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Costing OROP critical PDF Print E-mail
Friday, 28 August 2015 04:58
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Don’t go by first-year costs, look at longer term

 

With 10 former service chiefs taking it up with the Prime Minister and war veterans continuing to protest—and those on hunger strike at Jantar Mantar being rushed to hospital periodically—the pressure on Narendra Modi to implement OROP is rising by the day. So much so that he had to bring it up even in his Independence Day address. But no matter how great the pressure, the PM cannot afford to lose perspective and has to examine the matter from all angles, including the possibility that others could want similar facilities—at least one Railways union has already said it wants OROP as well, and there are the paramilitary forces that will almost certainly agitate for it. While those leading the agitation, and their cheerleaders, point to how this will cost ‘only’ R8,000 crore—some put the figure at one-and-a-half times that—this is just the first-year cost. And they will go up due to inflation and, every decade, there will be a substantial jump when the Pay Commission hikes the salaries of every government employee.

Renuka Sane and Ajay Shah have a nice model for how to cost OROP. They take a case where a promise is made to pay a person who is 60 years old one rupee a day, for the rest of her life. Based on mortality data for the civilian population, they estimate this will cost R3,163 as a one-time bullet payment. But government pensions are indexed to take care of inflation—at a 4% annual inflation, this cost rises 35%, to R4,270. OROP requires one step more since, as a concept, this means pensions have to keep pace with the earnings of those currently in service. Sane/Shah assume salaries rise around 8% every year, as a result of which the one-time pension costs will rise to R6128, or by 94%. The story gets scarier since the bulk of the armed forces retire at around the age of 35. Once you factor in pension costs from this age till death, the basic pension cost rises to R4,519, or by 42%. Do the inflation adjustment along with that for annual hikes of 8%, and you’re talking of the one-time cost rising to R14,998, or by 374%. The actual numbers will differ depending upon the mortality tables for the armed forces, and will go up since family pensions have to be provided for, but this is the template the government needs to use. Once this exercise is done, it needs to be put out in the public domain. After all, if India is getting into a situation where, over a decade or so, the costs of OROP can impinge on its ability to buy aircraft or ships, the nation needs to know. Being in favour of OROP is easy, but if the choice boils down to a few less nuclear submarines versus OROP, it could be quite different.

 

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