India's glitzy macroeconomic story has always been tempered by its chronic budgetary problems, with the government's explicit internal debt at 85% of GDP, plus a trade deficit of $30 billion in the year to May. Nonetheless, a rocketing stock market, rapidly rising inflows of foreign direct investment, and respectable GDP growth - along with a deep supply of well-managed, shareholder-friendly companies - has made India a trendy destination for foreign capital.

Its credit situation, however, must now be reassessed, thanks to a new study by New Delhi-based Invest India Economic Foundation, which makes the first stab at defining the government's pensions obligation.

Until now, analysts had only the regular budgetary flows to civil servant pensions to go by. But now IIEF has released a report detailing the demographics and income of employees of the central and state governments.

"Promises by the state about payment of pensions in the future are much like debt," says Gautam Bhardwaj, director at IIEF. "For the purpose of fiscal planning, and analysis of pension reforms, it is important to compute the 'implicit pension debt' of the country."

IIEF's initial findings show (IPD) that the funding gap for state and central government employees as of December, 2004 is Rs1,735,527 crore (Rs17.3 billion, $400 billion), or 56% of GDP.

"This projections are fairly modest," Bhardwaj explains, "and don't cover the full IPD." He says there are five other types of pension obligations the government has undertaken, such as for the military and for funding the Employee's Pension Schemes. IIEF is now expanding the study to cover some of these other areas.

Bhardwaj says, "This shows the cost of inaction in pension reform. We can project forward what will happen if pension reform is not implemented."

He notes that while other emerging markets such as China also have high pension obligations - in China's case, around 70% of GDP - those figures tend to be comprehensive. "Our calculations show a debt of 56% of GDP just for 5% of the workforce," he says.

Rating agencies such as Standard & Poor's have been interested in understanding the impact of these obligations on India's overall fiscal health, and the issue is now being debated in parliament, Bhardwaj says.

India is still waiting for parliament to pass a long-overdue pension reform that will establish a new mandatory defined contribution system for central and state government employees. The government has, however, established a new pensions regulator on an interim basis, the Pension Fund Regulatory and Development Authority, with an acting chairman, Dhirendra Swarup, former secretary of expenditure in the Ministry of Finance.

The scheme has been taking new civil servants' contributions since 2004, promising 8% interest while held in escrow. Once the PFRDA is formalized by parliament, it will move toward selecting external investment managers, and convincing more state governments to join.

The bigger challenge is to roll out this new pension system to the private sector, where it would be adopted on a voluntary basis, but IIEF believes there is a 22 million-strong body of middle-class workers with the desire and means to participate. "The system should reach $4-500 billion within the next 10 to 15 years," he predicts.