OROP May Put Government Finances at Risk: Analysts

The government on Saturday approved the "One Rank One Pension" scheme for defence personnel, a move that will ensure uniform pension payments to ex-servicemen who served at the same rank and for the same amount of time, regardless of the year they retired.

Rs 8,000 crore - Rs 10,000 crore will be spent to rollout the OROP scheme this fiscal, the government said. Analysts however peg OROP outflows to be much higher.

"We estimate the overall cost to be Rs 16,000 crore or 0.1 per cent of GDP in FY16... The existing defense pension bill will go up by Rs 10,000 crore, while arrears totaling Rs 12,000 crore will be paid out over two years," said Pranjul Bhandari, chief India economist of HSBC Global Research.

The OROP announcement comes at a time when analysts have been questioning the government's ability to meet its fiscal deficit target of 3.9 per cent of GDP, given more allocation for bank recapitalization and slow pace of disinvestments.

Last month, the government said it will infuse Rs 25,000 crore in public sector banks this fiscal against Rs 7,940 crore earmarked in the annual Budget. As far as the disinvestment roadmap is concerned, the government has been able to collect Rs 13,000 crore through four stake sales this year, but future disinvestments have come under a cloud given the meltdown in stock markets.

"The disinvestment receipts target of Rs 69,500 crore looked rather rich. Even in the previous year, FY15, the government budgeted for Rs 63,400 crore but ended the year with about half of that," HSBC said.

According to Nomura, OROP may not derail the government's FY16 fiscal deficit target, but the recurring annual additional fiscal cost is expected to increase in the future.

"Increased pension liabilities, the upcoming pay commission hike and higher recapitalization requirements suggest that continued fiscal consolidation beyond FY16 will require structurally addressing both the expenditure and revenue side of the fiscal balance," said Sonal Varma of Nomura.

The government can however draw some comfort from the depressed commodity prices. FY16 fuel and fertilizer subsidy bills are likely to be lower than anticipated given that oil prices have fallen dramatically. The government had budgeted for these subsidies factoring oil at $70 per barrel, but crude oil prices are currently trading much lower.

Higher tax collection is another key factor that may help the government meet its fiscal commitment. According to the finance ministry, indirect tax collections have grown 37 per cent year-on-year in the four months to July.