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No money for years ahead

The basic question is why is the government talking reforms? The answer, not surprisingly, is relatively simple. Unlike expectations, resources at the disposal of governments are rather limited.

india Updated: Jan 22, 2006 23:32 IST

The basic question is why is the government talking reforms? The answer, not surprisingly, is relatively simple. Unlike expectations, resources at the disposal of governments are rather limited. Yes, they can still afford to meet their pension liabilities today but pension, or pension reforms, has never been and should not be about today. It is about the distant uncertain tomorrow.

Today isn't hunky dory either. Blame poor governance, lack of a meaningful database or leakages but there is no government in India that can tell you what it will have to pay out in pensions to retired government servants next year.

Last fiscal, the central government spent more than Rs 24,727 crore on pension payments. Compare this with the retirement bill in 1993-94, Rs 5,206 crore, and the picture becomes a little clearer. Want a comparison in real terms, consider this. The annual average increase in pension expenditure during 1995-2001 - in large measure due to selective implementation of the Fifth Pay Commission recommendations - was 27.1 per cent, faster than any economy can expect to grow.

Last year, nearly 11 per cent - lower than the previous year's 12.68 per cent but still too high for comfort - of the net tax revenue mopped at the Centre by the economy was exhausted on retirement benefits. The government's real bur den is much higher if one accounts for the hundreds of organisations - autonomous or otherwise - that run on central funds. They meet their liabilities out of the government's grant but their pension figures are not incorporated into the central budget.

In the absence of actual data, let us go along with this Rs 24,727 crore figure. This money was spent on nearly 38 lakh people beyond the age of 60 in 2004 who had worked for central government departments. In 2001, India had 766 lakh people over 60 years.

For what it is worth, the Centre is still much better off than the states that borrowed to give employees FPC recommended hikes in salary and pension. The consolidated pension bill of the states went up to Rs 38,370 crore last fiscal from Rs 5,107 crore a decade ago. A few years ago when the states were yet to recover from the FPC shock, 11 states ere spending more on pensions than on administrative services.

Not surprisingly, it was the states and not the Centre, which were the first to issue orders to start the NPS Tamil Nadu and Himachal Pradesh made NPS mandatory for fresh recruits in mid-2003, six months before the scheme was to be launched at the Centre. Nearly a dozen states have since signed-up; most of the others expected to sign-up after Parliament finds the time, and will, to pass the pension regulator bill.

At Rs 3,209 crore, for instance, Kerala's pension bill comes to half of what it spends on salaries of employees of the state government and aided educational institutions. The Twelfth Finance Commission calculated that states were spending nearly 1.5 per cent of the gross state domestic product on their pension liabilities. The RBI's database suggests state governments spend nearly 15 per cent of their tax revenue on pension payments, 10 per cent of their total revenue receipts.

States have been spending between 10-11 per cent of their revenue receipts on pension payments over the last few years, up from 5-6 per cent a decade ago. Similarly, they were spending nearly 8 per cent of their tax receipts on pension in 1990-91. Today, this figure hovers at around 15 per cent.

First Published: Nov 16, 2005 19:37 IST