Postponing the problem

Prime Minister Narendra Modi has been given less credit than he deserves for resolving the thorny issue of the ‘One Rank, One Pension’ (OROP) demand by ex-servicemen, which was threatening to balloon into a major civil-military rift, and was sending ripples of unrest through the ranks of India’s exemplarily disciplined armed forces. OROP is a problem which had been allowed to fester for over four decades by previous governments, till it was no longer capable of an administrative solution. It needed political will for resolution, since the available choices were equally impossible — accept the OROP demand and face the damaging economic consequences, or reject it and risk potential upheaval both in the armed forces and in civil society, where ex-servicemen now constitute a significant electoral block. By grasping the nettle, Modi has at least demonstrated more political resolve than his predecessors, and also fulfilled one of his key election promises in the bargain.

That resolve needs to now be carried through into addressing the key problem — reforming the government’s pension scheme. Although India’s civil servants and other government employees constitute only a tiny portion of the total workforce, they account for a disproportionate share of government social security spends, thanks to tenure security and periodic pay revisions. A 2005 paper ( Towards Estimating India’s Implicit Pension Debt , by Gautam Bhardwaj and Surendra A Dave of the India Pension Research Foundation) calculated India’s ‘implicit pension debt’ — the present value of future pension payments promised — at a staggering 64.5 per cent of GDP in 2004. This shocker finally pushed the UPA government into implementing the New Pension Scheme, although it chickened out of including military pensions in it. That now needs to be addressed seriously, since accepting OROP has economic consequences at a GDP level. Pension researchers Ajay Shah and Renuka Sane have estimated that implementing OROP will increase the implicit pension debt by anything from 94 to 374 per cent! While that exercise relied on sketchy data and several assumptions that may not hold true (life expectancy, rate of wage growth, etc), it is still a pointer to the scale of the problem unleashed by OROP.

That does not mean the OROP demand was unjustified. A pension plan based on last salary drawn is inherently weighted against the services, where 85 per cent of the force retires before the age of 35, when the salary level is still quite low, and only one per cent retires at 60, the age when civil servants retire. Equally, the early start to pension payments lengthens the government’s financial commitment. While the Centre is yet to release actual numbers, it is estimated that implementing OROP is set to take pension outlay almost equal to wage outlay for the defence forces this year. This is unsustainable, unless the Centre gets serious about reducing the size of the military while focusing on modernisation, so that the quality of defence is not compromised.

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