The newly announced Unified Pension Scheme (UPS) is expected to result in a fiscal deficit impact of around 15 basis points (bps) in the current financial year, according to a report released by the Macquarie Group on Monday. The report by the global investment bank estimates that the fiscal deficit for FY25 is expected to increase to 5.1 per cent from the budgeted 4.9 per cent if the impact of the new scheme on government finances is around Rs 45,000 crore.
“While the cabinet secretary designate Somanathan has quantified the FY25 impact at Rs 6,250 crore, other news reports talk about an impact of Rs 40,000-45,000 crore resulting in a fiscal deficit impact of 15 bps,” it noted.
Under the unified system, employee contributions will remain unaltered at 10 per cent of basic pay plus dearness allowance (DA). The government’s contribution will increase from the present 14 per cent to 18.5 per cent.
“This 18.5 per cent will cost the Centre an extra Rs 6,250 crore in the first year and Rs 800 crore as a one-time expenditure for arrears,” cabinet secretary designate TV Somanathan has said.
The report further notes that while the union budget wasn’t populist, unfortunately, post-budget developments, such as the UPS scheme announced over the weekend and a slew of populist schemes announced by the states, suggest that populism is emerging as the narrative to win elections.
“That is a worrying sign, which could keep India stuck in a ‘middle-income trap’ if it doesn’t adhere to its reform agenda,” it added.
The report also notes that there is pressure on the states to shift to the new UPS scheme, which will further burden their fiscal deficits. Maharashtra became the first state on Sunday to adopt UPS for its employees ahead of the assembly elections in November.
“The fiscal deficit of the states in India is already beyond 3 per cent at 3.2 per cent; 3 per cent is the target set by the central government, and these schemes could make matters worse.”
The union cabinet on Saturday approved the UPS scheme, which is likely to benefit 2.3 million central government employees, and this could increase to 9 million if state governments also adopt it.
“While this scheme is not a complete reversal to the OPS (Old Pension Scheme), which was an entirely defined benefit scheme, from the current NPS (National Pension Scheme), which is a defined contribution scheme, it will still drain the exchequer in our view,” the report added.
First Published: Aug 26 2024 | 7:19 PM IS