governance, political economy, institutional development and economic regulation

OROP

photo credit: ex-servicemenwelfare.blogspot.com

Ex-servicemen are angry that their attractively titled demand — one rank, one pension — is not being implemented by the government. OROP as a “brand” is a huge communication success, hitting all the right buttons — simplicity, easy comprehension and being evocative of equity.

It is not surprising therefore that Prime Minister Narendra Modi adopted it in his election campaign. The United Progressive Alliance, caught napping, made a notional budgetary provision in February 2014, but did not survive the general election to be held accountable for its implementation. This pledge was repeated by Prime Minister Modi from the ramparts of the Red Fort on August 15. But fauji pensioners were not impressed.

Top babus, secretaries to the government and generals retire at a fixed apex pay since the Fifth Pay Commission (1996). Their pension increases to reflect all future revisions in apex pay. Those retiring below the apex pay have to make do with pension revisions at 50 per cent of the minimum of the revised pay scale, even if they retired at the maximum of the pay scale. Hence the inequity. Babu and fauji apex level officers thereby invite the charge of being self-serving.

A bit of history here. The armed forces have traditionally enjoyed an “edge” in the compensation they get versus civilians. The logic for the premium is accepted and remains rock solid even today.

Till 1973, fauji pay was reviewed separately. The 1970s were bad times for all government servants. Faux socialism required that government salaries be stagnated in the name of removing poverty. But the axe fell most heavily on Army pensioners via the Third Pay Commission, 1973. The result was that the payout ratio (the proportion of last pay to pension) for fauji and civil pensioners was made the same — 50 per cent — by reducing the fauji payout and increasing the civilian payout.

Real basic pay under the Fourth Pay Commission (1986) doubled, but inflation adjustment was only partial. The Fifth Pay Commission (1996) doubled the basic pay and provided for 100 per cent inflation indexing including for pensions. This fixed the earlier problem of pension not keeping pace with inflation. The Sixth Pay Commission (2006) tripled real pay. Whilst this was necessary, it stoked the angst of pensioners, other than the creamy layer, because pension adjustments lag behind salary revisions. With every pay commission, pensioners fall further behind. Only faujis have led the agitation for OROP, possibly because of the high regard the public has for them versus a less than rosy public perception of other government employees.

Kohima

The principle that fauji salaries must have an edge over civilian salaries has been consistently accepted. Suitable salary scales exist to illustrate this “edge” of around 10 to 15 per cent of basic pay. But in a classic case of maintaining the form whilst subverting the spirit, the benefits of the designed “edge” are only notional and not real. Here is why.

First, the sharply pyramidal structure of the armed forces limits the potential for promotion. In comparison, the civilian cadres are much less sharply tapered. Since pay is still effectively linked to position or rank, this means that civilians’ pay outgrows the notional salary “edge” over the first 16 years of their service. Thereafter, they lead not lag the fauji pay.

Second, stringent health requirements also ensure that faujis retire much earlier than civilians. Estimates suggests that 60 per cent of fauji officers retire by the age of 54. A soldier retires at the age of 35, while other ranks retire by the age of 45. In comparison, all civilians carry on earning promotions and pay enhancements till the age of 60.

Shorter service spans and fewer promotion avenues ensure that at retirement faujis have a basic salary which is around 40 per cent lower than a civilian who started service at the same time at an equivalent grade. To provide an equated pension to a fauji, the pension payout ratio has to be at least 75 per cent, as it was till the Third Pay Commission slashed it to 50 per cent.

The other options to safeguard the “edge” are to increase the salary scales of faujis significantly above civilian pay or to proliferate the number of senior positions — as it happens for civilians — to safeguard promotion prospects and income. Neither is an optimal solution to deliver more bang for the buck. Both require complex negotiations between losers and gainers within the armed forces.

The fact remains that OROP, as a principle, is flawed. It is not consistent with the principle of efficiency and it violates the principle of contracts. Pension is a stream of future payment for past services. Pay is a dynamic concept which changes as markets and job requirements change. Pay must reflect current market conditions. Pension is like a fixed annuity, albeit indexed to inflation to protect pensioners. Increasing the base pension amount as pay increases, as envisaged in OROP, is indefensible.

What then is the way out of the Jantar Mantar logjam, where the agitating faujis vent their gussa?

Good practice suggests that huge changes in pay be avoided since they lead to intergenerational inequity — future employees get paid much more, even in inflation indexed terms, for doing the same job. But such pay changes are sometimes necessary to correct a long neglected problem. Interim solutions can be one way to smoothen the transition. This is the way to go.

The government can restore the pre-1973 pension payout of 75 per cent but only for those faujis who retired between 1973 and 1995 when pension was not 100 per cent inflation indexed. This will significantly soothe the gussa of faujis whilst creating no untoward precedents for civilians.

The cost is around Rs 10,000 crore per year (back of the envelope estimates) or 7 per cent of the annual defence revenue budget for a period of four years.

Righting a wrong is costly but best done whilst the cost is bearable. Giving fauji pensioners short-shrift, whilst feting them publicly is inconsistent. Let January 26, 2016 be when the President of India soothes the gussa of 1.6 million fauji veterans.

Adapted from the authors article in Asian Age August 23, 2015: http://www.asianage.com/columnists/soothe-gussa-fauji-pensioners-476

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