27 September 2024 : The Hindu Editorial Analysis

1. An opportunity to rethink India’s pension system

(Source – The Hindu, International Edition – Page No. – 8)

Topic: GS2 – Governance – Government Policies – Issues arising out of their design & implementation.

Context

India’s pension system has evolved from the Old Pension Scheme (OPS) to the New Pension Scheme (NPS), shifting retirement funds into market-based investments. With growing concerns over retirees’ financial security, the proposed Unified Pension Scheme (UPS) aims to balance market risks and government-backed pensions.

Transformation of India’s Pension System

• The pension system in India has undergone a major transformation over the years, marked by three significant schemes: the Old Pension Scheme (OPS), the New Pension Scheme (NPS), and the proposed Unified Pension Scheme (UPS).
• These schemes represent different phases of government policy, with each having a distinct impact on retirees.
• While the OPS is often seen as more secure, the NPS ties retirement funds to the volatile financial market.
• The UPS aims to balance state involvement and market participation but needs significant changes to truly protect retirees.

The Old Pension Scheme (OPS)

The OPS was in place before 2004 and provided a defined benefit pension to government employees. Under this system, the pension amount was based on the last drawn salary, and the government bore full responsibility for pension disbursements. The OPS guaranteed stability, with retirees insulated from market risks, offering a predictable post-retirement income. It reflected the government’s commitment to social security, providing pensions without any exposure to market fluctuations.

Shift to the New Pension Scheme (NPS)

• In 2004, the OPS was replaced by the NPS, which introduced a defined contribution model.
• Both employees and the government contribute to a pension fund, which is then invested in the financial market.
• The pension payouts under NPS are tied to the performance of market investments, making retirees’ incomes vulnerable to market volatility.
• The NPS reflects a shift towards neoliberal policies, transferring financial risk to individuals.
• Critics argue that the NPS weakens the social responsibility of the state and leaves retirees exposed to economic downturns, undermining their financial security.

Concerns Over the NPS and the Neoliberal Shift

• The NPS has been criticised for commercialising public welfare and reducing the state’s involvement in ensuring pension security.
• Retirees’ financial futures now depend on market performance, unlike the OPS, which provided guaranteed pensions.
• This model has raised concerns about the erosion of the state’s welfare responsibilities.

Global Shift Towards Welfarism

• Globally, there is a retreat from neoliberal policies, with calls for stronger social safety nets after events like the 2008 financial crisis and the COVID-19 pandemic.
• The demand for state-backed welfare provisions has been growing, and India is experiencing a similar trend.

The Proposed Unified Pension Scheme (UPS)

• The UPS, proposed by the Narendra Modi government, is an attempt to offer universal pensions, balancing government and market roles.
• While aiming to address the issues raised by the NPS, the UPS still needs significant rectifications to be a viable alternative.
• Critics argue that the UPS exposes retirees to market risks and offers reduced returns compared to the OPS.
• Concerns include the requirement of 25 years of service for a full pension, underfunding, and exclusion of many public sector workers.

The Need for Reform in the UPS

• The UPS must offer better safeguards against market fluctuations, possibly by introducing a minimum guaranteed pension, similar to the OPS.
• Government contribution levels also need to be reformed to mitigate the risks of market exposure.
• The scope of the UPS must be expanded to include all citizens, especially those in the informal sector, ensuring broader pension coverage.

Conclusion: Balancing Welfare and Market Policies

• The debate between state-backed welfare and market-driven policies in India’s pension system continues.
• While the OPS provided a secure and predictable pension, the NPS subjected retirees to market risks.
• The proposed UPS, if restructured with proper state intervention, can protect retirees’ financial security and offer a more balanced system.

Practice Question:  Discuss the shift from the Old Pension Scheme (OPS) to the New Pension Scheme (NPS) and its impact on retirees’ financial security. Evaluate the potential of the proposed Unified Pension Scheme (UPS) to address the shortcomings of NPS. (150 Words /10 marks)

2. Is India’s growth story benefiting only big capital?

(Source – The Hindu, International Edition – Page No. – 9)

Topic: GS3 – Indian Economy

Context

India’s post-pandemic economic growth has been remarkable, but concerns persist over its uneven distribution, with large businesses reaping most benefits while small and medium enterprises (SMEs) struggle. The K-shaped recovery has highlighted income inequality, urging reforms to promote more inclusive growth that benefits the broader population.

