As costs spiral, after Pay Panel, things will get worse
As the veterans celebrate their OROP victory, and anticipate being able to squeeze out a bit more once the judicial commission is set up to address their remaining concerns, finance minister Arun Jaitley has reason to be worried. Very worried, since there is no clarity on what OROP is actually going to cost and, in the remainder of its term, the government seems to have set itself up for a series of similar agitations from others including the paramilitary forces. There is, to begin with, the issue of early retirees. While the veterans were not clear about whether this group had been included when the initial package was announced by the defence minister, prime minister Narendra Modi clarified that they would be. It is not clear whether the R8,000-10,000 crore number bandied around as the annual OROP cost takes this into account; if not, it could boost the cost significantly. Certainly, the cost of the Pay Commission has not been included—its report will be out in a few months. As the Pay Commission merges existing DA with basic salary of government employees, the annual pension costs will go up substantially; and that will rise further depending upon the actual pay hike that is considered.
While one Railways union has already said it also wants OROP, there will be demands from even existing civil servants that, for instance, their pensions be revised to the ‘average’ of the new pay scales as opposed to the current practice of the bottom of the new pay scale. Right now, if someone at the top of the R15,000-20,000 pay scale retires, his pension is R10,000. If this scale is revised to R25,000-30,000 in the new Pay Commission, the pension for the old retiree goes up to R12,500—the salary goes to the bottom of the new scale—while a new retiree will get R15,000. Since, in the case of the veterans, the pension will go up to R13,750—the average of the scale—existing bureaucrats can also petition for this, apart from OROP itself; right now, OROP is available only to secretary-ranked officials.
Officials of the finance ministry argue that the FY16 Budget will not be badly affected since there is a cushion provided by, for instance, low oil prices—the OROP arrears are not to be paid out at one go, but will be paid in instalments. The numbers, however, look quite touch-and-go since there is also the additional money needed for the recapitalisation of banks and disinvestment receipts could fall short if the markets continue to behave as they are. The real danger, of course, will be in FY17 when, apart from the impact of OROP, the Pay Commission impact will have to be dealt with. Theoretically, the government has a lot of fat it can trim by way of eliminating waste in subsidies—in this year alone, food subsidies account for R1.2 lakh crore and fertiliser subsidies R73,000 crore. The problem here is that the progress on cutting subsidies has been quite poor and, despite the low oil prices, the government has not used the opportunity to completely free up prices—so, were oil prices to start rising again, so could petroleum subsidies. Hopefully, the finance minister will use the crisis created by OROP to push the long-overdue subsidy reforms.