In a recent study of state government budgets, the Reserve Bank of India (RBI) estimates that any shift by states to the old pension scheme (OPS) would increase their fiscal burden by 4.5 times compared to the expenditure under the National Pension System (NPS) for retirement benefits.
The internal estimates suggest that if all state governments revert to OPS from NPS, the cumulative fiscal burden could reach 4.5 times that of NPS. This additional burden is projected to account for 0.9 per cent of GDP annually by 2060. These estimates gain significance as some state governments, primarily from opposition parties, have promised to return to the old pension system.
The RBI report, titled “State Finances: A Study of Budgets of 2023-24,” highlights that reverting to OPS could exert a substantial burden on state finances, limiting their capacity for growth-enhancing capital expenditures. It emphasizes that such a move would be a step backward, undermining past reforms’ benefits and compromising the interests of future generations.
The report underlines the importance of scaling up fiscal capacity for efficient service delivery and upgrading the quality of physical and human capital. It suggests that uninterrupted fiscal capacity is essential for social, economic, and general service delivery to the people.
Moreover, the RBI calls for improvements in tax administration, including data analytics to curb tax evasion, to enhance the fiscal capacity of states. The report acknowledges that GST implementation has led to greater formalization of the economy and expansion of the tax base without unduly raising the tax burden.
