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Fiscal deficit to rise to 5.1% in FY25 due to UPS: Report

The newly-announced Unified Pension Scheme (UPS) is expected to shoot up the fiscal deficit by 15 basis points (bps) to 5.1 per cent from the budgeted 4.9 per cent in the financial year 2025 (FY25), according to a report released by the Macquarie Group on Monday.

News Arena Network - New Delhi - UPDATED: August 27, 2024, 08:58 AM - 2 min read

Fiscal deficit to rise to 5.1% in FY25 due to UPS: Report

Fiscal deficit to rise to 5.1% in FY25 due to UPS: Report

The global investment bank estimates that the new scheme could increase the fiscal deficit for FY25 by around Rs 45,000 crore.


The newly announced Unified Pension Scheme (UPS) is projected to increase the fiscal deficit by 15 basis points to 5.1 per cent from the budgeted 4.9 per cent for the financial year 2025 (FY25), according to a report released by Macquarie Group on Monday.

 

The global investment bank estimates that if the new scheme burdens the government's finances by around Rs 45,000 crore, the fiscal deficit could rise as forecasted.

 

The report highlights a discrepancy in cost estimates: while Cabinet Secretary-designate T.V. Somanathan has projected the FY25 impact at Rs 6,250 crore, other sources suggest the burden could range from Rs 40,000 crore to Rs 45,000 crore, which would lead to the projected 15 basis point increase in the fiscal deficit.

 

Under the UPS, employee contributions will remain at 10 per cent of basic pay plus dearness allowance (DA). However, the government's contribution will rise from the current 14 per cent to 18.5 per cent. This increase will cost the Centre an additional Rs 6,250 crore in the first year, plus a one-time expenditure of Rs 800 crore for arrears, according to Somanathan.

 

The report also criticises the recent budget, noting that while it was not intended to be populist, subsequent announcements, including the UPS and various state-level schemes, suggest a shift towards populism in a bid to win elections. This trend is seen as potentially hindering India’s progress and increasing the risk of falling into a ‘middle-income trap’ if reform efforts are not maintained.

 

Additionally, the report points out that the introduction of the UPS may place further strain on state finances, as states are encouraged to adopt the scheme. Maharashtra has already become the first state to implement the UPS ahead of the November assembly elections.

 

With states’ fiscal deficits currently exceeding the Central government’s target of 3 per cent—standing at 3.2 per cent—the adoption of the UPS could exacerbate the fiscal strain, the report warns.

 

The Union Cabinet approved the UPS on Saturday, which is expected to benefit 2.3 million central government employees. If adopted by state governments, the scheme could eventually cover up to 9 million employees.

 

Although the UPS is not a complete reversal of the Old Pension Scheme (OPS), which was a defined benefit scheme, it represents a significant shift from the current National Pension Scheme (NPS), a defined contribution scheme, and may still place a considerable burden on public finances, the report concludes.

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