Date: 22/03/2023

Relevance: GS-2: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Key Phrases: Old Pension Scheme, New Pension scheme, Freedom without finances, Dependency on the Centre for Resources, Gap between Richer and Poorer States, financial disparities, Sustainability and Efficacy of Redistribution.

Why in News?

• India's states have matured and are eager to make their own decisions such as implementing different welfare schemes, choosing types of pension schemes, and deciding how universities should admit students.
• However, the states do not have the financial resources to implement these decisions or the freedom to mobilize finances on their own.

Freedom without finances:

• The current standoff between the Union government and the states over various issues like freebies versus welfare, reversion to the old pension scheme, imposition of conditions for financial grants on states, and so on are all manifestations of this syndrome of "freedom without finances."
• The recent uproar over the old versus new pension scheme is a classic example.

OPS in Different States:

• States such as Rajasthan, Punjab, Himachal Pradesh, Chhattisgarh, Jharkhand, and Bengal want to implement the old pension scheme (OPS), but the Centre opposes it because they have to provide the financial resources eventually.
• Large states such as Maharashtra, Tamil Nadu, Karnataka, and Gujarat are resisting pressure from their government employees to revert to OPS because of its dangerous financial implications.

Financial Implications:

• States that want to implement OPS have much higher debt levels (40% of GDP) than the states that are reluctant to switch to OPS (22%).
• The implementation of OPS will increase the financial burden of these states in the long run, which will affect their ability to cater to the basic needs of their citizens.
• For instance, Punjab has a debt of 48% of its GDP and spends nearly one-fifth of its income on pensions for government employees, who constitute only 6% of the total families in the state.
• Similarly, Himachal’s debt levels are 42%, with a pension expenditure of 21% for just one-fifth of the households.
• When these states spend so much of their income on just 20 percent of the families, they will not have enough resources to cater to the basic needs of the remaining 80 percent, which forces them to borrow more money.

Dependency on the Centre for Resources:

• States implementing OPS neither have the financial muscle nor the powers to raise their own finances and are dependent on the Centre to provide funds either through devolution of taxes collected from other states or by borrowing and lending.
• The problem arises because just four large states – Maharashtra, Tamil Nadu, Karnataka, and Gujarat – are net contributors to the Union government’s tax pool, while most other states are net takers.
• For example, for every Rs 100 that an average Maharashtrian pays in all forms of taxes to the Union, nearly Rs 70 is sent to other states. But for every Rs 100 that the average Punjabi or Rajasthani pays to the Union government, they get back Rs 150.
• In other words, the Punjab or Himachal government claiming the right to decide on OPS is paid for indirectly by future generations of people in Maharashtra, Gujarat, Tamil Nadu, and Karnataka through the Union government.

Impact of OPS on the Gap between Richer and Poorer States:

• Such redistribution from richer states to needier ones is neither unique to India nor confined just to the OPS. However, the gap between the “net giving” and “net taking” states has only increased over time, leading to financial disparities.
• For instance, the gap between the debt levels of states that have implemented OPS (Bengal, Rajasthan, Punjab, Jharkhand, Chhattisgarh, Himachal) vis-à-vis the states that have resisted OPS (Maharashtra, Tamil Nadu, Gujarat, Karnataka) has increased from 13% in 2003 to 20% of GDP in 2023.

Sustainability and Efficacy of Redistribution:

• The pattern of richer states giving and the needier states taking more without closing the gap is unsustainable and dangerous.
• Schemes like OPS that lavish money on the small creamy layer of government workers at the expense of the vast majority of their poor will only exacerbate the gap between richer and poorer states.
• At some point, the richer states will start to question the efficacy of such redistribution and the need for them to continue to fund regressive schemes such as OPS in poorer states.

Conclusion:

• The decision on what to spend money on may be a state’s right, but the money is a national issue.
• Duly elected state governments must have the right to frame their policies, but they must also be accountable for their financial decisions.
• Schemes like OPS will only exacerbate the gap between richer and poorer states. It is time for the states to realize their financial limitations and adopt more responsible programs and policies.
• Otherwise, the fiscal elephant in the federalism room of the nation will continue to grow, resulting in long-term financial instability.

Source: The Indian Express

Mains Question:

Q. How does the implementation of schemes like the Old Pension Scheme (OPS) exacerbate the gap between richer and poorer states in India, and what are the implications of this on the fiscal relationship between states and the Union government in the country?