Monday, September 7, 2015

One Rank One Pension will impact India's fiscal math? Contrary views

The government has "in principle" accepted OROP - a demand by India's defence personnel that uniform pension should be paid to armed force retirees with the same rank and same length of service.

One Rank One Pension (OROP) will have a significant impact on the country's fiscal bill and the overall cost will be around Rs 16,000 crore or Rs 160 billion in the current financial year, says an HSBC report.
The government has "in principle" accepted OROP - a demand by India's defence personnel that uniform pension should be paid to armed force retirees with the same rank and same length of service.
"This would mean higher current pension payments as well as paying off arrears (retrospectively from July 2014), it will have a significant impact on the fiscal bill.
We estimate the overall cost to be Rs 16,000 crore or Rs 160 billion ($2.5 billion or 0.1 per cent of GDP) in FY16," HSBC said in a research note.
As per the global brokerage firm, the existing defence pension bill is likely to go up by Rs 10,000 crore, while arrears totalling Rs 12,000 crore will be paid over two years.
"In sum, we estimate the fiscal implication to be Rs 16,000 crore or Rs 160 billion in Fiscal year 2015-16," HSBC Chief India Economist Pranjul Bhandari said.
Meanwhile, other pressures on the fiscal front are also mounting.
The government recently announced capital infusion of Rs 70,000 crore or Rs 700 billion over the next four years including Rs 25,000 crore or Rs 250 billion in the current fiscal.
The disinvestment department's mammoth target of Rs 69,500 crore or Rs 695 billion, on the other hand, is unlikely to be met.
"The disinvestment receipts target of Rs 69,500 crore or Rs 695 billion looked rather rich. Even in the previous year, FY15, the government budgeted for Rs 63,400 crore but ended the year with about half of that," Bhandari added.
However, factors like lower than expected subsidy bill, additional non-tax revenues like RBI and PSU dividends are likely to offset some pressures on the fiscal front.
The deciding factor on whether the fiscal deficit target of 3.9 per cent of GDP is easily met is likely to rest on tax revenue growth.
 "All said, while it's too soon to declare that the fiscal target will be missed, pressures are mounting and it is time to monitor closely," HSBC said.
Financial services major Nomura has also said though the implementation of 'One Rank, One Pension (OROP)' is going to put fiscal burden to the tune of around Rs 10,000 crore or Rs 100 billion, the government is unlikely to miss the fiscal deficit target this year.
"We do not expect the OROP scheme to derail the fiscal deficit target of 3.9 per cent of GDP in FY16, due to lower spending (on account of savings on fuel and fertilizer subsidies this year) as well as higher indirect taxes (relative to the budget target)," the Japanese firm said in a report.
Last week, over the weekend, the government gave up to mounting pressure from ex-servicemen and approved the OROP scheme for the armed forces.
The scheme provides a uniform pension to the armed forces personnel who retire at the same rank after the same length of service, regardless of their date of retirement.
These benefits would be given retrospectively from July 1, 2014, with arrears to be paid in four half-yearly instalments, with pensions re-fixed every five years.
The report said the OROP scheme is expected to add to the fiscal burden due to higher pension outgoings.
The government estimates the one-off hit due to arrears is likely to be Rs 10,000-12,000 crore (0.1 per cent of GDP) in FY16, if implemented this year, while the recurring annual additional fiscal cost will be Rs 8,000-10,000 crore  or Rs 80-Rs 100 billion(0.1 per cent of GDP), and is expected to increase in future.
"The increased pension liabilities, the upcoming Seventh Pay Commission hike and higher recapitalisation requirements of public sector banks suggest that continued fiscal consolidation beyond FY16 will require structurally addressing both the expenditure and revenue side of the fiscal balance," the report added.
Meanwhile, the government on Monday ruled out the additional financial burden of Rs 8,000-10,000 crore on account of OROP scheme hurting the fiscal consolidation programme, saying there was "space" to absorb it.
"We have the fiscal space to be able to absorb this without having any impact of the fiscal deficit target, which is 3.9 per cent.
So, we have taken that into account as we have prepared the One Rank One Pension (OROP) scheme," Minister of State for Finance Jayant Sinha told PTI in an interview.
The government had last week announced that it will implement OROP under which a uniform pension would be given to armed forces personnel retiring at the same rank with the same length of service.
The scheme would be implemented from July 1, 2014. Funding the OROP, the Minister said, was never a consideration, but the government took time in finalising the scheme as it wanted it to be "equitable and not half-baked".
Sinha said the actual payout in arrears for implementation of the scheme from July 1, 2014, as well as the recurring burden are being worked out.
For the current year, the outgo is estimated at Rs 8,000-10,000 crore or Rs 80-Rs 100 billion, he said.
"We are estimating that cost would be between Rs 8,000-10,000 crore at present and it would increase further in future...
It is a recurring number. The Rs 8,000-10,000 crore is in this fiscal and there are of course arrears which have to be paid," he said.
As per the OROP scheme announced by the government, the pension for defence personnel would be revised every five years.
The arrears would be paid in four half-yearly instalments.
However, all widows, including war widows, will be paid in one instalment.
"We have taken into account what adjustment will be necessary in the Budget to be able to both apply one rank one pension which we have promised to our brave servicemen while at the same time maintaining our fiscal discipline and fiscal target that we have already outlined," he said.
Sinha said there are estimated 6.5 lakh war widows and over 27 lakh ex-defence personnel who will benefit from the OROP scheme.
"We have sufficient ability to be able to find fiscal space for that... As of now, we are quite confident we will be able to find that fiscal space," Sinha said.
In the current fiscal, the government aims to restrict fiscal deficit at 3.9 per cent of GDP.

As per the fiscal consolidation road map, the fiscal deficit is to be brought down to 3 per cent of GDP by 2017-18.

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