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For pension panel, a red line: Turning clock back on reforms

2023-11-30 19:56:44source:news

THE committee under Finance Secretary TV Somanathan, announced by Finance Minister Nirmala Sitharaman last week, to relook at pension may not recommend a solution where the gains made over two decades are reversed, The Indian Expresshas learnt.

For pension panel, a red line: Turning clock back on reforms

Read | Old vs new hotting up, Govt forms panel to relook at pension

That’s the big-picture sense from conversations with officials who have to balance the imperatives of politics in a pre-poll year and a reform that has withstood the pressures of time — and partisanship.

For pension panel, a red line: Turning clock back on reforms

There are options.

For pension panel, a red line: Turning clock back on reforms

One, increase the government contribution to the pension corpus of its employees from the current 14 per cent to such a level that the employee can expect 50 per cent of her last drawn basic pay as pension upon retirement.

Indeed, one of the models being looked at is the Andhra Pradesh government proposal which has a “guarantee” that employees will get 50 per cent of the last drawn salary as pension.

Officials said the government may also explore ways to make good for the increase in payout (dearness relief announced twice every year increases the pension by a certain percentage taking care of the rise in living expenses) as it happens under the old pension scheme (OPS).


Politics over pension

The NDA lost elections in 2004, the year NPS was implemented. But the Congress carried it forward. After a decade, when NDA returned under Modi, it consolidated the gains. But in 2019, just before elections, NDA hiked government contribution. Now, a fresh review again just ahead of 2024 polls.

Whatever the formula that’s worked out, one thing is clear.

The committee and its mandate mark a sharp turnaround in the Modi government’s support of the new pension system (NPS) — where contributions are defined, and benefits market-linked — which came into effect in January 2004, just a few months before the Lok Sabha elections.


“There was no question of any looking back when the BJP under the leadership of Narendra Modi returned to power. His political conviction in pension reforms and fiscal conservatism meant the NPS was there to stay,” said an official.

And yet there was no escaping the politics.

In fact, the BJP’s electoral loss in May 2004 may have nothing to do with pension reforms – the Atal Bihari Vajpayee government was convinced of the economic rationale behind the move. But the party’s 10-year loss of power, between 2004 and 2014, is a memory that still stalks North Block.

This when, in 2009, BJP’s loss in the Lok Sabha elections had not deterred the Congress from staying the course on pension reforms. With Manmohan Singh at the helm, and P Chidambaram as Finance Minister, the Congress-led United Progressive Alliance government earnestly implemented the NPS, exhorted states to follow suit, and also introduced a Bill to develop and regulate the pension sector. This was one of the many reforms that earned bipartisan support.


There were four good reasons the government reformed the pension sector at the time it did: i) with increasing life spans, pension bills were ballooning, putting to risk future finances of the Centre and states, ii) a safety net for a very small percentage of workforce was being funded ironically by even the poor taxpayer, iii) inter-generational equity – the next generation footing the bill for the previous – presented a difficult-to-ignore moral hazard, and iv) India was at the cusp of a 50-year demographic dividend opportunity beginning 2005-05 with the best working age population ratio (workers or those in the 15-64 age group age/ dependents or those under 15 plus 65 and over).

However, after the first five years in power, the BJP-led NDA government at the Centre did not take any chances. Just before Lok Sabha elections in 2019, it increased the employer’s contribution to NPS to 14 per cent of the employee’s basic pay every month from 10 per cent earlier; the employee continued to contribute only 10 per cent of her basic pay.

The timing was not lost on those keeping a tab on BJP’s economic thinking; this came into effect from April 1, 2019.

Now with just a year to go for the 2024 Lok Sabha elections, the BJP is acutely aware of an altered economic and social landscape. The straws in the wind have been there for the past couple of years.

Low growth that precedes the pandemic, job and income losses during Covid-19, stretched financial resources of people due to medical expenditure, and high inflation – which works like a painful tax on the poor, have highlighted the inadequacy of safety nets for a bulk of the country’s people. The political class cannot be blind to this. To discount the giveaways in recent Budgets by even fiscally prudent states like Tamil Nadu and Maharashtra as an election freebie will be drawing a wrong message.


It is in this backdrop that government employees are demanding a return of the old pension scheme. At least five states (Congress-ruled Rajasthan, Chhattisgarh and Himachal Pradesh, JMM-led Jharkhand, and Aam Aadmi Party-led Punjab) have done so, having already notified the old pension scheme.

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The Congress win of the Assembly elections in Himachal, which most attribute to its promise to bring back OPS, has made the BJP leadership anxious. In Maharashtra, protests by state government employees prompted the Eknath Shinde government, whose finance minister is BJP’s Devendra Fadnavis, to set up a committee and address the NPS shortcomings. Some national employee unions continue to protest too, giving calls for rallies demanding restoration of OPS.


Then, there is the insider bias. A section of senior IAS bureaucrats – who have the political executive’s ear – feel their juniors who joined service after January 1, 2004, can’t be left to the “mercy” of markets while seniors retire with the assurance of a continuously rising pension kitty.

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This conversation on NPS has been in the top echelons of power for a while now. Not that the Prime Minister is not aware of these noises around him. But if his preference for fiscal prudence is an indication, he will be happy only with a solution that doesn’t put the future of state finances in jeopardy.

© The Indian Express (P) Ltd