scorecardresearch
Friday, March 29, 2024
Support Our Journalism
HomeEconomyStates’ finances improving, but moving back to old pension scheme could pose...

States’ finances improving, but moving back to old pension scheme could pose future risks: RBI

States have seen stronger revenues and have been prudent with their expenditure, leading to better deficit ratios. But capex needs to increase & debt needs to reduce.

Follow Us :
Text Size:

New Delhi: While the states are seeing an improvement in their finances with the easing of pandemic-related stress, a ‘major risk’ to its finances is the increasing adoption of the Old Pension Scheme, which will yield only short-lived benefits, the RBI has said in a report. 

The central bank also said that the states should use the ‘sweet spot’ of buoyant revenues and prudent expenditure to improve their levels of capital expenditure, which have been significantly lower in reality as compared to what is initially budgeted. 

The RBI on Monday released ‘State Finances: A Study of Budgets of 2022-23‘, the latest in its annual report series on the finances of all the states. In the report, the central bank finds that not only have states benefited from strong revenue collections, they have also been prudent in their expenditure. 

“The undershooting of budgetary targets for key deficit indicators has enabled States to reduce their outstanding liabilities,” the RBI report said. “These developments have extended into 2022-23 so far.”


Also Read: Covid’s economic fallout hit India’s industrialised states harder than agrarian ones, finds RBI


States project robust revenue growth

The data in the report shows that the States have projected revenue receipts to touch Rs 38.57 lakh crore in the Budget Estimates for 2022-23, which is 38.6 per cent higher than the previous year. Last year, as well, revenue growth stood at a robust 32.2 per cent, but that was on the back of a low base since collections had shrunk in 2020-21 due to the pandemic. 

Notably, within total revenue receipts, tax revenue growth is also projected to be robust, coming in at 11 per cent in 2022-23, following up on a 33 per cent growth in the post-lockdown year of 2021-22. 

“A coincident indicator of this sustained improvement is that market borrowings are much lower than in the indicative calendar due to comfortable cash flow positions of the States, boosted by timely payment of GST compensation by the Centre (May and November 2022) and release of two advance instalments of tax devolution (August and November 2022),” the RBI said.

“The States need to take advantage of this ‘sweet spot’ by building up fiscal buffers and stepping up capex,” the report added.

Short-lived benefits of Old Pension Scheme  

Last week, the Congress government in Himachal Pradesh announced that it would revert to the Old Pension Scheme (OPS), joining a list of other Congress-led or aligned States that are doing away with the New Pension Scheme (NPS) that most States have adopted. 

Under OPS, government employees who have worked for at least 20 years get 50 per cent of their last drawn salary as their pension. There are no contributions made through this period, and the pension payments come due at the time of the employees’ retirement. 

The NPS, implemented in 2004 by the NDA government, introduced a system where the government and employees contribute 10 per cent and 14 per cent of the employee’s salary, respectively, towards a pension fund. This pension fund is invested by the Pension Fund Regulatory and Development Authority in diversified portfolios. The idea is that these contributions would grow and so the government can use these funds to pay pensions when it needs to. 

The consensus view among economists is that moving back to the OPS would entail future fiscal distress for states, or “fiscal harakiri” as noted by the State Bank of India (SBI)’s October 2022 Ecowrap.

“It seems that the States moving back to the old schemes want to save money currently and use the amount to give freebies to gain popularity,” the SBI report said. “However, it must be emphasised that the money for pensions would be collected from the tax payers in future. It also seems unfair that only a certain section of people (government employees) get this benefit of pension.” 

Apart from Himachal Pradesh, Rajasthan, Chhattisgarh, and Jharkhand have also moved to the OPS. In Chattisgarh, government employees can choose between OPS and NPS. 

“A major risk looming large on the subnational fiscal horizon is the likely reversion to the old pension scheme by some States,” the RBI said in its report. “The annual saving in fiscal resources that this move entails is short-lived. By postponing the current expenses to the future, States risk the accumulation of unfunded pension liabilities in the coming years.”

States sacrifice capex

“Generally, the actual capital outlay of States during a year is considerably lower than the budget estimates made at the beginning of the year,” the RBI noted. “In 2020-21, States were able to execute only 69 per cent of their budgeted capital outlays.” 

What the report found was that even though the pandemic meant states had to cut their overall spending, most of these cuts were done in capital expenditure rather than revenue expenditure.

“The deviation from budgetary targets is comparably much smaller for revenue expenditure, which is mostly committed in nature,” it said. “State governments in India often sacrifice capital outlays during business cycle downturns to contain overall spending for achieving their deficit targets.”

The RBI noted that although the initial waves of COVID-19 had placed States under considerable stress, their deficit ratios have improved significantly since then. 

“While the first two waves of the pandemic posed a major fiscal management challenge for States following revenue shortfalls and the compelling need for higher spending, the subsequent waves had a relatively milder impact on their finances,” the report said. “Accordingly, the States could bring down their gross fiscal deficit below the Fiscal Responsibility Legislation (FRL) target of 3 per cent of GDP in 2021-22.” 

“In 2022-23, the budgeted GFD (gross fiscal deficit) of 3.4 per cent of GDP is higher but within the target of 4 per cent set by the Centre,” it added. 

However, the central bank did warn that the budgeted debt-GDP ratios of States continue to remain significantly higher than the 20 per cent recommended level. 

Edited by Geethalakshmi Ramanathan 


Also Read: Freebies, bailouts, revival of pension scheme — why many states are at risk of fiscal stress


 

Subscribe to our channels on YouTube, Telegram & WhatsApp

Support Our Journalism

India needs fair, non-hyphenated and questioning journalism, packed with on-ground reporting. ThePrint – with exceptional reporters, columnists and editors – is doing just that.

Sustaining this needs support from wonderful readers like you.

Whether you live in India or overseas, you can take a paid subscription by clicking here.

Support Our Journalism

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular