Fiscal time bomb

Govt must explore new options to limit OROP's impact

The government has announced the implementation of the one-rank, one-pension scheme, generally referred to as OROP. This will ensure that all those retired members of the armed forces who draw a government pension will receive an amount determined by their last held position, regardless of when they retired. Till now, someone who retired as a major in 1990 might not have received the same sum as someone who retired as a major in 2010. There is little doubt that OROP is an emotive issue, which is why Prime Minister Narendra Modi, when on the campaign trail, repeatedly harped on it and made it an electoral promise. The strong emotions it engenders - since it feeds into a narrative of civilian administrators not giving the armed forces their due - also explain why it was the subject of a disturbing series of demonstrations by ex-servicemen. In effect, the government's hand has been forced. It is also a matter of fact that all those retiring at the apex pay scale (all officers of the Indian Administrative Service and the Indian Foreign Service and senior members of the armed forces including commanders and some lieutenant-generals usually retire at this scale) are already enjoying OROP, thanks to a decision taken many years ago. There is, therefore, an air of inevitability about this announcement. Once the scheme was promised and already the top echelons of the civil services and armed forces were enjoying OROP benefits, the government could not back away from it.

However, the fiscal implications are uncertain, but almost certainly severe. The PM, in a speech in Faridabad on Sunday, said that it would cost about Rs 8,000-10,000 crore. This does not take into account several factors. Annual estimates do not factor in the present value of such annuities - exactly what makes entitlements dangerous. Also, those in the armed forces frequently retire early, meaning that at any one point there may be multiple retired servicemen for every one still in uniform. This in itself is enough to increase the fiscal burden. By some estimates, it would double or even triple the existing net present value of servicemen's pensions. India, at this stage in its development, should be moving to contributory pension systems instead of creating entitlements - this was, for example, the thinking behind the New Pension Scheme or NPS. Successive governments have failed to make the case for extending the NPS to cover armed forces as well, which would be both just and sustainable.

The impact on government finances will be even more severe because the concession of this demand, especially given that it follows a noisy agitation, will embolden other groups who will justifiably ask: why not them? Other forces, in particular, will start asking the question. The paramilitaries such as the Central Reserve Police Force will be the first. It was perhaps inevitable after an electoral promise was made by the Bharatiya Janata Party leaders, but a Pandora's Box has been opened, and now the government has chosen to sit down on a fiscal time bomb. Add in the impact of the Seventh Pay Commission, due to report in December, on the overall pay burden and also on post-OROP pension liabilities, the fiscal challenges become even more daunting. In other words, just when it looked India's fiscal worries have been contained somewhat, the government has let the situation spiral out of control.

The damage has been done. The government must now use its political management skills more wisely, and limit the spread of this demand to other segments. Another option is to start the process of introducing the contributory pension benefits scheme like the NPS for the armed forces. Civil servants joining the government after 2004 are already part of it. This would at least cap the future burden on account of pensions for the armed forces. Without exploring such options, the portents for fiscal stability do not look very bright.