One-rank one-pension – An economic analysis of an emotional issue


I have been quoting a lot from the writings of British economist John Kay in my recent columns. The reason for that is very straightforward. I have read two very good books (Other People’s MoneyMasters of the Universe or Servants of the People and Everlasting Light Bulbs – How Economics Illuminates the World) written by him over the last two weeks. A lot of what Kay writes is very relevant for the times that we live in. And given that I have ended up quoting him over and over again. Today will be no different as well.

In an essay called A Fetish for Manufacturing which is a part of Everlasting Light Bulbs, Kay talks about an article he wrote in 1980. In this article he predicted that the British manufacturing would decline due the growth of North Sea oil production. Kay doesn’t explain the reason behind his prediction in the essay I am talking about and honestly, it is not important, given the point I am trying to make.

After the article was published there was a lot of controversy around it. As Kay writes: “Few critics focussed on the weakness in the argument. They claimed instead that what I was saying ought not to be true or, if it was true, ought not to be said.”

After a point, Kay started to understand “that for many people the role of manufacturing industry was an emotional issue rather than an economic one.” The phrase I want you pay attention on is that, “it was an emotional issue rather than an economic one”.

Something similar is playing out in India right now – the issue of one-rank one-pension for India’s armed forces. When an individual retires from the armed forces, he gets a pension. The pension amount depends on the date of retirement. Up until very recently, there was no ‘one-rank one-pension’ in the armed forces. This essentially meant that individuals who retired at the same rank and had served similar number of years, did not receive the same pension, if they retired at different points of time.

Given this, an individual retiring in 2004 would get a lower pension than the one retiring in 2006, despite having retired at the same level and having served for a similar number of years.

It also needs to be mentioned here that a bunch of armed force personnel retire in their mid to late 30s and unlike the general segment of the population do not get benefits of a full-pay until the retirement age of 58 to 60.

The armed force veterans have been demanding one-rank one-pension for a while now. It was one of the key promises that Narendra Modi made during the campaign for the last year’s Lok Sabha elections.

On September 5, 2015, the ministry of defence announced one-rank pension for the armed forces. As the press release said: “In simple terms, one-rank one-pension implies that uniform pension be paid to the Armed Forces personnel retiring in the same rank with the same length of service, regardless of their date of retirement. Future enhancements in the rates of pension would be automatically passed on to the past pensioners. This implies bridging the gap between the rate of pension of current and past pensioners at periodic intervals.”

And given that it took close to sixteen months for the Modi government to come up with anything concrete on the issue, it is not surprising that the issue has turned into an emotional one. Individuals who defend the borders of India, need to be treated better, is an oft-repeated argument.

The government estimates that “to implement OROP, the estimated cost to the exchequer would be Rs. 8,000 to 10,000 crore at present, and will increase further in future.”

The question is can the government afford this? Let me make a slight deviation before getting back to the question.

I have been reading through this interesting book called The Challenge of Things—Thinking Through Troubled Times, written by the British philosopher AC Grayling. In one of the essays in the book titled Does the Government Know Best, Grayling writes: “Much of the debate about levels of welfare spending concern how much security should be provided, not whether or not it should be provided. The consensus in question is that the state has welfare responsibilities; the arguments are almost always about how much should be spent in discharging them.”

So this brings us back to the question whether the government can afford this? And if yes, how much should it spend on it? The total budgeted expenditure of the government for the current financial year stands at Rs 17,774,77 crore. Rs 8000-10,000 crore is around 0.45-0.56% of that expenditure. Hence, if looked at in isolation, one-rank one-pension is clearly affordable for the government.

Nevertheless, the thing is that it won’t stop at just armed forces. As a report in The Asian Age points out, the Central paramilitary forces also want one-rank one-pension. This includes the Border Security Force, the Central Reserve Police Force, the Central Industrial Security Force, the Indo-Tibetan Border Police and Sashastra Seema Bal.

These forces are responsible for our borders as well as security within the country. They tackle the naxal threat as well in large parts of the country. So how can they be left out of one-rank one-pension? I think that is a fair question.

The Asian Age reports that the Central paramilitary forces have a strength of nearly nine lakh serving personnel and six lakh retired personnel. I haven’t come across any clear thinking by the government on this issue.

It doesn’t stop here. The PTI reports that the railwaymen also want one-rank one-pension. As the newsreport points out: “Railway employees are now asking for similar pension benefit, arguing that their duties too are “hazardous, risky and complex”. In a letter to Prime Minister Narendra Modi, National Federation of Indian Railwaymen has demanded uniform pension policy for railway employees. “On an average, 800 railway employees get killed per year in the course of duty and nearly 3,000 sustain injuries at work,” M Raghavaiah, general secretary of NFIR, said.

Saurabh Mukherjea and Sumit Shekhar of Ambit point out in a research note that the “cost of salaries/pensions for railway employees is 2.7 times the cost of salaries/pensions of the armed forces”. Railways currently employs nearly has 13 lakh individuals.

Once all these factors are taken into account one-rank one-pension suddenly starts to look like an expensive proposition.

The question is will the government be able to stop after the armed forces? I don’t think so. And how will they finance this?

As John Kay (Oops I am quoting him again) writes in an essay titled How We Decide which is a part of Everlasting Light Bubbles: “Big decisions in politics and businesses are the result of political horse-trading, and are based on partial information, visions and prejudices, hopes and fears.”

The feeling I get is that people in decision making positions haven’t thought through the issue at the level they should have. In the years to come other government agencies will also demand one-rank one-pension and they are more than likely to get it.

Rest assured, you will hear more about one-rank one-pension in the years to come.

Watch this space.

The column originally appeared on The Daily Reckoning on Oct 16, 2015