Pension Reforms in India
Broadly pension reform proposals in India aim at creation of an independent pension regulatory authority to control the pension system, making it mandatory beyond a level of employment, limiting withdrawal option before retirement, facilitating increase in rate of return on funds contributed by liberalising investment rules for such funds, and professionalising pension funds management. In short, there is a proposed shift from defined benefit system to defined contribution system as well as a choice of three different investment patterns: growth, balanced income and safe income. It is assumed that with higher levels of corpus and with better financial management, higher income replacement levels at the time of retirement can be anticipated. The focus of the reforms at present seems to encourage the working population to take more interest in their post retirement income levels.
There is a general perception that in a society faced with demographic features like an ageing society and higher pensionary outflows on a retiring work force and delicate state of public finances, a switch from public unfunded pensions to private funded pension systems will increase growth through savings, especially the flow of savings to capital markets and augment the overall well being of the pensioners by giving them the responsibility of managing their pensionary finances.
Can funded pension system face the challenges of demographic transition? Demographic transition is indicated by an ageing population and higher healthcare costs associated with it. There is also the question of declining proportion of working population and higher dependency levels on earning members.
The most compelling reason for pension reforms seems to be the increasing pension burden in the future. One of the key aspects of such reforms is seen to be the replacement of Pay As You Go (PAYG) system with funded pension systems. Funding is seen as a solution for two basic reasons: a) funded systems will increase levels of savings and investment and thus income b) funding is expected to lead to faster economic growth and generally enable coping with demographic challenges. Both these can however, be challenged. Assuming that funded systems lead to accumulation of financial assets such as equity and debt, enhanced role for capital markets is envisaged and increased savings can be expected to flow through capital markets. The logic largely follows the Feldstein theory that PAYG pension system curbs national savings and a switch to funded systems will increase savings and investment. This can however be subject to critical analysis. Savings largely depend on life cycle considerations, with society’s age structure determining the level and time profile of savings. If that be so, savings should be unaffected by how the society takes care of the elderly. There are several reasons why savings of the society are expected to remain unchanged. In a transitional phase, Governments would still need to fund existing pension liabilities. This can be done by borrowing, raising taxes or cutting (non-pension) expenditure. Raising taxes does not effect savings as it directly affects social security contributions, leaving workers’ disposable income and saving unchanged. Government borrowing is usually in the form of issue of bonds to finance pension obligations, and in fact Government borrowing can be seen as dissaving. By cutting manpower expenditure, Government saving is not effected and in fact may adversely impact economic activity. If Governments can cut expenditure, they would do so irrespective of the pension system prevalent. In sum, the hope of a higher level of savings may not be well founded.
In an assumption of a complete switchover from PAYG to funded pension system, it appears as if more forced contributions would lead to greater savings. Having the possibility of savings does not mean savings will take place. Even if these are made mandatory, it has to be remembered that higher savings by workers may not imply higher national savings as pensioners may be forced to dissave by selling other financial assets.
Often it is argued that privately funded pension systems would ensure that demographic challenges are met more effectively. The demographic challenges are often meant to denote a declining proportion of workforce and an ageing population. It is also assumed that pensioners have no saving capability and consume whatever output they are used to in their active years. Furthermore, they have no wage or other income and claim today’s goods and services based on their past contributions.
Under Indian conditions many of these assumptions can be put to test. While the demographic challenge for mature countries like those in Europe is understood, Indian working population is set to increase in the years to come. Furthermore, any growth in public or private sector is expected to create employment opportunities leading to more than proportionate growth of workers vis a vis non workers or pensioners. It may be added that the present pension system has not fully saturated the working population for various reasons. Only about 23% in the Government sector are beneficiaries of defined benefit pension system and only about 49% employed in the private sector are covered by mandatory Employee Provident Fund. Many organisations blatantly violate labour laws and try to avoid any type of benefit to their employees including pensionary benefits or provident fund.
The present pension scheme assures a transfer payment from Government in a fixed proportion to their present wage level and even this is indexed broadly to cost of living. Under funded pension systems, workers accumulate no assurances of income replacement but financial assets. Inflation is a cruel reality that bites into financial assets even as they are being built up. Even if investments are made in bonds, equities and real estate, their value is likely to depreciate as in an ageing society, there may be few takers for these assets and hence lower realisation or even a capital loss.
Two other compelling arguments for funded pension systems are often cited: growth and globalisation. But as shown earlier, higher savings may only be misnomer and may not translate into growth. Growth can however result from more efficient mobilisation and allocation of savings. Under funded pension systems, funds may flow more through capital markets than through banks. The hidden assumption however is that market based financial systems are more efficient than bank based financial systems, or score in allocational efficiency. However, one cannot at the present juncture compare the two as banks have been overregulated and our capital markets are yet to inspire confidence, after repeated scams have scarred investors’ memories. Growth in a reforming economy like ours presumes that expanding investment opportunities would be available for private sector and high levels will be sustained.
