India spends more than 3% of GDP on govt pensions, states' burden growing

Centre last week proposed new policy for its staff to manage costs

The Centre and states spent about Rs 9.6 trillion on the pensions of their employees in FY24 (revised estimates), accounting for 3.3 per cent of India’s gross domestic product (GDP).

The proportion peaked at 3.8 per cent in the pandemic year of FY21 and trimmed to 3.3-3.4 per cent later. The average spending was 3.3 per cent in the decade beginning FY15.

With their combined outgo topping Rs 5 trillion for the first time in FY24, the pension bill of states exceeded that of the Centre by more than Rs 82,000 crore. States’ spending was higher than the Centre’s in three financial years till FY24. 

According to the latest Finance Ministry data, there are over 679.5 thousand central government pensioners, including defence pensioners, as of March 31, 2023. While, the number of civil and defence pensioners stood at close to 114.2 thousand and over 338.7 thousand, respectively, the number of telecom and postal pensioners stood at over 438 thousand and 301 thousand. Meanwhile, railway pensioners stood at over 152.5 thousand as of March 2023.

However, as a proportion of revenue receipts, the states' outgo was 4.2 percentage points lower than the Centre’s in FY24. This has been the trend for a decade.

 This analysis included defence and railway pensions while calculating the Centre’s bill. Defence personnel are paid under the Old Pension Scheme (OPS), while other central government employees are paid according to the National Pension Scheme (NPS). Central government employees, other than defence personnel, have been given the option to shift to the new Unified Pension Scheme (UPS).

Finance Minister Nirmala Sitharaman said earlier this week states may adopt UPS at their discretion.

Under UPS, government employees with a minimum 25 years of service are guaranteed 50 per cent of their last drawn basic pay (over the past year) as pension. The scheme increases the government’s contribution to pensions from 14 per cent of an employee’s basic pay under NPS to 18.5 per cent. UPS pensions are inflation indexed.

States’ pension expenditure is growing faster compared to their tax revenues (OTRs), causing financial pain. Their pension bills have grown at a compound annual growth rate of 12.3 per cent, while OTRs have grown at 11.3 per cent in the decade ended FY24.

 As a proportion of revenue receipts, the pension expenditure of states was higher in FY24 compared to FY15. This ratio is higher for the central government but it is declining and is likely to be the lowest in FY25 in over a decade.

Pensions are a disproportionately higher burden on some states. In Himachal Pradesh, Punjab and Kerala, pensions accounted for 26.1 per cent, 22.5 per cent and 21 per cent of revenue receipts in FY24, almost twice the average for other states. Smaller states like Manipur, Assam, Nagaland, Uttarakhand and Tripura too had considerably higher pension liabilities. 

Some UPS financial, operational, and administrative nuances have to be sorted. Even so, Maharashtra last week became the first state to approve UPS for its employees. Jharkhand, Chhattisgarh, Himachal Pradesh, Rajasthan had reverted to OPS, while Punjab had agreed to do so in principle. Other states continue to use NPS.