What is the issue?
Though the NPS was a fiscally expensive solution, deviating from it imposes very large costs on the exchequer.
How does the pension policy evolve in India?
- The traditional civil servants pension was a defined benefit at about half the wage at retirement.
- In the 1990s, there was an explosive trajectory of sharp growth in pension expenditures.
- Particularly with the armed forces and the railways, pension payments were growing much faster than wage payments.
- Thus, the Ministry of Finance and the Asian Development Bank funded a household survey through which the number of civil servants and pensioners was estimated.
- The survey estimated that the implicit pension debt was about 65% of GDP.
- The Ministry of Social Justice created Project OASIS in 1999.
- Under that, a National Pension System was created, which proposed a 10% wage hike to civil servants to ensure consistent contribution of pension amount from them.
- All recruits of the government from January 1, 2004, were to be placed into the NPS.
- However, it was only in 2013 that the law was passed, and the Pension Fund Regulatory and Development Authority became a statutory regulator of the service providers.
What are the concerns?
- Unlike many pension reforms elsewhere in the world, there was no decline in pension payments to existing workers or pensioners.
- This has made the NPS a fiscally expensive reform for the government.
- This is because, the government is paying contributions to both new workers (with a 10% wage hike) and pensions to those hired earlier.
- Only, when employee hired prior to January 1, 2004 was dead, the government can avoid contributing to them and derive the fiscal benefits.
- Also, in the early days of NPS reform, the armed forces were always part of the plan.
- The idea was that NPS implementation for armed forces would be done after the institutional structures were working for civil servants.
- However, this was not carried through and hence demands for “one rank one pension” were erupted later by the armed forces.
- Upon its implementation, the revenue expenditure of the government has increased further and weakened its fiscal capacity.
- All these expenditures fall under the off-balance-sheet liabilities of the Indian state.
What should be done to reduce off-balance sheet liabilities?
- A bond market with voluntary buyers, along with the Public Debt Management Agency (PDMA), should be encouraged.
- The PDMA will engage with buyers of bonds and will bring the bond market perspective into the policy process.
- This will reduce the concern of voluntary buyers of bonds regarding the fiscal stress of the economy in the long term.
- In turn, it will increase the capital receipts of the government along with ensuring checks and balances on each of its policy decisions.
Source: Business Standard
