27th August 2024 (13 Topics)
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Unified Pension Scheme
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Context
The Maharashtra government has adopted the Unified Pension Scheme (UPS) for its employees shortly after the Union Cabinet approved it for central government employees. This move highlights the ongoing efforts towards cooperative federalism and has implications for state finances and pension policies.
Significance of UPS
- Unified Pension Scheme (UPS) Benefits: The UPS ensures pensioners receive 50% of their average salary from the last 12 months of service while maintaining the contributory and funded nature of pensions, as established by previous reforms.
- Impact on Cooperative Federalism: The adoption of UPS by Maharashtra and potentially other states reflects the success of cooperative federalism, where increased tax devolution and incentives for capital spending are key components.
- Reversal from Old Pension Scheme (OPS): Several states reverting to the Old Pension Scheme (OPS) had avoided immediate pension fund contributions but faced long-term financial burdens. UPS aims to prevent such issues by providing a sustainable pension framework.
Financial Implications
- Fiscal Concerns with OPS: A paper by the RBI highlighted that reverting to OPS could increase pension burdens by approximately 4.5 times compared to the New Pension Scheme (NPS), making it fiscally unsustainable.
- Capital Investment Incentives: To support state capital expenditure, the Union government has significantly increased interest-free loans for infrastructure projects, from Rs 1 lakh crore to Rs 1.3 lakh crore, to complement state budgets.
- Transparency in Borrowings: The new push for transparency in state borrowings, including those by state public sector companies, aims to prevent misuse and ensure accurate accounting of state finances.
Policy and Political Responses
- Opposition’s Inconsistent Stance: Opposition parties have offered contradictory responses to the UPS, reflecting a lack of cohesive policy critique on key issues such as fiscal policy and national security.
- Continuity in Reforms: The UPS is part of broader reforms that also include boosting state capital investments and ensuring transparency, thus supporting fiscal health and cooperative federalism.
- Modi’s Cooperative Federalism: The implementation of UPS, alongside other fiscal measures, underscores Prime Minister Modi's commitment to strengthening cooperative federalism by aligning state and central financial strategies.
Mains Question
Q. Evaluate the impact of the Unified Pension Scheme (UPS) on state finances and cooperative federalism in India. Discuss the broader implications of this reform on fiscal policy and state governance.
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