One Rank One Pension and Its Fiscal Implications

There are many reforms introduced by the Indian government one of them is OROP. OROP is a pension reforms movement for Indian Armed Forces Personnel. OROP basically means that retired soldiers of the same rank, who have retired after serving for the same length of service, will receive the same pension, irrespective of the date/ year of their retirement. Pensions of the officers are based on the last salary drawn by them at the time of retirement.

A pay commission comes after every 10 years and gives recommendations for enhancing the pay and allowances keeping the various factors into mind like inflation, price hikes and increase in living expenditures etc. Hence, with each consecutive pay commission, the military persons who retired earlier received lesser pension as compared to those who have retired later with the same rank and length of services.

That’s why the government wants to introduce the principle of “OROP” which means uniform pension should be paid to armed forced retirees with the same rank and same length of service. Government wants to increase the current pension payments as well as paying off arrears (retrospectively from July 2014).

There are many fiscal implications on implementing OROP. Firstly, the estimate overall cost of OROP is to be Rs.16,000 crore ($2.5 billion or 0.1% of GDP) in FY 16. This will significantly impact the fiscal bill of the country. Secondly, the existing defence pension bill is likely to go up by Rs.10000crore, while arrears totalling Rs.12,000 crore or will be paid over two years. Thirdly, other pressures on the fiscal fronts are also mounting. 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 government has already laid out a roadmap for Rs.70, 000 crore capital infusion in PSU banks over a period of four years. Of this Rs 25,000 crore each will happen in 2015-16 and 2016-17 and Rs 10,000 crore each in 2017-18 and 2018-19. Finally, after the seventh pay commission, every government servant and pensioner is due to get at least 30% jump in a pay, allowances and pension; therefore, it will increase the pension liabilities. Many other civilians pensioner are also demanding similar OROP scheme for them and this will bound to throw the government in a huge mess.

In a country like India, this has limited resources, an expense as big as OROP must be examined carefully and kept in limits. At present are defence budget is Rs.250000crore. In addition, the government pay defence pension of around Rs.60000crore. OROP will add another of Rs.10000crore to it annually. Pensions are basically for services already rendered. These funds are given out with no output obtained in return. Retirees can be provided with job opportunities so that pension expenses can be reduced.

Blog is written by Kanika Goel, MBA FP student, 2015-17 batch, ICoFP Delhi Campus.

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