Virendra Pandit
New Delhi: The Reserve Bank of India (RBI) has cautioned the states against reverting to the Old Pension Scheme (OPS) for government employees, saying it poses a major risk on the “subnational fiscal horizon” and would result in the accumulation of unfunded liabilities in the coming years for them.
Recently, several economists also expressed concern over reverting to the OPS saying it would put stress on states’ finances and prove a drain on precious resources worth thousands of crores each year, which could otherwise be utilized in productive and developmental works.
Even former Deputy Chairman of the erstwhile Planning Commission, Montek Singh Ahluwalia, also voiced against bringing back the OPS, saying it is one of the biggest ‘revadis.’
In 2004, the then UPA-ruled Union Government, led by Dr. Manmohan Singh, announced the National Pension System (NPS), a defined contributory pension scheme replacing the OPS. Some employees’ unions had protested against contributing to the scheme and demanded the government should continue to bear the entire burden of pension as was prevalent in the OPS.
When the BJP-led NDA government came to power in 2014, it continued with the NPS. But the Congress, and other non-BJP-ruled states, to endear themselves to the government employees, resorted to populist tactics like reverting to the OPS at the expense of their states’ exchequers, developmental needs, and fiscal prudence.
The observations in the RBI’s Report, titled State Finances: A Study of Budgets of 2022-23, come in the backdrop of Congress-ruled Himachal Pradesh becoming the latest state to announce reverting to the OPS.
Earlier, the Congress-led governments of Rajasthan and Chhattisgarh, and also Jharkhand informed the Centre and the Pension Fund Regulatory and Development Authority (PFRDA) about their decision to restore the OPS for their employees.
The Punjab Government also, on November 18, 2022, notified implementation of the OPS for the state government employees who are at present being covered under the NPS.
“A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some states. The annual saving in fiscal resources that this move entails is short-lived,” the RBI report said.
By postponing the current expenses to the future, the report said these states risk the accumulation of unfunded pension liabilities in the coming years.
Under the OPS, an employee gets a defined pension and is entitled to a 50 percent amount of the last drawn salary as a pension.
Under the NPS, however, the pension amount is contributory, which is in effect since 2004.
For 2022-23, the RBI report said states have budgeted an increase in revenue spending, mainly led by non-developmental expenditures such as pension and administrative services.
Budget allocations towards medical and public health and natural calamities have been lowered, while housing outlay has been increased.
Committed expenditure, comprising interest payments, administrative services, and pension, is expected to increase marginally from 2021-22, the report said.
They should increase allocations of capital expenditure for sectors like health, education, infrastructure, and green energy transition to expand production capacities and create a broad-based developmental agenda. Also, outlays on social services and physical infrastructure can enhance productivity, it added.