Expert Speak India Matters
Published on Jan 24, 2023
The old pension scheme is a deform that is practically, morally and colonially out of tune with a 21st century modern India; Parliament must start at the top and bring MPs and Judges under the National Pension System
Pensions: Constitutional office holders must lead by example A pensions divide is tearing India’s economic reforms to shreds, destroying two decades of hard fought-for fiscal discipline. This is happening at a time when the country is looking at future empowerments of the many rather than forging new pathways to yesterday’s entitlements for the few. The demand for the old pension scheme (OPS), which assures highly-paid government servants an inflation-adjusted and assured pension for themselves and their spouses for life, financially burdened by taxpayers (also known as defined benefits plan), is spreading like the Made in China virus, infecting one state after another, one party at a time. Pension politics has created a quad of deformers that have found electoral crevices to re-enter India’s political sphere and destroy—from within—two decades of hard-fought reforms. Politics of the past has returned to haunt the fiscal futures of five states—Himachal Pradesh, Chhattisgarh, Rajasthan, Jharkhand and Punjab—the first four governed by the Indian National Congress and the last by Aam Aadmi Party; the latter of which is now promising a return to OPS if it wins elections in Karnataka.

The motivations of politicians wanting to buy votes by schemes that feast on the toil of the poor needs to be confronted and interrogated, and this fiscally-choking virus prevented from spreading to other states.

The National Pension System was enabled on 1 January 2004 through an independent regulator, the Pension Fund Regulatory and Development Authority, to oversee the transition and management to defined contribution pension, a self-funded system (also known as defined contributions plan) that eased the fiscal burden on governments at the Union and in states. Deforming this crucial reform is creating and will continue to create income inequalities, institutionalised by those tasked with reducing them. It is no longer enough to blame political parties seeking relevance for this; the malaise begins at the top of the privileges pyramid built by the privileged for the privileged. Further, the current exception granted to armed forces too must go. The motivations of politicians wanting to buy votes by schemes that feast on the toil of the poor needs to be confronted and interrogated, and this fiscally-choking virus prevented from spreading to other states. There are core issues that highlight how the poor and the young are being smothered by the affluent and the old. These implications need to be understood by both the governments distorting their finances as well as other residents of the states, including children of today’s beneficiaries. First, practical. The dominant narrative and expectation that governments will pay pension because they are supported by a legislative fiat may be true. But that does not mean that these luxuries will come for free. Barring two products—fuel and alcohol for human consumption—most other indirect taxes have been subsumed under the Goods and Services Tax (GST) and are determined by the GST Council. As a result, expect prices of petrol and diesel, as well as alcohol, in these states to increase over the next two years. At INR 108.46 per litre, the price of petrol in Rajasthan, for instance, is already 12 precent higher than Delhi’s INR 96.76 per litre. The space for Himachal Pradesh (INR 96.95 per litre) and Punjab (INR 96.16 per litre) is higher, while for Jharkhand (INR 99.82 per litre) and Chhattisgarh (INR 102.44 per litre) it is limited. On 8 January 2023, Himachal Pradesh showed how this pension burden will be distributed: It increased the value added tax (VAT) on diesel, and through it its price, by INR 3 per litre. The other four states will be forced to follow Himachal Pradesh. This will increase prices of goods in these states, leading to higher inflation there. Likewise for taxes on alcohol for human consumption. This is a cost that must be understood and the price that will be paid by residents in these states. Second, moral. Behind the rise in fuel and alcohol prices, lie two things—numbers and people. The pension liability for Punjab when it reverts to the old pension scheme is 242 percent, for Jharkhand 217 percent, and 207 percent for Rajasthan, according to SBI Research. That is, these states will be spending double of what they collect as taxes to fund the pension of a small number of people. In other words, a small number of privileged households will be financed for life by the taxes of the underprivileged and the poor. It is true that the protests and political pressures for any reform will come from incumbents, and we are seeing that play out in these states. It is here that responsible governance must listen to and take cognisance of the aspirations and expropriations of the silent majority, as Montek Singh Ahluwalia said while releasing a book on reforms, Reform Nation, calling the move “absurd” and “a recipe for bankruptcy”. There is also a perverted though invisible cost that the young will have to bear to finance the lifestyles of the privileged—the future will pay for the sins of the past and the deforming present. “…the adoption of the old pension scheme is likely to benefit the current generation at the expense of future generations,” an RBI report states. An ideas bankruptcy is leading states towards financial bankruptcy.

The pension liability for Punjab when it reverts to the old pension scheme is 242 percent, for Jharkhand 217 percent, and 207 percent for Rajasthan, according to SBI Research.

And third, colonial. The distortion of reforms by government servants and the political pandering as a fulcrum of victory is accentuated by an entitlement inequality. The Union government may speak of empowerment rather than entitlement as a medium of governance. But right at the top of the entitlement pyramid stand the most privileged individuals, protected by a conflicted institutional cover. Beginning with the President of India, the Prime Minister of India, the Chief Justice of India and down the line to Members of Parliament, Judges of the Supreme Court and high courts, and all Constitutional bodies that are appended to one another by protocol, there is no point talking about NPS without embracing it and leading the change. If an MP can get defined benefit pension and benefits for life after a five-year term in Parliament or a Judge after a 12-year service, it creates an entitlement structure that trickles down to the last government servant in line. This structure needs to be smashed. The coloniality of these pensions of high office bearers is backed by not just law but the Constitution. Under Article 106, it is Parliament that creates the laws that regulate salaries and allowances of MPs, Judges and other Constitutional office holders. Under this Article, three laws have been enacted. For MPs, the provisions lie in the Salary, Allowances and Pension of Members of Parliament Act, 1954 and related Rules; for High Court judges, it lies in the High Court Judges <(Salaries and Conditions of Service)> Act, 1954 and related Rules; and for Supreme Court judges, it lies in the Supreme Court Judges <(Salaries and Conditions of Service)> Act, 1958 and related Rules. These three laws and related Rules need amendments that enable the shift of retiral benefits of Constitutional office bearers from defined benefits fixed pension provisions to defined contributions NPS. Constitutionally, enacting these amendments and clearing the way forward is the responsibility of Parliament. It must take the lead and legislate its way out of this fiscal-moral mess; the judiciary must cooperate and not sit on an island of privileges, using ‘independence’ as cover. It is only once this walk-the-talk stance is taken at the top that state governments will stop playing fiscally dangerous games with pensions lower down. The Privileges Raj of the past 75 years cannot be allowed to return in states or continue with Constitutional office holders anymore. Once this structural pension inequality is fixed, states will hopefully follow through. And once this entitlement ends, it will provide moral and political relief to the people of a nation whose per capita income, at INR 1.8 lakh per annum, is a tiny fraction of exchequer-funded pensions the entitled receive.
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Gautam Chikermane

Gautam Chikermane

Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...

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