Centre Needs To Draw The Line For States: 'Old Pension Scheme' Is Another Name For Fiscal Catastrophe

Competition is good but only if regulated. Laissez-faire leads to undercutting and destruction of market forces which do not help anyone. It is time India’s lawmakers pay attention to this proven economic principle that holds good for democracy. 

The increasing competition by Opposition-ruled states to revert to the old, defined-benefit pension scheme (linked to pay commission awards and dearness allowances) for government employees and, the growing popularity of the issue as an election poll plank highlight serious inadequacies in India’s federal and political systems.

The need of the hour is to impose constitutional restrictions or responsibilities on registered political parties and state governments, limiting the scope of such outrageous moves which can set the country’s reform clock back and increase the fiscal vulnerability of the nation. 

Apparently, the overwhelming electoral dominance of BJP vis-à-vis a weak and splintered opposition, which is desperate for success, is the cornerstone of this trouble. 

The first salvo was fired by Congress which is trying to shore up its declining popularity at any cost. 

Suicidal move

The Congress-ruled Rajasthan and Chhattisgarh pioneered the switch from a defined-contribution-based, market-linked National Pension System (NPS), with a retrospective effect from 2004 (when they adopted NPS), earlier this year. Both states will go to the polls in 2023. 

NPS was introduced in 2004 by the Atal Bihari Vajpayee government (1998-2004) to check the financial outgo of the government and widen the social security net as well. Theoretically, it offers higher returns than the old pension scheme. 

Owing to the federal structure, the scheme was not obligatory on states. Only three states - Tamil Nadu, Punjab and Rajasthan - joined NPS during Vajpayee’s tenure. 

It was the Congress-led Manmohan Singh government that had taken the reform nationwide (except West Bengal, Kerala and Tripura) and opened it to private sector participation. It is a pity that the same Congress is now working against it. 

It is noteworthy that NPS requires contributions from both employees (10 percent) and employers (14 percent). Participating states provided for the employees’ contribution by enhancing salaries. 

The reversal to the old scheme, therefore, unduly benefits employees as they will enjoy higher salaries without any payment obligation. Removal of fiscal commitment to NPS will improve state finances in the short term. In the longer term, their outgo will increase by leaps and bounds. 

All those who joined the Rajasthan government in the last 18 years will retire in the next 15 years. If Rajasthan stuck to NPS, its financial commitment would have declined thereafter. Now Rajasthan will have to provide a way fatter pension bill than perceived. 

However, the Ashok Gehlot government seems least bothered about that. They gambled with the state’s weak finances to tide over unpopularity and try to secure a second term in office. The nation will be the final sufferer. 

Dangerous trend

AAP won the Punjab election in February. Over the last six months, they first offered 300 units of free electricity a month. That's nearly enough for a small, middle-class family with one air-conditioner. Last week, they reverted to the old pension scheme. There is no new tax proposal in the state budget. 

Punjab and Rajasthan are among the five top indebted states in India. In a bulletin issued on 16 June this year, in the wake of the Sri Lankan debt crisis, the Reserve Bank of India (RBI) said both the states “appear to be most vulnerable to fiscal shocks.” 

According to the RBI, 10 states - Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana –have the highest debt burden. Two (Bengal, Kerala) didn’t reform and three (Rajasthan, Punjab, Jharkhand) rolled back. 

The demand for the rollback of NPS is audible in Haryana and Andhra Pradesh where the Assembly elections are due in 2024. However, the ruling BJP (Haryana) and YSR congress (Andhra) are opposing the demand. 

BJP governments in states are so far backing the NPS. However, it is questionable how long they can remain an exception. 

With opposition batting for a rollback of reforms in the poll-bound Himachal Pradesh and Gujarat, pressure is mounting on BJP leadership to join the trend. 

And if they do, pension reforms will be history. The fiscal reforms clock will be set two decades back. 

For the central government alone, salaries and pensions now account for over 16 percent of the total expenditure. Many states pay even higher amounts. As the fiscal space will squeeze, governments will have less money to finance development projects. 

Studies by Carnegie and Tata Trusts indicate that Indian bureaucracy and police are seriously understaffed compared to G20 and BRICS. Resource crunch will come in the way of increasing the capacity, thereby impacting the delivery of government services which in turn will impact private sector efficiency. 

The dream of building a New India will suffer a premature death. 

Time to act

That India was slow in reforming its economy was known. Electricity sector reforms have been facing political resistance for the last two decades. There were also incidents like the recent rollback of the farm sector reform initiative in the face of protests. 

However, never before has a two-decade-old critical reform suffered such a setback. The politics of the pension scheme has ushered the Brexit moment in India. If this goes unchecked, a whole floodgate of anti-reform politics will open. 

In a recent report, Ecowrap, the State Bank of India sought judicial intervention in capping the growing tendency in states to introduce welfare schemes ignoring fiscal stability. Prime Minister Narendra Modi referred to it as ‘Rewari culture 'but is yet to initiate any action. 

The nation wants to see the Prime Minister doing an ‘Article 370’ act on the economy. Political freedom is essential but it cannot supersede fiscal viability. It’s time to put states and politics on a leash.