The Hindu Business Line : Pension challenge and apprehension

Pensions should not suffer from a tax disadvantage under an EET (exempt-exempt-tax) regime vis-à-vis any other savings instruments. Thus wished Mr D. Swarup, Chairman, PFRDA (The Pension Fund Regulatory and Development Authority) in a recent speech at the Institute of Chartered Accountants of India.

While that should nourish the hopes of retirees, including the prospective ones under the NPS (new pension system), what can be alarming are numbers that are spoken of about the prospect of unmanageable pension liability, especially after the Sixth Pay Commission's recommendations are out.

The Fifth Pay Commission made a big economic dent in the finances of both the States and the Centre, when the recommendations came into effect in the second half of the 1990s. As a result, at the turn of the century, many States found themselves scraping their kitty to pay salaries and pension.

"The challenge has become more daunting in recent years pursuant to the sharp increase in Government wage bills resulting from the Fifth Pay Commission," conceded the Economic Survey, 1999-2000, while discussing `effective management of public finances'.

"Prior to the Fifth Pay Commission recommendations, the Central Government's wage bill (including pension dues of Rs 5,094 crore) was Rs 21,885 crore in 1996-1997. It shot up by nearly 99 per cent to Rs 43,568 crore in 1999-2000," says Mr Kaushik Dutta, partner, Price Waterhouse, New Delhi. "The State Governments' wage tickets are about 90 per cent of their revenues, and these went up by 74 per cent to Rs 89,813 crore in 1999, from Rs 51,548 crore in 1997. Some States were nearly bankrupt and about 13 states did not have money to pay salaries in 2000."

Wage differentials

"Wage differentials between the public and private sectors in India", a recent paper by Elena Glinskaya and Michael Lokshin of The World Bank, points out how a government employee at lower levels gets paid 3.8 times higher than their private/informal sector counterpart and at senior levels it goes completely reverse. Differentials as high as in India were found in only two African countries (Ghana and Côte d'Ivoire) and in regions of Brazil, the authors had noted.

The crucial question is, can we afford the Sixth Pay Commission? Mr Dutta cites a report by India Pension Research Foundation, according to which the implied debt on pensions in 2004 stood at Rs 2,00,300 crore, or 64.5 per cent of gross domestic product. A 2005 research paper, `A sustainable and scalable approach in Indian pension reform,' by Ajay Shah of the Ministry of Finance, is, however, confident that India has the sophisticated institutional capacity required to build and operate a modern pension system.

"For the ageing government workforce, an increase in salary will take into account all the past service at the increased pay scale for calculation of pensions and gratuity." Can we expect to mitigate the pinch by giving effect to recommendations of the Pay Commission on cost savings or work-force rationalisation? "Doubtful," says Mr Dutta, "if past is any indication."

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