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New Delhi With the Bhartiya Janata Party (BJP) wresting Rajasthan and Chhattisgarh from Congress, the big debate on the National Pension System (NPS) vs Old Pension Scheme (OPS) is likely to lose steam. It is also expected that the Centre might not hurry to make changes in NPS.
Rajasthan was the first State to revert to OPS, followed by Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh. When the Gehlot government announced bringing back OPS, it was said it would be a game-changer. Later, the Congress made this a poll plank in Himachal Pradesh. Post-poll, when it formed the government in the hill state, restoring OPS was one of the Cabinet decisions. The same promise also appeared to have worked in Karnataka, though the State government has yet to implement the poll promise.
Many economists and even RBI have been very vocal against bringing back OPS as they believe this will upset the fiscal balance of the states. OPS refers to defined benefit, where the government bears the entire financial cost. At the same time, NPS means defined contribution, where pension expenses are met through a corpus of inflows from employees and the government. NPS was introduced for Central Government employees for all Central Government service recruits (except armed forces) from January 1, 2004. All but two states (West Bengal and Tamil Nadu) joined the NPS.
As of end-November 2022, the cumulative number of State government employees subscribing to NPS rose to around 50 lakhs, with their cumulative contribution to NPS corpus amounting to ₹2.5 lakh crore.
In its latest bulletin of RBI, an article mentioned that States’ reverting to the OPS would be taking a major step backwards, which can increase their fiscal stress to unsustainable levels in the medium to long-term. “Cumulative fiscal burden in case of OPS could be as high as 4.5 times that of New Pension Scheme (NPS), with the additional burden reaching 0.9 per cent of GDP annually by 2060. Thus, short-run reduction in States’ pension outgo, which may be driving decisions to restore OPS, would be eclipsed by the huge rise in future unfunded pension liabilities in the long run,” the article said.
Now, a Central Government committee under Finance Secretary T V Somnathan is reviewing NPS and has been asked to suggest whether any changes are warranted in light of the existing framework and structure of the NPS as applicable to Government employees. The committee will recommend considering the fiscal implications and impact on overall budgetary space to maintain fiscal prudence to protect the common citizens. Last week, when asked about the timeline, Somtahan simply said deliberations are on.
Fiscal of five States
Meanwhile, all five States, Telangana, Rajasthan, Madhya Pradesh, Chhattisgarh, and Mizoram, have very limited fiscal space for populist measures. As per FY24 budget estimates, the fiscal deficit of Telangana, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram is pegged at 3.7 per cent, 4.2 per cent, 3.7 per cent, 2.9 per cent and 3.9 per cent of GSDP respectively. Also, available information indicates that all these States are well above the 20 per cent debt-GSDP benchmark as per the 2018 FRBM amendment. Rajasthan and Mizoram have debt-GSDP ratios of above 30 per cent (37.3 per cent and 41.2 per cent, respectively).
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