India bid to raise FDI limit in pension sector with an eye on US trade deal

The Union finance ministry has announced that a bill to allow higher foreign investment in pension funds would be introduced when the Parliament meets. The Monsoon Session of Parliament is expected to be convened only in July.

The announcement, which is considered to be a part of the second-generation reforms initiated after the phased unlockdown a year ago in the wake of the COVID-19 outbreak, has also another scheduled event as its objective. It has been made ahead of the resumption of the stalled trade negotiations with the United States and also ahead of Prime Minister Narendra Modi's participation in the virtual 40-nation summit on climate change hosted by new American President Joe Biden.

US ties and financial reforms

Major changes in financial sector have come ahead of meetings between the Indian prime minister and the US president since the time of original reformer PV Narasimha Rao.

Rao, who was invited for a summit in 1994 with the then-President Bill Clinton and also addressed the joint session of the United States Congress, was to discuss major issues relating to trade and investment. As the officials of the two countries prepared for the summit meeting, it was felt both countries should make announcements which would prepare the ground for positive outcomes. This pattern continued when Rao's successors — I K Gujral, Atal Behari Vajpayee, Manmohan Singh and now Narendra Modi — went to the United States for meeting with Presidents or when the latter — Clinton, George W. Bush, Barack Obama and Donald Trump — visited New Delhi.

While the Indian quest was for access to high technology including defence and atomic energy, Americans too wanted defence ties as well as the opening of Indian markets for goods and services. Since 1994 other than information technology and defence companies, American businesses which showed maximum interest in India were from the banking and insurance sectors. Even though the civil nuclear deal dominated Manmohan Singh's visits to Washington in 2005 and 2011 or George W Bush's visit to India in 2006, economic changes also came about ahead of these summits.

Prime Minister Narendra Modi and US President Joe Biden
Prime Minister Narendra Modi and US President Joe Biden.

Why small savings will be made unattractive

There were murmurs that the sharp reduction in the interest rate for post office savings, which was withdrawn hastily by Finance Minister Nirmala Sitharaman early this month, was aimed at the overall aim of attracting foreign investment into the financial sector. If the interest rates come down for savings and pension schemes run by the government, the savers — mainly salary-earners and pensioners — would approach the private sector and the stock markets for better returns on their savings. But Sitharaman said the reduction announcement was an "oversight" by her ministry and restored the original rates.

Arguments have been going on within the government for the last three decades on reducing the high level of savings in government schemes including small savings, Post Office Savings, Provident Fund, General Provident Fund, Employees State Insurance and other government schemes. According to the Reserve Bank of India, during the last financial year, the highest share of household savings — totalling 7.4 lakh crores of rupees — was in bank deposits, but the next major investment — to the tune of Rs. 4 lakh crore — was in pensions and provident funds.

Moreover, Indians invested Rs 2.5 lakh crore in life insurance schemes of the Life Insurance Corporation and private life insurance companies. The investment in shares and debentures was comparatively lower at Rs. 77,000 crore.

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Nudge by right-wing economists

Right-wing economists have argued that the robust growth of the economy has opened up many avenues for investing savings and that the central task of providing these economic security schemes can be handled by the private sector. They point to the growth and popularity of the private insurance companies in the last two decades to say that government need not run every scheme. They also have argued that government cannot afford to pay a large amount as pensions to its retired employees or give tax concessions for small savings. Recently, Sitharaman did eliminate tax relief given to deposits made into General Provident Fund accounts above the limit of what is available to investors in Employees Provident fund.

But pensions and savings are a sensitive political subject for governments. Pensions are also under different ministries, some of whom have an argument contrary to those advanced by a finance ministry, focused on budget balancing. The Department of Pensions under the prime minister and the Department of Defence Pensions under the defence minister are responsible for administering the pensions for government employees.

The industries ministry which is keen on the expansion of private sector and increasing foreign investments normally supports the finance ministry. The labour minister is responsible for running employee welfare schemes like the Employees Provident Fund and Employees State Insurance where the minister has to balance the conflicting demands of employees, employers and the economists. A BJP government has also to consider the views of the Bharatiya Mazdoor Sangh and the Swadeshi Jagran Manch which are under the fold of the Rashtriya Swayamsevak Sangh.

Yet the direction of the economic decisions of the last one year indicates that the privatisation and liberalisation of the pension and savings segments would continue under Narendra Modi even if there are delays and U-turns.

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