5 min readAug 27, 2024 10:07 AM IST
First published on: Aug 27, 2024 at 07:57 AM IST
Less than 24 hours after the Cabinet decision to implement the Unified Pension Scheme (UPS) for 23 lakh Union government employees, the Maharashtra government decided to adopt the UPS framework for its employees. Fostering cooperative federalism has been one of the biggest successes of the Narendra Modi government. Along with measures such as increasing tax devolution to states from 32 per cent to 42 per cent, incentivising states towards capital spending and pushing them to be transparent about their fiscal situation, the changes in the UPS regime is another positive development for cooperative federalism.
Many have already explained the benefit of the UPS: It provides more certainty to pensioners by assuring them 50 per cent of the average drawn basic pay in the last 12 months in service as pension. This has been done without whittling away the two key pillars of the well-thought-out reforms introduced by Prime Minister Atal Bihari Vajpayee — the contributory character of pensions, wherein employees contribute to their pensions from the salary they receive while they are in service, and its “funded nature” wherein the government sets aside money in advance to pay for future pension provisions.
However, one aspect that has not been discussed in detail is the potential of this reform to become one of the biggest wins for cooperative federalism. Over the past few years, several states such as Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh reverted to the Old Pension Scheme (OPS) of the pre-2003 era — these states had a non-NDA government at the time of taking the decision. This was a cynical move. The OPS is non-contributory and unfunded. Therefore, in the immediate term, the state government did not have to contribute its share of money to the pension fund, thus saving money. At the same time, a future government would have to pay the money in bulk therefore kicking the problem down the road.
The implications for this decision and the risk of more states adopting this became so alarming that the RBI released a paper in its bulletin in September 2023 stating that “the fiscal cost of reverting to OPS will be enormous as the actual pension burden will increase by around 4.5 times than that of the NPS.” The paper concluded by stating that “any reversion to OPS by states would be fiscally unsustainable, though it may result in an immediate fall in their pension outgo”. Other states are likely to follow Maharashtra’s example and adopt the UPS, ensuring that states have the fiscal space to spend on capital infrastructure that results in more employment opportunities and a better quality of life for its people.
Balancing state finances has been a longstanding concern. Meeting people’s aspirations for opportunities and creating an enabling environment to meet their potential needs to be balanced with setting aside funds for welfare measures for disadvantaged and vulnerable groups. To ensure that states give a thrust to large capital expenditure spending in the post-Covid scenario, the Ministry of Finance has increased the special assistance for capital investment eightfold. It has provided state governments Rs 1 lakh crore in the form of 50-year interest-free loans for capital investment projects. The loan was also to be over and above the normal borrowing ceiling allowed for states. In this year’s Budget, this was further increased to Rs 1.3 lakh crore. The rationale for strengthening the scheme was to ensure that states complement their own budgets in capital expenditure spending and not substitute their own spending through this Union government scheme.
At the same time, to bring transparency and sustainability in state finances, borrowings by state public sector companies, corporations and special purpose vehicles (SPVs), serviced by state government budgets, were considered as borrowings made by the state. The previous government in my own home state of Telangana used such off budget borrowings to push the state finances to the brink. The new push on transparency in off budget borrowings will plug the gap that was exploited by the Telangana government.
Tweaks and improvements in government decisions show its willingness to listen to all stakeholders and engage with them. However, Opposition parties have been speaking in contradictory tones on the adoption of the UPS. There is a lack of a coherent response. On matters such as national security, fiscal policy and other key issues that have larger ramifications, national parties in Opposition need to speak more responsibly rather than in binaries or with forked tongues.
The UPS is a win-win — it provides predictability of pension to retired government employees who have contributed a lifetime of service to nation-building. This has been done by retaining the contributory pay and its funding nature. There is, therefore, a continuity in reforms. However, this would mean looking at the policy through a narrow lens. The change should be seen as a part of a range of steps which comprises boosting capital investment in states through complementary schemes and introducing transparency in borrowings giving states an opportunity to strengthen their finances. That’s why the UPS scheme has far-reaching implications. From that perspective, this is a great win for Prime Minister Modi’s push for cooperative federalism.
The writer is Union Minister of Coal and Mines and represents Secunderabad Lok Sabha constituency
Prime Minister Narendra Modi with a delegation from Joint Consultative machinery for central government employees, at his residence in New Delhi. (PTI/File) 
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