Schemes like OPS will only exacerbate the gap between richer and poorer states

Source: The post is based on the article “Schemes like OPS will only exacerbate the gap between richer and poorer states” published in “The Indian Express” on 21st March 2023. 

Syllabus: GS 3 – Indian economy  

Relevance: Issues related to fiscal federalism 

News: Recently, there are demands in some states to implement OPS. Some states like Himachal and Rajasthan have implemented it. 

What are the differences between centre and states over fiscal autonomy?

States want to make their own decisions such as the type of pension scheme, the freedom to decide welfare programmes and so on.  

But, states neither have the financial resources to implement their decisions nor the freedom to mobilise finances on their own. They are dependent on the Centre for resources.  

This is responsible for the current standoff between the Union government and states over various issues such as “freebies” versus welfare, reversion to the old pension scheme, and imposition of conditions for financial grants on states. 

What are fiscal issues related to the implementation of the Old Pension Scheme by some states? 

The poor financial condition of states: States such as Rajasthan, Punjab, Himachal Pradesh, Chhattisgarh, Jharkhand and Bengal want to implement the old pension scheme (OPS). 

But large states such as Maharashtra, Tamil Nadu, Karnataka and Gujarat are resisting pressure from their government employees to revert to OPS 

Paradoxically, states that want to implement OPS have much higher debt levels (40% of GDP) than the states that are reluctant to switch to OPS (22%).  

Punjab has a debt of 48% of GDP. It spends nearly one-fifth of its income on just pensions for government employees.  

When these states spend so much of their income on pensions, they will not have enough resources to cater to the basic needs of the remaining population. It forces them to borrow more money. 

States that are implementing OPS do not have the financial strength for it. They are dependent on the Centre to provide funds either through devolution of taxes collected from other states or by borrowing and lending.  

The financial gap between states: Just four large states; Maharashtra, Tamil Nadu, Karnataka and Gujarat are net contributors to the Union government’s tax pool. Most other states are net takers.  

When the Punjab or Himachal government claims it has the right to decide on OPS, it is actually paid for indirectly by the future generations of people in Maharashtra, Gujarat, Tamil Nadu and Karnataka through the Union government. 

The purpose of such redistribution is to close the gap between these states over time. But, the gap between the “net giving” and the “net taking” states has only increased.  

For example, the gap between the debt levels of states that have implemented OPS vis-à-vis the states that have resisted OPS has increased from 13% in 2003 to 20% of GDP in 2023.  

This pattern of the richer states giving and the needier states taking more and more over time without closing the gap is unsustainable and dangerous. Profligate schemes like OPS will only exacerbate the gap between the richer and poorer states. 

At some point, the richer states will start to question the efficacy of such redistribution and the need for them to continue to fund regressive schemes in poorer states.