GS paper III

News Excerpt:

Recently, reports released by RBI states that a return to Old Pension Scheme by a few states would exert a huge burden on their finances.

More about the News:

• The return to the Old Pension Scheme (OPS) by a few states would put a huge burden on their finances, restricting them from undertaking capital expenditure to drive growth, a report released by the Reserve Bank of India said. 
• Any reversion to OPS by the states will be a significant step backwards, undermining the benefits of past reforms and compromising the interest of future generations, the RBI said in State Finances: A Study of Budgets of 2023-24.

Why are more states going for OPS?

• Under the OPS, retired employees received 50% of their last drawn salary as monthly pensions. States have found it convenient to pay old pensioners with the money collected from the serving employees.
• After Rajasthan, Chhattisgarh, Jharkhand, and Punjab, Himachal Pradesh announced its intention to opt for OPS. The RBI warning has come after more states joined the queue to bring back OPS instead of the National Pension Scheme (NPS).

What is the Old Pension Scheme, and issues related to it?

• The OPS is a defined benefit (DB) scheme under which, after retirement, state government employees get a pension fixed at 50% of the last drawn salary. 
• Issues related to OPS:
• Foreign experiences: OPS was in vogue in most countries before the 1990s, it was discontinued given the problem of pension debt sustainability, an ageing population, an explicit burden on future generations and the incentive for early retirement (as the pension is fixed at the last drawn salary), the SBI Research report said.
• Fiscally Unsustainable: Firstly, the state governments do not have the money to fund it. Secondly, OPS had no accumulated funds or stock of savings for pension obligations and hence is a clear fiscal burden.
• Used as a Political weapon: The scheme is always an attractive dispensation for political parties as the current aged people can benefit from it even though they may not have contributed to the pension kitty, according to the SBI Research report.
• On the other hand, the NPS (National Pension Scheme), launched in 2004, is a defined contribution (DC) scheme in which the employees’ defined contribution is 10% of basic salary and dearness allowances, with a matching contribution from the state government.

Way Forward:

• Need for Rationalized Approach on tapering grants: The revenue deficit grants (recommended by the 15th FC) were provided in a manner so that they taper off in successive years. However, several states have continued to budget revenue deficit. In the backdrop of reducing grants, states may have to augment their revenue or reduce expenditure to maintain revenue balance.
• Need to Rationalize GST slabs: To restore the revenue-neutral rate under GST, the 15th Finance Commission recommended merging tax slabs and minimising exemptions. In the post-compensation period, rationalising GST slabs may bring additional revenue.
• State subsidies spent on the electricity sector: Concerns have been raised over rising subsidies for non-merit goods in several states. Providing such non-merit subsidies may constrain the fiscal space available for capital expenditure. This needs to be rationalised somewhere.

Mains PYQ

Q. In what way could replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss (UPSC 2015)

Q. The public expenditure management is a challenge to the Government of India in the context of budgetmaking during the post-liberalization period. Clarify it. (UPSC 2019)