One of the most visionary reforms in India is the pension reform called New Pension Scheme (NPS) implemented by the NDA government in 2003-2004. A key feature of the NPS is that the government will move away from the old pension system (OPS), which required pre-determined benefits to be paid to retired civil servants, to a broader and more sustainable contributory pension system. bottom. Under OPS, civil servants did not contribute retirement benefits. Over time, as civil servant life expectancies increased, the state’s financial burden under OPS began to grow exponentially, necessitating pension reform. India had a paradoxical situation. More than 80 per cent of the workforce works in the informal sector, with virtually no job security or financial support for the elderly, while 5-6 per cent of the workforce working for the government has job security and no financial support. I was enjoying a very generous retirement. advantage.
More recently, however, some state governments have already reversed pension reforms and returned to financially burdensome and financially infeasible OPS, while others have attempted to revive OPS. political turmoil is growing. Beyond the financial burden and financial viability of OPS, this essay will focus on the economic trade-offs that state governments must consider, especially the impact on the poor and vulnerable. An objective analysis of the national budget over the 30-year period from 1990 to 2020 highlights two points worthy of consideration.
The first point concerns the trade-off between development and non-development costs within the national budget. Development spending is mainly spent on (a) social services such as health and education; (b) economic services related to rural and urban development and infrastructure; Non-development expenditures are primarily government services, interest and debt service, and pensions.
Between 1990-91 and 2004-05, the ratio of development to non-development spending fell dramatically in all states, from about 221% to 118%. Of course, there was variation across states, with West Bengal showing the worst deterioration (from 224% to 77%), while Gujarat showed his decline from 228% to 141%. This shift from development to non-development spending is largely due to exponential growth in state spending on pensions, interest payments, and debt service. For example, the ratio of pension spending to development spending nearly tripled from about 6.4% in 1990 to 17.3% in 2004. In Bihar, for example, this ratio has risen from about 6% in 1990 to 34% in 2004. The ratio of pensions to social services.
A fundamental lesson from this analysis was the trade-off between state pensions and development spending. Pension reform was therefore a turning point for the state. Reversing OPS would therefore lead to a redistribution of resources away from national development spending that benefits the poor and to far fewer people who have benefited from safe and privileged jobs throughout their lives. Become. Given that economic services such as infrastructure and rural and urban development have been hit more severely than social services, the productivity of the poor will decline, further jeopardizing future economic prospects. Simply put, a return to OPS would exacerbate inequality and lower economic growth in the state.
The second tradeoff comes from state budget funding. Two instruments were available to fund the increase in non-development spending related to pensions. One was to raise revenue primarily through taxes, and the other was to finance the deficit through debt. Analysis revealed that from 1990 to 2004, state revenues did not match increases in state spending. Thus, state government deficits increased exponentially. To better understand this, we calculated the real gross deficit (GFD) per capita from state budgets for each state so that they can be compared over time and across states. The actual value was calculated by deflating the nominal value with each state’s annual price deflator. State-level price deflator time series were calculated from RBI annual time series data on National Net Domestic Product (NSDP) at factor costs at constant and current prices, using 2011-12 as the base year.
An analysis of state budgets revealed that on a per capita basis, real GFD in all states doubled from Rs.995 in 1990 to Rs.2,129 in 2003. As for his GFD to NSDP ratio, it deteriorated from 3.6. The GFD was primarily funded by market borrowings, the National Small Savings Fund (NSSF), and loans from the Centre. So the fundamental trade-off was that increased state borrowing to finance non-development spending was effectively crowding out private investment. Resources that would otherwise be available to the private sector for investment and fostering growth are now spent for the consumption benefits of a few privileged retired public sector employees.
Globally, pensions for civil servants have become a major political issue as populations age and life expectancy increases. France, for example, sees violent protests against government reforms that seek to raise the retirement age from her 62 to her 64. The Indian government had the political will and foresight to introduce pension reforms in 2003-2004 to make the national budget sustainable. The data clearly show structural disruption after reform. The real beneficiaries of India’s pension reform have been the poor and vulnerable, including women and children. Otherwise, the national resources given to them would have been squeezed out by the privileged and organized minority. It suggests that we need to think seriously about the impact on the poor and vulnerable, especially women and children. Himachal Pradesh and Punjab already have the highest proportion of pensions in development spending in the world at 37% and 31%, respectively. So in these states, a reversal to OPS would certainly have devastating effects on the poor. This retrograde will deprive the poor of essential services such as health and education. They are also unable to participate in growth opportunities when resources are reallocated from the infrastructure needs of the poor to the overconsumption of the privileged few.
The author is a member of the Economic Advisory Board of the Prime Minister of India.
