Relevance: GS-2: Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Key Phrases:  Institutional reforms, Cooperative Federalism, Fiscal Slippage, Federal Bargaining, Competitive federalism, Flexibility, Transparency

Context:

• Rajasthan government’s recent announcement of implementing the old pension scheme for state employees appointed on or after 1 January 2004.
• Calls for a return to the old pension scheme are slowly gathering support in other states.
• Recently, a political party made a similar promise related to the old scheme in its election manifesto for Uttar Pradesh.

Why is the Move Problematic?

• The resolution presents a classic case of a nationwide reform being undone by some states after having agreed and completed a significant portion of it. Such back and forth could jeopardize our new institutional reforms.
• Going back and forth in reforms within a federal system sharpens political competition that can result in tensions over the federal bargain between national and state governments. This poses challenges for short-term political opportunity spaces and efficient resource utilization
• Rajasthan’s decision raises larger issues of sustaining reforms in a federal system. Some important questions crop up:
  1. First, have state governments identified their priorities among desired outcomes? States must allocate resources accordingly and adhere to these allocations, as fiscal slippages could prove costly in this recovery phase of the economy.
  2. Second, it raises an issue of the levels of expenditure that states can afford in the short, medium, and long term. Some expenses in the short and medium terms cannot be sustained in the long term and so pruning them is necessary.
  3. Third is the level of commitment by states to the cause of reforms. The level of political stability and its implications in turn for electoral cycles often decides the level of political commitment to economic, institutional and governance reforms.

Scenario of Institutional and Economic Reforms in India:

• The process of furthering economic and institutional reforms in India is facing some unexpected challenges at this juncture.
• As these reforms have to deal with complex political and social contexts, the decisions needed are fundamentally political and shaped by political settlements. Though we must take politics seriously, crucial changes to economic institutions need to emphasize the underlying economic gains and highlight the virtues of patience as these changes takes decades to pay off.
• There are some signs of states and political parties getting restless and trying to undo past reforms. One such example is the case of pensions.

Evolution of India’s Pension Scheme:

• Prior to India’s pension reforms, the civil services pension scheme was designed as Pay-as-you-go defined-benefit scheme.
• Studies and various panel reports showed that this scheme of pension and provident fund arrangements in Central and state governments would strain future public finances and could lead to a fiscal crisis.
• Discussions culminated in policy reforms, leading to the discontinuation of defined benefit (DB) schemes and a shift to a defined contribution (DC) scheme.
• All new Union government recruits after a date in 2004 were enrolled in the National Pension Scheme (NPS), state government followed suit, and in 2007, public sector banks also moved to the NPS under its corporate plan. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is now open to all citizens.

Why the Cooperative Federalism is Desired?

• Reforms on issues such as pensions touch upon many aspects of people’s lives. This often makes it complex to push these reforms and implement them.
• It is here that we must recognize the importance of joint initiatives between states and the central government, so that we achieved better outcomes.
• Both the Centre and states can learn a lot from each other through an exchange on key aspects of these reforms that can develop into expertise on how to fix the system.
• Importantly, such mechanisms can facilitate the implementation of reforms and compliance with them.
• In the current recovery phase of the Indian economy, states and the Centre need to work together and utilize forums for dialogue to identify significant areas for reforms.
• State- level institutions could be catalysts for the implementation of agreed reforms. We need reform accelerators. This could be done keeping in mind the political economy factors that have impeded reforms in the past.

States as Reform Accelerators:

Such an approach could be built on four pillars:

1. Tailoring: Issues can be identified at the state level and solutions provided to tackle them directly.
2. Prioritization and sequencing of reforms which could include combining gradual reforms with longer term structural changes, and their translation into clear, achievable, and measurable targets.
3. Transparency: Both targets and the process can be made public to increase participation and shared commitments.
4. Flexibility: This can ensure that the process allows for adjustments if targets are not reached and create space for innovation.

Why the Successful Reforms at State Level Imperative?

• Successful reforms at the state level are not only about technical capacity, knowledge, and targets, it is also about the imperative of creating a sense of accountability and infusing a process of shared responsibility across a coalition in support of changes.
• In order to sustain reforms at the state level, top political commitment is necessary. State governments can either create political momentum for reforms or capitalize on the existing momentum to support change.

Pension Schemes before 2004:

Prior to 2004, the existing pension schemes were limited in their coverage. Broadly there were two kinds of pension schemes:

• First, there was a pension scheme for civil servants and employees of autonomous bodies such as universities, which was fully funded by the government. Under the scheme, employees on their retirement used to get usually 50 per cent of their last drawn salary, as pension with dearness relief linked to inflation.
• Second, there is the pension scheme by the Employees Provident Fund Organisation (EPFO), which is mandatory for establishments covered by the EPFO (roughly speaking, companies with more than 20 workers).

What were the Benefits of NPS over Old Pension Scheme?

The introduction of the NPS had solved two problems:

• The first was the explosive fiscal burden of pensions. The reversion to the old pension system will have fiscal implications as the government would either have to cut on investments or borrow more to pay for a higher pension bill under the old pension system.
• The second objective addressed by NPS was to move away from concentrating the government’s pension obligations from a thin slice of the population to the wider population and to the poor and unorganised workers.

Conclusion:

• By going back to giving a defined benefit pension to civil servants, the Rajasthan government will reduce the chances of creation of a nationwide pension system for all workers.
• The proposal will reintroduce inequity into old age benefits of the Indian population
• We must replace blame assignment with a culture of finding solutions by doing, and, eventually, empowering stakeholders and supporting them in outcome delivery. This requires a move from ‘thinking politically’ to ‘working differently’.

Source: Live-Mint

Mains Question:

Q. Rajasthan government has recently passed a resolution for implementing the old pension scheme for the state employees. State the concerns associated with the move and its impact on the successful implementation of economic and institutional reforms. (250 words).