ the government employees, to the exclusion of everybody else, especially the vast, unorganised sector which are excluded from the social safety nets provided by the governments and who are the worst sufferers in any crisis like the pandemic. Reverting back to the OPS serves neither equity nor social justice and is against all economic rationality.

As it is, the public finances of both the Centre and the States are under great strain due to the so-called committed expenditure of the government which mainly comprises interest, salary and pension payments. Add to this the subsidies provided by the Centre on food, fertilizer and petroleum products and by states on various other items of expenditure which are also in the nature of committed expenditure in view of the election promises which they have to fulfil.

Government expenditure is classified into capital expenditure (CE) for creating income generating capital assets and revenue expenditure (RE) for maintenance of those assets. For most states, the committed expenditure sans subsidy accounts for two-thirds of total RE; for the Centre also, salary, pension and interest together account for 44 per cent of RE as per the budget estimates of the current fiscal. If we include major subsidies like food, fertilizer and defence expenditure where there is no scope for reduction of allocations, the total amount of nondevelopmental expenditure becomes two-thirds of the total RE. Thus, only a third of the RE is available for maintenance of the assets created ~ like roads and brdges, schools, hospitals, irrigation and energy infrastructure etc. which is clearly inadequate as evident from their pathetic state. All over the world, rising pension liabilities in view of the higher life expectancy of people has been putting government budgets under serious stress, forcing many countries to institute reforms.

But in India, while the government has introduced the NPS, budget constraints have not prevented the Centre from extending state largesse by way of hiking the pension to super senior retired employees, those who live beyond 80 years of age, in a graded manner so that upon attaining 100 years of age, the pension becomes double the original amount.

In a country where a majority of the senior citizens do not get any state support in their old age, government pensioners are a group of highly pampered people whose healthcare needs are also borne by the government. Increasing the pension depending on their age defies any rhyme or reason and defeats all logic. Another aberration is the differential treatments given to civil and armed forces personnel in respect of pension; while the former is covered under the NPS, the latter enjoys the OPS.

Of course, there are reasons for that ~ about 85 per cent of the armed forces personnel retire below the age of 40 to keep our fighting forces young. Even officers retire between 52 and 54 depending on their rank, while all civilian employees retire at the age of 60. A larger service span allows the civilians more time to rise in hierarchy and get higher pension, those advantages are denied to armed forces. Though there are some job reservations for ex-servicemen, opportunities are limited. Given the hardships and peculiarities of service conditions of armed forces, they obviously cannot be equated with civil servants. But pension cannot be the only remedy, the government must think imaginatively to utilise the vast reserves of trained and disciplined manpower in other productive ways without burdening the pension system with indefinite liability. The OPS for armed forces combined with the One Rank One Pension Scheme which has added an annual liability of Rs 8,500 crore to the Centre’s pension bill has made the defence pension liability clearly unsustainable. For the current fiscal, defence pension alone accounts for Rs 1.20 lakh crore of the total defence budget of Rs 5.25 lakh crore including CE for defence acquisition, compared to only Rs 66,000 crore for the civilian employees.

Pension and salary of our 1.2 million strong armed forces takes away more than 50 per cent of the defence budget, leaving little money for all other purposes like upgradation and acquisition of arms and equipment and for boosting defence infrastructure, etc. which are vital for national defence and security. This was insane to say the least, and that is why the Government had no option but to resort to the muchcriticised Agnipath scheme. Hopefully the impact on public finances shall be visible after a few years’ time.

Rajasthan, Chhattisgarh and Jharkhand have already informed the Central Government and Pension Fund Regulatory Development Authority (PFRDA) about their decision to restore OPS for their employees. These states have also asked the PFRDA to return the accumulated corpus of subscribers under the NPS, which the Central government has refused on the valid ground that there is no such provision for refund of NPS corpus to state governments under relevant regulations. Clearly, populism has blinded these states to the disastrous impact of restoring OPS on their public finances.

As per the revised estimate of 2021-22, Punjab has a debt ratio (ratio of outstanding debt to the state income, or GSDP or Gross State Domestic Product of the state) of 53.3 per cent, the highest in India; Chhattisgarh has a debt ratio of 26.2 per cent, Jharkhand 33 per cent, Rajasthan 39.5 per cent, and West Bengal 34.4 per cent. Even without the OPS, their fiscal deficits during the year were 5.2 per cent for Rajasthan, 4.6 per cent for Punjab, 3.8 per cent for Chhattisgarh, and 3.5 per cent for West Bengal – all above the FRBMA limit of 3 per cent, while it was 3 per cent for Jharkhand. Introducing the OPS which will add indeterminate liability for an indefinite future will spell disaster for their public finances, forcing them to raise more taxes and resorting to more borrowing with consequent debt-servicing burden on our children and forcing to pay ever higher taxes. But where populism is bliss, it is folly to be wise.

It seems the opposition has already run out of ideas about how to face the BJP juggernaut except resorting to self-destructive populism. In Bihar, Mr Nitish Kumar whose political future is uncertain has ushered in the new year with his pet project of caste census, earmarking Rs 500 crore of state’s scarce resources after the Centre refused to bear the expenses of his census whose outcome is uncertain, given our past experiences with the SECC which the UPA II government undertook in 2011 and whose results are as yet unpublishable, though the government is using the data for extending social welfare benefits to the people.

Bihar’s debt ratio in 2021-22 RE was 38.6 per cent, and its fiscal deficit as high as 11.3 per cent, the highest among the major states in India. It has not been able to recover from the shock of its prohibition policy, which deprived the exchequer of nearly Rs 5000 crore annually and saddling the courts with 3.7 lakh additional cases, while not being able to address the prohibition issue. Nitish is expecting to capitalise on the fact the voter rationality is absent in our political system.

But lack of discipline of public finance ultimately causes acute suffering to the people. Till the voters realise this, Nitish Kumar, Arvind Kejriwal and their ilk will get enough time to make their states completely broke and ruined ~ socially, economically and morally.