The newly announced Unified Pension Scheme (UPS) is set to increase the fiscal deficit by 15 basis points (bps) to 5.1% for the financial year 2025 (FY25), up from the budgeted 4.9%, according to a recent report by the Macquarie Group. The report estimates that the UPS could impose a financial burden of around Rs 45,000 crore on the government.
Financial impact
The UPS, which is slated for implementation from April 1, 2025, will see government contributions rise from 14% to 18.5% of employees’ basic pay plus dearness allowance (DA). This adjustment will lead to an additional annual expenditure of Rs 6,250 crore for the Centre, with a one-time cost of Rs 800 crore for arrears, according to the government.
The report estimates that the Unified Pension Scheme (UPS) could burden the government’s finances by approximately Rs 45,000 crore, affecting the fiscal deficit for FY25. While the government has projected an impact of Rs 6,250 crore for FY25, other reports suggest a broader range of Rs 40,000-45,000 crore, which would increase the fiscal deficit by 15 basis points (bps).
Despite these increases, the Centre’s pension bill, estimated at Rs 2.43 lakh crore for FY25, remains relatively stable compared to previous years.
The Macquarie report highlights concerns over the scheme’s impact on fiscal health. While the UPS is not a complete return to the Old Pension Scheme (OPS), which was a fully defined benefit plan, it is expected to strain the exchequer. The report also points out that the scheme’s rollout might exacerbate the fiscal deficit of states, as seen with Maharashtra becoming the first state to adopt the UPS.
Broader implications
Experts suggest that although the UPS will affect government finances, the impact might not be as severe as some forecasts. They noted that the increase in government contributions is relatively modest, mentioning that as new employees join the scheme, the fund size will grow, potentially mitigating some of the fiscal pressures.
The report warns that the UPS could contribute to India being stuck in a ‘middle-income trap’ if it deviates from necessary reforms. The current fiscal deficit target for states is 3%, but the report highlights that this benchmark is already being exceeded, raising concerns about the broader implications of the UPS.
