Terms of Trade | Why the Unified Pension Scheme is important and unimportant at the same time

Even though the fiscal implications are not exactly clear, the UPS is among the most important “reform” rollbacks in India’s history.

Last week the government announced that it will bring a Unified Pension Scheme (UPS) along with the existing New Pension Scheme (NPS) for central government employees. State governments are also free to join the UPS.

How is the UPS different from the NPS? The key difference lies in the fact that it has a minimum guaranteed pension amount (half of the last drawn salary)

How is the UPS different from the NPS? The key difference lies in the fact that it has a minimum guaranteed pension amount (half of the last drawn salary), which, from the information available so far, seems to be largely the same as what government employees were entitled to under the Old Pension Scheme (OPS).

Unlike the OPS, however, employees will continue to contribute towards their pension fund and the government’s contribution, which was already more than the contribution by employees, is expected to increase further from 14% to 18%. This makes it less fiscally draining than the OPS.

Make no mistake. Even though the fiscal implications are not exactly clear and perhaps not significant in the short term, the UPS is among the most important “reform” rollbacks in India’s history. This is because of the philosophical importance of the decision. The UPS essentially means the state reinstating its guarantee of a minimum inflation-indexed pension amount rather than leaving pensioners to the vagaries of market returns. It is therefore a drastic realignment in the risk-reward sharing framework between the triumvirate of the citizens, state and markets and marks a fundamental departure from the philosophy of neoliberalism.

Why has something as big as this not really triggered politics and the news cycle in India? The government and BJP themselves have not really made a big deal out of the issue if one were to compare it to propaganda efforts invested in many other decisions or issues. The only economic policy decision that perhaps even comes close to the importance of UPS being announced is the roll-out of Goods and Services Tax (GST). The answer to this question lies in two factors.

The first can be explained by the fundamental asymmetry in our public discourse, which oversells policy changes, which are in favour of capital and tends to undersell, even vilify policies which do the reverse. The fact that the former is often termed as reform and the latter rollback of reforms explains the in-built bias. Its fiscal consequences notwithstanding, the UPS is not something, which will please capital and capital markets in principle.

To be sure, their opposition to the scheme would be significantly diluted by the fact that the scheme will create a very large pool of resources which will be invested in financial markets. As of July 31, the NPS had ₹12.8 lakh crore in assets under management. This is bigger than any other private mutual fund in the country.

An even bigger reason for the relatively muted reaction to the UPS is the size of the cohort it will affect. The government’s own estimates suggest that even with all state governments joining in, the UPS pool would comprise about 10 million people at most. When seen in the context of India’s 550 million strong labour force this is a very small number. This also means that the cohort of government employees, on their own, is too small to move politics in the country.

The numerical insignificance argument, however, needs to be read with a caveat. A policy which sweetens the already sought-after (relatively) small club of government employment does not just generate a feel-good among existing employees. It also enhances the feel-good factor among those who want to land such jobs.

Assured pensions in government jobs, for the universe of job-seekers, if one were to make a cheeky comparison, are like what the Soviet Union was to communists across the world. Most of them knew that their country would never have a revolution, but it was still nice to know that the idea itself was not completely outlandish. A government which agrees to underwrite pension payments can hope to be seen as a friend of the worker rather than throwing them to the mercy of market returns.

It is this combination of facts and perception which makes the UPS look like the best of both worlds, which is what this newspaper termed it in its editorial.

Having made this point, it is equally important to underline the fact that there is a very large world outside the comfort of government salaries and pensions in the Indian economy. An overwhelming majority of this population lives in the world of meagre welfare entitlements, which the government provides and aspires to enter the privileged club of government employees. It is this mass of humanity which shows itself in millions of people applying for a handful of government job vacancies. Can this crowd, which is significantly bigger than the cohort of government employees, force the government or capital to give it a better deal in labour markets or the economy in general?

Political parties are more interested in creating fissures within this group rather than uniting it. This is exactly what the recent politics of increasing, decreasing or sub-stratifying reservations tries to do by exploiting economic insecurities to create or safeguard vote banks.

Unions of government employees have never really bothered to build larger solidarities beyond their immediate economic concerns in a long time. To be sure, India does have a history of partisan working-class actions in the past such as strike actions during the fag end of the freedom struggle or the railway strike before the Emergency. These things are relics of the past now. Whether this mind-your-own-business renegade attitude of the formal sector unions is a result of the retreat of overall left politics or the causation is the other way around is a question that is best left unanswered.

What is preventing a new political formation from waging this struggle for a better world that lives in the extremes of welfare entitlements and a small club of privileged government employees? Any such new-age mobilisation must navigate three practically unsurmountable barriers. The first is caste solidarity completely overwhelming class solidarity. The second is the challenge of finding a common class enemy outside the government. Most Indian workers are actually employed in small-size firms where the owner is as exploited as the employee. Last but not least is the compulsion of mobilising astronomical amounts to political finance to become an electoral force to reckon with.

That India has not had wage-price spiral-driven inflation unlike other large economies in the world is largely a result of this fundamental imbalance of power between labour and capital.

Policies like UPS, notwithstanding their philosophical and targeted economic impact, are largely inconsequential in this larger scheme of things. The irony is this was exactly the critique of India’s development model even before we unleashed economic reforms. There was a small privileged club of government employees and a large mass of people who were hoping to make it to this club.

While reforms have created a small club of really privileged people and an India which looks very different from what it was three decades ago, they have failed miserably to offer the so-called good life to the vast majority. In many ways, the government reinstating guaranteed pensions is more a failure of the markets to provide better-paying employment than a success of the radical disruption threatening unions.

Roshan Kishore, HT's Data and Political Economy Editor, writes a weekly column on the state of the country's economy and its political fall out, and vice-versa