The newly announced Unified Pension Scheme (UPS) is expected to widen the fiscal deficit by 15 basis points (bps) to 5.1 per cent from the budgeted 4.9 per cent in fiscal year 2025 (FY25), according to a report released by the Macquarie Group on Monday.
The global investment banker’s report estimates that the impact on fiscal deficit for FY25 could be seen if around Rs 45,000 crore is the burden of the new plan on the government’s finances.
“While Cabinet Secretary-designate TV Somanathan has quantified the FY25 impact at Rs 6,250 crore, other news reports speak of an impact of Rs 40,000-45,000 crore, resulting in a fiscal deficit impact of 15 basis points,” it noted.
Under the unified pension system, employee contributions will remain unchanged at 10 percent of basic salary plus dearness allowance. The government contribution will rise to 18.5 percent from the current 14 percent.
“This 18.5 per cent will cost the Centre an additional Rs 6,250 crore in the first year and Rs 800 crore as one-time expenditure on arrears,” Somanathan said.
The report further notes that unfortunately the Union Budget was not populist (be it the UPS scheme announced over the weekend or the series of populist schemes announced by states), populism seems to be the emerging narrative to win the elections.
“This is a worrying sign, which could keep India stuck in a ‘middle-income trap’ if it does not stick to its reform agenda,” he added.
The report also notes that there is pressure on states to adopt the new UPS system now, which will further increase their fiscal deficit. Maharashtra on Sunday became the first state to adopt UPS for its employees ahead of the Assembly elections in November.
“India’s state fiscal deficits are already over 3 percent, at 3.2 percent; 3 percent is the target set by the central government and these plans could make things worse,” the report said.
The Union Cabinet on Saturday approved the UPS scheme that is likely to benefit 2.3 million central government employees, and this figure could go up to 9 million if state governments also adopt it.
“While this scheme is not a complete departure from the OPS (erstwhile pension scheme) which was a fully defined benefit scheme as compared to the current NPS (national pension scheme) which was a defined contribution scheme, in our view it will still drain the exchequer,” the report added.
First published: August 26, 2024 | 19:19 IS
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