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The NPS, a defined contribution scheme, was applicable to all employees of the central government joining on or after January 1, 2004. A few days ago, the Rajasthan budget, presented by Chief Minister Ashok Gehlot, proposed to revert to the old pension scheme for state government employees appointed after January 1, 2004. Worryingly, Rajasthan does not appear to be an outlier. There are indications of this proposal gaining traction across the country. For instance, the Samajwadi Party has also proposed a similar move if it is voted to office in Uttar Pradesh. There are also reports of something similar being contemplated upon in Chhattisgarh. In the current environment of economic uncertainty, such populist moves may be politically expedient. However, such proposals, passed without a complete appreciation of their fiscal implications, will undermine the hard-won policy gains, and can have ruinous implications for government finances.
The NPS, a defined contribution scheme, was applicable to all employees of the central government joining on or after January 1, 2004. It replaced the defined-benefit old pension scheme under which employees would get a part of their last drawn salary as pension on retirement. The shift to NPS was undertaken due to concerns over the coverage, sustainability, and scalability of the old pension framework. As per research carried out in the early 2000s, India’s implicit pension debt, owing to central (civil) employees, state government employees and the funding gap of the employees pension scheme, was reaching unmanageable, unsustainable levels. Moreover, this framework only benefited a tiny portion of the total labour force.
Considering that the rationale to shift to the NPS revolved around the need to manage the government’s pension liabilities, states with limited fiscal resources at their disposal must ask themselves whether they can provide for such a scheme? The availability of funds for such a scheme when seen against competing demands that range from the provision of health and education facilities, public transport and infrastructure among others, would suggest otherwise. Then there is also their current fiscal position to contend with. State government debt has risen from 26.3 per cent of GDP in 2019-20 to 31.2 per cent in 2021-22 (budget estimate). This will need to be brought down to manageable levels. States will also have to contend with the GST compensation cess ending in its current form in the coming year. Shifting back to the old pension scheme will only further increase the burden on the state exchequer — as per RBI, the total pension expenditure of all states put together stood at Rs 3.86 lakh crore in 2020-21 (BE). Hence, states must desist from such fiscally unwise moves.
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