Cash Down

On August 25, the monsoon session of Parliament will probably lapse into history as one of the most memorable ones, for one crucial law that it will have passed and another that it did not. In Union finance minister P. Chidambaram's record books, it may even go down as a day as nightmarish as the one in 1997 that adopted the Fifth Pay Commission's recommendations and messed up the state finances for ever.

One can only pray that the passage of the draft Rural Employment Guarantee Act (REGA) and the non-adoption of the Pension Fund Regulatory and Development Authority (PFRDA) Bill won't do the same to central finances and raise the burden on honest, tax-paying citizens to backbreaking levels. A few numbers will make it clear why, despite his brave assurances on the money front, even PC might need Leftist mercy or divine intervention.

REGA needs Rs 11,000 crore to roll out in 200 districts to begin with, and nationwide it would cost Rs 40,000 crore annually to provide one job per each rural family. That means, explains the Union rural development minister R.P. Singh, 25 million households will join the scheme when it's in full force. Estimates by financial analysts, including a research report by J.P. Morgan, range from Rs 50,000 crore to Rs 1.5 lakh crore. Just to put this figure in perspective: the central share of taxes this fiscal is expected to be Rs 2.7 lakh crore, and the total central expenditure could be double this amount.

At a press conference to explain theUPA's stand on disinvestment modes on August 17, PC reiterated that though the money was enough this year (only half the year is left), "we'll have to rework the numbers next year. Our calculations show there'd be a nominal impact on the next budget". According to Oxus Research's Surjit Bhalla, the fiscal deficit may rise by 4-4.5 percentage points. Rajiv Gandhi Foundation director Bibek Debroy says: "Employment guarantee and unemployment insurance are completely different; the bill mixes up the issues. Doing something in the name of the poor is not the same as doing something for them. The poor don't need this rubbish, they need rural roads, water, sanitation." Kristin Lindow of the rating agency Moody's Investor Services is more acerbic: "The job guarantee plan should induce wariness on the part of investors in Indian government and even public corporations' debt."

While the Left parties back largesse schemes like REGA and even unorganised workers' insurance, they have dismissed the Khanduri committee's recommendations on the PFRDA Bill, refusing even to discuss the new self-paid defined-contribution pension scheme that has come into force for government employees who started service from 1.1.2004. (The government provides 10 per cent of the contribution which, pending the bill's passage, is being held by the government.) Says theCPI's Gurudas Dasgupta: "I'm against this bill lock, stock and barrel. Its sole aim is to channelise (sic) funds to the stockmarket to boost the sensex."

If passed, the law would allow the birth and development of a pension fund market, regulate private and public operators, and pave the way for pension planning and investment by 88 per cent of the Indians not covered by any kind of social security. It would also ameliorate the humongous burden of servicing pensions on the cash-strapped central and state governments. Which, according to a study by Gautam Bharadwaj of Invest India Economic Foundation and S.A. Dave of theCMIE who call it the net pension liability over the next 35 years, or the net present value of the governments' future pension outgo, is 56 per cent of GDP!

Although Left leaders call the numbers fraudulent, civil servants too are sympathetic to pensionreforms. Going by a finance ministry paper, pension liabilities of all governments account for 1.64 per cent of the GDP, a little less than what the REGA wouldneed. Freeing up the pension market would have given the government enough breathing space to implement the politically expedient REGA with an easy conscience. Just last year's pension expenditure by state and central governments was Rs 66,000 crore!

Even from a social equity point of view, the arguments to create a pension fund market are infallible. With two-thirds of the population under 35, like in many developing countries, and reducing mortality, the Indian government not only faces a huge pension burden not financially accounted for, but is also forced to neglect essential development schemes for the entire nation to cater to a fortunate few. Second, the assured pension scheme for government employees benefits only a handful of privileged Indians, at the expense of the vast majority who have to fend for themselves for old-age security. Even the Employees' Pension Scheme run by the Employees' Provident Fund Organisation, the only non-government social security scheme, is underfunded to the extent of Rs 22,000 crore as of 2004, putting millions of people's old age care under a cloud.

The Left parties protest the rationale of investing pension fund money in the stockmarkets. But the PFRDA Bill allows full freedom for individual choices in scheme selection and an array of options in growth, security and mixed schemes. Says D. Swaroop, chairman of the interim PFRDA: "Returns on the new pension scheme will be at least 50 per cent higher than what government staffers have been getting."

Swaroop is confident that it will take only 3-6 months from the passing of the bill for the entire pension fund market to start operating fully. Senior officials assure that all the recommendations, including those of 26 per cent FDI and full equity investments, will have no difficulty in sailing through North Block. The only impediment is the Left; even the bjp supports pension reforms.

The combined fiscal deficit of the states and Centre now stands at 9.6 per cent of GDP. With the oil price deficit ticking away furiously and the central FD already touching 36 per cent of the budgeted amount in three months, PC's options are limited. Now that disinvestment, too, is off, brace yourself for another round of tax hikes and cess to pay the price of Leftist folly and the debts against our future generation.