October 14, 2003

B. K. Bhattacharya

Chief Secretary (Retd.) Government of Karnataka

Senior Fellow, Indian Institute of Management, Bangalore.

Honorary Visiting Fellow, ISEC, Bangalore.

3288, 12th Main Road, HAL, 2nd Stage, Bangalore - 560 008. Tel. : 5200280 e-mail : bkbhat@hotmail.com

Dear Dr. Rakesh Mohan,

It was indeed a pleasant surprise to me when I received an invitation from the Reserve Bank of India in February, 2003 to chair a Group constituted, as a sequel to the discussions at the Eleventh Conference of the State Finance Secretaries held in the RBI, to examine the various issues relating to the growing pension liabilities of the State Governments and to make suitable recommendations.

I had no hesitation in giving my consent to the proposal which gave me an opportunity to study the problems of State finances and the contributory role of growing pension liabilities of the State Governments in compounding these problems.

As majority of the members of the Group were State Finance Secretaries and they were preoccupied with the work connected with State Budgets in the months of February and March, the Group could hold its first meeting only in April, 2003. The very fact that the Group could arrive at a consensus on various complex issues involved in the subject and submit the Report within about six months of holding the first meeting is testimony to the deep interest shown by all the members of the Group.

During this period, the Group held six meetings. A few representatives of the Group, including the Chairman and the Convenor, also visited seven States (Kerala, Andhra Pradesh, West Bengal, Orissa, Punjab, Haryana and Uttar Pradesh) with a view to obtain greater insight into the problems by holding discussions with the officials of the States concerned and, wherever possible, getting the opinions and suggestions from the State Finance Ministers. Such interactions helped the Group not only in appreciating the problems of the States, but also in formulating pragmatic suggestions.

In view of the divergences among the States in terms of coverage of their pension schemes, degree of viability of State finances, administrative and political history, etc., the Group felt that a rigid and uniform set of recommendations may not serve the purpose. The Group has, therefore, recommended certain alternative long-term structural solutions to the pension problems of the States. Even in matters of extension of the proposed new schemes to the existing employees, future treatment of employees of Grant-in-Aid Institutions, urban and rural local bodies (Corporations, municipalities, Zilla panchayats, etc.), there are likely to be variations among the States due to the differences in ‘Initial Conditions’ referred to earlier. Similarly, with regard to parametric changes in the existing schemes of Retirement Benefits (Pension, Commutation, Family Pension,

Leave encashment at the time of retirement, etc.) and in exploring the possibility of pre-funding part of the Pension commitments, while mutual discussions among the States may lead to certain degree of uniformity of approach, some differences may remain. Considering all these factors, the Group, after discussing the issues involved, has adopted a flexible approach and suggested alternative solutions.

Lack of adequate data regarding the profile of State Government employees, employees of Local Bodies and Grant-in-Aid institutions covered under State Pension Schemes, Pensioners, etc. was a major constraint. This has come in the way of making any precise forecasting of future pension liabilities. This constraint will also seriously affect the capability of the State Governments to design rational pension schemes in future. The Group has, accordingly, recommended compilation of relevant data regarding all employees covered by the State Pension Schemes, periodic updating and verification of data, computerisation of data, etc. It will be a good idea if this subject is periodically discussed at the Conference of the State Finance Secretaries convened by the Reserve Bank of India.

I must keep on record, however, that the task of the Group became quite congenial because of the excellent hospitality and logistic support provided by the Reserve Bank. My sincere thanks are due to you and Shri M.R. Nair, Adviser, Department of Economic Analysis and Policy, RBI, for facilitating smooth completion of our task. It would not have been possible for the Group to complete its deliberations within a period of six months, but for the excellent Research support and analytical inputs provided by Shri M.R. Nair, Dr. B.N. Anantha Swamy and all the other officers of the Department of Economic Analysis and Policy of the Reserve Bank of India, whose contributions have been gratefully acknowledged in the Report.

I must also thank every member of the Group who provided valuable information and enthusiastically participated in the deliberations in a positive and constructive manner which made it possible for us to produce a unanimous Report within a short period. My thanks are due to the special invitees, Dr. R. Bannerji, Joint Secretary, Ministry of Finance, Government of India, Dr. N.J. Kurian, Adviser (Plan Finance) Planning Commission, Government of India, and Smt. Usha Thorat, Executive Director, RBI who have taken time off from their busy schedule to participate in the meetings of the Group and made valuable contributions which have enriched this Report.

The Group has recommended that the Report be given wide publicity, including bringing it in the public domain. While the RBI will, no doubt, forward the Report to the State Governments, Union Territories, Government of India (Departments of Finance, Personnel and Labour), Planning Commission, Life Insurance Corporation, the Institute of Actuaries, etc., some efforts may also be necessary to ensure that the Report reaches as many representative Bodies of various Stake holders as possible.

The subject of Pension Reforms has been a matter of serious public debate in the developed countries as well as in some of the newly industrialised countries and countries emerging out of the former ‘Iron Curtain’ area. However, in India, though at the official level the matter is being discussed during the last 2/3 years, it has not provoked much public debate. One reason, of course, is that Pension Reforms are being talked of only in the context of pension Schemes of Central and State Governments which cover a very small percentage of total workforce in the country. The other reason is that enough attempt has not been made so far to sensitise the general public about the importance of the issues involved. Not many people are aware how precarious is the position of finances of many State Governments and to what extent pension payments have already contributed to the same and what will be its impact in the coming decades if reform measures are not undertaken immediately.

May I take the liberty of suggesting that, apart from discussing the Report in the next Conference of the State Finance Secretaries convened by the Reserve Bank of India and giving wide publicity to the Report, RBI may also take the initiative in organising Regional Level Workshops to sensitise the parties concerned about the important findings of the Group and its recommendations regarding Pension Reforms.

I, once again, sincerely thank you for initiating this Study and for providing necessary intellectual and material support to the Group to enable us to fulfil our task successfully.

I have great pleasure in submitting the Report of the Group to the RBI with the hope that this Report will form the basis for further deliberations and decisions by the State Governments regarding State Level Pension Reforms.

With personal regards,

Yours sincerely,

(B.K. Bhattacharya)

Dr. Rakesh Mohan
Deputy Governor
Reserve Bank of India
Central Office
Shahid Bhagat Singh Road
Mumbai –400 001

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Download Report of the Group to Study the Pension Liabilities of the State Governments in PDF Format.