RBI advises states against reverting to old pension scheme, says big risk

Amid a move by some state governments to restore the old pension scheme (OPS), the Reserve Bank of India has put forth its reservation against it, saying doing so would entail a major risk for the sub-national fiscal horizon.

Earlier this month, Himachal Pradesh became the fourth state to revert to the OPS for state government employees. Chhattisgarh and Rajasthan, too, have rolled out the old pension scheme. Both these states are ruled by the Congress party. Besides them, the AAP-ruled Punjab has preferred the OPS.

According to The Hindu Businessline, the RBI said in its report on state finances that the annual savings in fiscal resources by reverting to the OPS ARE “short-lived”. “By postponing the current expenses to the future, states risk the accumulation of unfunded pension liabilities in the coming years,” the RBI report said.

Themed “Capital Formation in India: The Role of States”, it said states should “mainstream capital planning rather than treat them as residuals”.

They should increase allocations of capital expenditure for sectors like health, education, infrastructure, and green energy transition to expand production capacities and create a broad-based developmental agenda. Also, outlays on social services and physical infrastructure can enhance productivity, it added.

The report also stressed that the states should form responsible climate change policies in areas such as clean energy, clean transport and sustainable land use. Capacity building on access to finance and climate governance would help states meet their potential and realise the committed national target of net zero emissions by 2070.

It noted that the fiscal health of states has rebounded from pandemic-induced stress, aided by buoyant revenue collections and prudent expenditure management.