In its latest report on state finances on Monday (16 January), the Reserve Bank of India (RBI) once again red-flagged the return of some states to Old Pension Scheme, as a major concern with respect to the fiscal situation of states.

The report titled ‘State Finances – A Study of Budgets of 2022-23’ says, “The annual savings in fiscal resources that this move entails is short-lived. By postponing current expenses to the future, states risk accumulation of unfunded pension liabilities in the coming years”.

While the report notes that state debt is expected to decline to 29.5 per cent of Gross State Domestic Product (GSDP) in the current fiscal, down from 31.1 per cent in 2020-21, it is still much higher than the 20 per cent level recommended by the Fiscal Responsibility and Management Review Committee of 2018.

RBI had previously conducted a risk analysis termed ‘State Finances: A Risk Analysis’, which showed Punjab and Rajasthan among five states, having dangerous levels of debt to GDP ratios, and flagged debt levels of states as being harmful to national debt levels.

It also pointed out the lack of capital expenditure, and the tendency to fund freebies at the expense of capex.

In recent times, several states including Himachal Pradesh, Punjab, Chattisgarh, Jharkhand, and Rajasthan have announced a return to the defined benefit scheme, promising government employees 50 per cent of the last pay drawn as the monthly pension.

The move is a reversal of the National Pension System implemented by the Manmohan Singh government in 2004, where employees contribute 10 per cent of their salary with a matching contribution from the government.

A huge part of the states’ tax revenue goes to fund the pensions of previous employees, touching unsustainable levels in states like Bihar (58.9 per cent), Himachal Pradesh (79.93 per cent), and Punjab (34.24 per cent).

In 30 years, the cumulative pension bill of states has jumped 130 times to Rs 3.86 lakh crore in 2020-21 from Rs 3,131 crores in 1990-91. Himachal Pradesh, the latest to bring back the scheme, is already the worst suffering state from pension bills.

Previously, several policymakers like former head of the Planning Commission, Montek Singh Ahluwalia criticised the move, calling it a ‘bankruptcy recipe’.

State Finances Report

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