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 the growth, a report released by the Reserve Bank of India said. Any reversion to OPS by the states will be a major 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, released on Monday. “The return to the Old Pension Scheme (OPS) by a few states and reports of some other states moving in the same direction would exert a huge burden on state finances and restrict their capacity to undertake growth-enhancing capital expenditures,” the report said. The OPS is a defined benefit (DB) scheme under which, after retirement, state government employees get a pension fixed at 50 per cent of the last drawn salary. The NPS is a defined contribution (DC) scheme in which the employees’ defined contribution is 10 per cent of basic salary and dearness allowances, with a matching contribution from the state government. In a recent report, Elara Securities India said that the Bharatiya Janata Party (BJP)’s win will see a readoption of the NPS is states, such as Rajasthan and Chhattisgarh where the Congress had shifted to OPS, but would see adoption of the old scheme in Telangana, where Congress has won. Internal estimates suggest that if all the state governments revert to OPS from the NPS, the cumulative fiscal burden could be as high as 4.5 times that of NPS, with the additional burden reaching 0.9 per cent of GDP annually by 2060, the RBI’s report said. This will add to the pension burden of older OPS retirees whose last batch is expected to retire by early 2040s and, therefore, draw pension under the OPS till the 2060s, it said. The report further said that states envisage a continuation of prudent fiscal management for 2023-24, with the consolidated gross fiscal deficit (GFD) budgeted at 3.1 per cent of GDP. States’ total outstanding liabilities are budgeted to fall to 27.6 per cent of GDP for 2023-24 from the peak of 31 per cent in 2020-21. However, outstanding liabilities may remain higher than 30 per cent of gross state domestic product (GSDP) for many states. The implementation of goods and services tax (GST) has led to increased tax buoyancy for the states. While the overall tax efforts of the states are strong, further improvement in tax revenues will require them to strengthen their tax capacity, including through tax reforms and effective and innovative tax administration, it said In case of non-tax revenues, there is considerable scope for states to increase them through revisions of user charges on electricity, water and other public services, royalties and premiums from mining, and better financial management of their public sector units (PSUs), the report said.
