OROP payout unlikely to scuttle fiscal deficit target: Nomura

Says it does not expect the scheme to derail the fiscal deficit target of 3.9% of GDP

Financial services major Nomura today said though the implementation of 'One Rank, One Pension (OROP)' is going to put fiscal burden to the tune of around Rs 10,000 crore, the government is unlikely to miss the fiscal deficit target this year.

"We do not expect the OROP scheme to derail the fiscal deficit target of 3.9% of GDP in FY16, due to lower spending (on account of savings on fuel and fertilizer subsidies this year) as well as higher indirect taxes (relative to the budget target)," the Japanese firm said in a report.

Last week, over the weekend, the government gave up to mounting pressure from ex-servicemen and approved the OROP scheme for the armed forces.

The scheme provides a uniform pension to the armed forces personnel who retire at the same rank after the same length of service, regardless of their date of retirement.

These benefits would be given retrospectively from July 1, 2014, with arrears to be paid in four half-yearly installments, with pensions re-fixed every five years.

The report said the OROP scheme is expected to add to the fiscal burden due to higher pension outgoings.

The government estimates the one-off hit due to arrears is likely to be Rs 10,000-12,000 crore (0.1% of GDP) in FY16, if implemented this year, while the recurring annual additional fiscal cost will be Rs 8,000-10,000 crore (0.1% of GDP), and is expected to increase in future.

"The increased pension liabilities, the upcoming Seventh Pay Commission hike and higher recapitalisation requirements of public sector banks suggest that continued fiscal consolidation beyond FY16 will require structurally addressing both the expenditure and revenue side of the fiscal balance," the report added.