One-time poll sop OK but revival of pension scheme sinful: Arvind Panagariya

Amid a political tussle over the issue of freebies for voters, and the Supreme Court referring a plea on the matter to a larger bench, former NITI Aayog Vice Chairman Arvind Panagariya said that a poll promise is “fair game” if it is a one-time sop and does “not create long-term liability” for the next government.

Panagariya, however, described as “sinful” and “immoral” poll promises, such as reviving the Old Pension Scheme (OPS), which will result in significant financial burden for governments in the future.

Speaking to The Indian Express, Panagariya said, “My view is that given the fact that in a democracy, promises will be made. I don’t call these freebies, I call them promises. The nature of those promises is very important… What is OK, for example? If it is a one-time transfer, which is not going to hugely burden the budget of the future government, then I think it is fair game…”

He, however, said that such promises “should not create long-term liability for the government”. He said “it is sinful to create liabilities such that if you win the election, they don’t apply to you and they will apply to the government that comes back even further into the future” — and cited poll promises of reviving the OPS, which was discontinued by the then NDA government in 2003, as “a prime example.”

The Congress had raised OPS as one of its key promises ahead of the polls in Himachal Pradesh last week, while the AAP has offered a similar benefit ahead of the Gujarat polls next month. Two Congress-ruled states, Rajasthan and Chhattisgarh, have already decided to implement the OPS while the AAP government in Punjab has made a similar move. Jharkhand, too, decided to revert to the old pension scheme.

Asked whether political parties should refrain from promising the OPS, Panagariya said, “Absolutely. It is very attractive for these parties who want to do that…. the earliest liability that will arise will be in 2034. I think, assuming that it takes 30 years service to retire. So, those who joined in 2004 will retire in 2034. Till 2034, there will be no liability. So, your ‘sarkar’ is safe. You do not pay. You are really stranding the government which will be in power in 2034 with all this liability and whoever will follow after 2034. That is actually very sinful. It will be immoral to do that. It would be immoral to promise this kind of system in which you shift the employees from the current pension system to the old one.”

Panagariya said states specifically would not be able to afford the financial burden of the old scheme. “I don’t think any state will be able to do that. I don’t think any state can afford to do that because the liability will be very large. They will have to finance it from the tax revenue. Where are the tax revenues? You may have some growth happening in the next 10 years but that would not be enough to generate required revenue. By the way, when you use a very large part of the tax revenue into giving pensions, you are crowding out your other expenses. There are other expenditures like infrastructure and welfare of the poor,” he said.

Citing the financial condition of Brazil, Panagariya said, “The country one should look to see what can happen to you is Brazil. Almost 12-13 per cent of the GDP today in Brazil goes into paying the pensions. You cannot afford to do that. Our tax to GDP ratio is around just 16 per cent. So, how can 12-13 per cent of the GDP be committed to pension? Which is what Brazil is doing…”

Referring to India, he said, “What percentage of the population are the government employees? Not more than 2 per cent. How can you take 12-13 per cent of the GDP from the taxpayer and give it to the 2 per cent of the population? Even distributionally, it is regressive. And, particularly, intergenerational transfer that you are doing, it is the workers of tomorrow whom you will tax; and workers of today whom you will give the money.”

Panagariya was the vice chairman of NITI Aayog from January 2015 to August 2017, and is currently Professor of Economics and the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.

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