If the newly elected Congress government in Himachal Pradesh implements its pre-poll promise of re-introducing the defined benefit old pension scheme (OPS) without any contribution from the contributory National Pension System (NPS), it could potentially inflate the state’s already high debt level further.

Debt-GSDP of Himachal Pradesh (HP) was estimated to be at 43% of GSDP in FY22, in the league of states plagued by high indebtedness such as Punjab (53%) and Rajasthan (40%), which have also reverted to OPS.

HP is also running a higher fiscal deficit in the range of 4-5% of GSDP in the past four years than the prudential level of 3% .

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The Himalayan state’s efforts in recent year to restructure and rationalise its spends by reducing the burden of committed expenditure (salaries, pension and Interest) had brought down Himachal’s committed expenditure from 80% of total revenue expenditure in FY13 to 61% in FY22. However, it is still one of the highest among states.

Under NPS, a monthly contribution of 10% of basic pay and DA was to be paid by the employee and matched by the employer (Centre and most states have since enhanced their contribution to 14%) to the corpus managed fund managers appointed of pension regulator PFRDA.

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Reverting to OPS may give some temporary relief to the state government as it would stop monthly contributions to NPS, but the rising components of salaries/wages, unfunded pension and Interest payments could lead to a debt trap for the state in the coming years.

“It will be a fiscal disaster for the states to go back from the new pension scheme and adopt the old pension scheme,” 15th Finance Commission chairman NK Singh said last week.

Some states, which are embarking upon it, would really be putting the state finances “under great difficulties and duress”, Singh said, adding that there was the sound economic logic behind the NPS.