Overview of India’s Growth Story

• India’s post-pandemic economic growth has been impressive, with an 8.2% growth rate in 2023-24, making it the fastest-growing major economy.
• However, this growth has primarily benefited large businesses, while smaller businesses and the bottom half of the population have not seen substantial income increases.

K-Shaped Economic Growth

• India’s economic growth is described as K-shaped, where the rich are experiencing faster growth while the poor remain stagnant.
• Government data supports this divide, showing that the top segments of society have reaped more benefits from the country’s growth, creating an unequal distribution of wealth.

Drivers of Growth: Large Corporations vs. Small Businesses

• The current growth is primarily driven by government capital expenditure on infrastructure, benefiting large corporations like steel and infrastructure companies.
• Private capital expenditure has not seen a broad revival, and small-scale industries are struggling to compete, losing market share and facing financial distress.
• The cost of capital is higher for smaller businesses, with interest rates ranging from 12-14% compared to 8-9% for large corporations.

Regulatory and Compliance Challenges for Small Businesses

• Smaller businesses face an overwhelming compliance burden, which is increasing over time.
• Large corporations find it easier to deal with these requirements, but small business owners struggle with the complexities of compliance and regulatory filings.
• The corporate tax cut introduced in 2019 has benefited only 5% of businesses, leaving the vast majority of non-corporate small and medium enterprises (SMEs) excluded from these benefits.

Impact of Policy Shocks on Small Businesses

• Economic shocks such as demonetization and the implementation of the Goods and Services Tax (GST) have disproportionately affected small and medium enterprises and the unorganised sector.
• Over the last decade, the effective tax rate for big businesses has significantly decreased, while small enterprises continue to bear a heavier tax burden.

Subsidising Big Business at the Cost of SMEs

• Current policies favour large corporations, with a focus on supporting big businesses to drive growth. However, this approach undermines the growth potential of SMEs.
• Government expenditure on sectors such as rural development, agriculture, and infrastructure has been cut, further hindering the growth of small enterprises that could become significant drivers of economic development.
• This bias towards large corporations could lead to unsustainable long-term growth as SMEs are crucial for employment generation and domestic demand creation.

Calls for Progressive Taxation and Reduced Regulatory Burden

• Some experts argue for progressive taxation, where larger corporations bear a higher tax burden, and smaller businesses benefit from lower tax rates. This could help reduce the financial strain on SMEs.
• Tax loopholes that allow large businesses to pay lower effective tax rates should be closed to create a more equitable system.
• However, others suggest a unified tax system, where all businesses, regardless of size, pay the same tax rate to avoid potential misuse of progressive taxation policies.

Reducing Compliance Burdens and Simplifying Taxation

• One solution is reducing the compliance burden on smaller businesses, making it easier for them to thrive.
• Simplifying the GST system, with quarterly filings and payments similar to the income tax system, could help alleviate the confusion and administrative burden faced by small businesses.
• The government should focus on ease of doing business from the perspective of SMEs, without needing additional subsidies or fiscal expenditure.

Reforming the Banking System for Small Businesses

• The current banking system favours asset-based lending, which disadvantages smaller businesses.
• Shifting to a cash flow-based lending model, especially in government banks, could improve credit access for SMEs, helping them invest and grow.

Addressing the Demand Problem and Supporting Rural Economies

• The fundamental issue in India’s economy is the lack of demand, stemming from low incomes among a large portion of the population.
• Increasing spending on rural economies, agriculture, and small businesses could raise wages and generate demand, which would benefit SMEs and the broader economy.
• The government has the regulatory tools to ease the burden on small businesses and support their growth, but this requires political will and recognition of the problem at the grassroots level.

Conclusion: Achieving Inclusive Growth

• To achieve inclusive economic growth, India must address the issues faced by small businesses and the bottom half of the population.
• Reducing regulatory burdens, reforming taxation, and improving credit access for SMEs are key to ensuring that India’s growth story benefits all segments of society, not just large corporations.
• The focus should shift towards supporting the rural economy and small businesses, which are essential for creating sustainable, broad-based growth.

PYQ: COVID-19 pandemic accelerated class inequalities and poverty in India. Comment. (150 words/10m) (UPSC CSE (M) GS-1 2020)

Practice Question:  Discuss the challenges faced by small and medium enterprises (SMEs) in India’s post-pandemic economic recovery and suggest reforms to promote inclusive growth. How can policy interventions help bridge the gap between large corporations and SMEs? (150 Words /10 marks)