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Congress’ promise of reverting to the old pension scheme is likely to bankrupt Himachal Pradesh, here is why

New Pension Scheme was introduced not only to ease the financial burden on the central government and the states but also to encourage people to invest

Congress managed to grab one of its rare victories these days in December when it won the Himachal Pradesh assembly elections winning 40 out of the 68 seats in the house. The state has a reputation for changing governments every 5 years so a Congress win was always on the cards, but they also benefitted from rebellions within the incumbent BJP and the key Congress promise of bringing the Old Pension Scheme back.

The Old Pension Scheme (OPS) means that the state has to bear the entire burden of the pensions, it emerged as a key issue ahead of the assembly elections. With a large percentage of the voting population reliant on government jobs in states, OPS may become a standard promise in manifestos presented before every assembly election in the future.

Notably, opposition-ruled states like Rajasthan, Jharkhand, Punjab, and Chhattisgarh have already reverted to the Old Pension Scheme, and now Himachal is set to join them under their new government. New Himachal Pradesh CM Sukhvinder Singh Sukhu has already reiterated that reverting to the old pension scheme is a priority for his government.

The OPS was discontinued on April 1, 2004, and replaced with the National Pension Scheme (NPS). In the OPS, the pension was 50 percent of the last drawn salary of the government employee. On the other hand, the NPS is a contributory pension scheme.

New Pension Scheme was introduced not only to ease the financial burden on the central government and the states but also to encourage people to invest in equity markets and fast-growing businesses. However, a guaranteed income under OPS is a powerful tool to gather votes so parties with short-term vision are desperate to use that to get an advantage over their opponents.

Everyone in government service will obviously like the OPS to be back as they get guaranteed money every month for the rest of their lives. In addition, the government pays Dearness Allowance (DA) which is not paid under the NPS. 

Even though reverting to OPS may grab the votes of government employees, for now, it is a risky proposition for the states as they run the risk of going bankrupt while funding this scheme.

Veteran economist and former deputy chairman of the planning commission, Montek Singh Ahluwalia has repeatedly stressed that going back to the old pension scheme can be disastrous. 

It is going to be particularly stressful for a state like Himachal Pradesh which is already having severe financial woes. The Debt to GSDP ratio of Himachal Pradesh was estimated to be at 43% in the previous financial year. It is already close to a state like Punjab which is at 53% and has also reverted to the old pension scheme.

Himachal Pradesh is already running a fiscal deficit of around 5%, way higher than the prudential level of 3%, on top of that, now the state will be burdened with the expense under the old pension scheme. The state’s committed expense under salaries, pensions, and interests is already one of the highest among states when compared to revenue, adding an additional burden on top of that is simply not sustainable.

On the issue, 15th Finance Commission Chairman NK Singh said, “It will be a fiscal disaster for the states to go back from the new pension scheme and adopt the old pension scheme.” 

While financial experts and even common sense tell us that reverting to the old pension scheme is going to be disastrous for the state’s finances, political parties are unlikely to pay heed. In their bid to get votes in the short term, this promise of reverting to the old pension scheme is likely to bankrupt every state in the long term. 

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Amit Kelkar
Amit Kelkar
a Pune based IT professional with keen interest in politics

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