Fiscal deficit to increase by 15 bps to 5.1% in FY25 due to UPS: Macquarie

Under the unified system, employee contributions will remain unaltered at 10% of basic pay plus dearness allowance

The newly-announced Unified Pension Scheme (UPS) is expected to shoot up the fiscal deficit by 15 basis points (bps) to 5.1 per cent from the budgeted 4.9 per cent in the financial year 2025 (FY25), according to a report released by the Macquarie Group on Monday.

The report by the global investment banker estimates that the impact on the fiscal deficit for FY25 could be seen if around Rs 45,000 crore is the burden of the new scheme on government's finances.

“While the Cabinet secretary-designate T V Somanathan has quantified FY25 impact at Rs 6,250 crore, other news reports talk about impact of Rs 40,000-45,000 crore, resulting in fiscal deficit impact of 15bps,” it noted.

 

Under the unified pension system, employee contributions will remain unaltered at 10 per cent of basic pay plus dearness allowance (DA). The government’s contribution will increase from the present 14 per cent to 18.5 per cent.

“This 18.5 per cent will cost the Centre an extra Rs 6,250 crore in the first year and Rs 800 crore as a one-time expenditure for arrears,” Somanathan has said.

The report further notes that the union budget wasn't populist, unfortunately post-budget- be it the UPS scheme announced over the weekend or slew of populist schemes announced by the states- populism seems to be the emerging narrative to win the elections.

“That is a worrying sign, which could keep India stuck in a ‘middle -income trap’ if it doesn't adhere to its reforms agenda,” it added.

The report also notes that there is pressure on the states to shift now to the new UPS scheme which will further burden their fiscal deficit. Maharashtra became the first state on Sunday to adopt UPS for its employees ahead of the assembly elections in November.

“The fiscal deficit of the states in India is already beyond 3 per cent- at 3.2 per cent; 3 per cent is the target set by the Central government and these schemes could make matters worse,” the report stated.

The Union Cabinet on Saturday approved the UPS scheme which is likely to benefit 2.3mn central government employees, and this could increase to 9 mn if state governments also adopt.

“While this scheme is not a complete reversal to the OPS (old pension scheme), which was an entirely defined benefit scheme from the current NPS (national pension scheme), which was a defined contribution scheme, it will still drain the exchequer in our view,” the report added.