The other argument—globalisation—presumes that free flows of capital or financial assets are possible; in other words, financial assets can acquire claims on output of other countries, and pension funds can be invested in foreign countries freely without any let or restriction. This is helpful if marginal returns on capital in other countries are expected to be more than realisable domestically. The investments have to be moreover, in countries with a different demographic profile and faster growth prospects, and those capable of exporting goods and non factor services when the investing countries is ready to sell its assets. Last of all, the credit worthiness issue is paramount in international investments and debt repayment of external finance depends equally on willingness and capacity to repay. Moral hazard argument has often been used while discussing reverse financial flows. This logic would however hold goods in both pension systems.
The question of overall welfare of the pensioners still remains. The power to select the fund manager according to the risk profile of the employee remains with the employee instead of depending on a designated public fund manager. But with it also shifts the responsibility of taking the risks associated with the investment pattern. There is also the uncertainty that extraneous factors such as inflation, depreciation of currency, the state of the stock markets as well as international monetary flows might put paid to the value of realisation of the financial assets which are being created. The emerging demographic profile will also have a great bearing on the value of capital assets created.
It can be therefore concluded that there are no strong reasons to believe that a shift in pension systems would impact growth of economies substantially and that the blow on pensioners would be softened compared to the present levels. However, with the good intentions and objectives such as risk sharing, corpus creation, and passing on part of decision making to the working population, the new scheme deserves to be given a chance and modifications if any can be considered looking to the lessons learnt in implementation of the same.
Thursday, August 30, 2007
Monday, August 27, 2007
Banking in India, cheque book
How to read your cheque book-1
There are many changes happening in the way India banks. One of them is the changes in the looks of the cheque book. It now contains
(a) a six digit number on the left corner
(b) a 11 digit alphanumeric code which identifies: bank code (first 4 digits), control character (1 digit), branch code (6 digits). This is the Indian Financial System Code.
(c) a 9 digit MICR (Magnetic Ink Character Recognition) code besides the six digit number, in which the first 3 digits denote the city code, the next 3 digits represent the bank code and the last 3 digits indicate the branch code. This uniquely identifies each branch in India which follows the MICR guidelines.
There are many changes happening in the way India banks. One of them is the changes in the looks of the cheque book. It now contains
(a) a six digit number on the left corner
(b) a 11 digit alphanumeric code which identifies: bank code (first 4 digits), control character (1 digit), branch code (6 digits). This is the Indian Financial System Code.
(c) a 9 digit MICR (Magnetic Ink Character Recognition) code besides the six digit number, in which the first 3 digits denote the city code, the next 3 digits represent the bank code and the last 3 digits indicate the branch code. This uniquely identifies each branch in India which follows the MICR guidelines.
Friday, August 24, 2007
Off the Record
Much woe has been felt on recognition that a public personality (political, social, religious, bureaucratic or other) has been misquoted or quoted out of context after he has granted an interview especially in the print media.
The fact is that, often reporters are there to make a story that will sell. They may not care if you are praised or condemned in the process of creation of a good (saleable) story. The reporter, who has to be a good story teller, has to interest. He has to give the power of trial to the reader or viewer, often loaded with his own conclusions.
Most of the time reporters have already built up a context or theme and are working in the background of current popular importance, and are just gathering information or elements to fit into their story.
The most powerful weapon the journalists have is that of the ‘edit’. They filter unwanted information, plant you with tricky questions which appear as if you agree with a logical fallacy, making you look an idiot. Edit also means they have to condense and condense powerfully to evoke an image, a reaction, an emotion.
Often, your half hour interview is but four lines in text or 8 seconds on the screen. The media has an agenda, whereas you may have facts or a message. A common myth is that media is objective; but unfortunately they can’t be—else no one else will read or view their story.
How do you protect yourself from such an adversarial if not hostile experience (as almost any experience with the press can be)? Here are some rules which may help you stay on safe ground.
Rule one is that there are no rules. Hence any amount of homework is necessary particularly if you are a novice. The ground rules have to clarified before any interaction, and loads of skepticism will go a long way to insulate you from unwanted embarrassment. The context needs to be researched, not yours, but that of the interviewer. In fact, the more you know of the person on the other side of the table, the better off you are.
Always be in control of the situation. To do this, control your speech, expression, emotion. Get your message straight and clear, without fuzzing around.
Often it is said that the answer to the first question sets the tone. Rightly so, as the mind has its own limits.
Say what you have to say no matter what the question is, if need be with a bridging phrase or clause. Never attack back or contradict, unless it if it is a purely factual question, which is rarely the case.
There is no such thing as ‘off the record’. If you whisper a four letter or five letter word at any time during before or after the interview, even to the best journalist you knew on earth, you can be pretty sure it will find a place in the media if not immediately, months or years after it was uttered. Spot interviews are the worst culprits, where you are least prepared and highly vulnerable.
Happy interviewing!
The fact is that, often reporters are there to make a story that will sell. They may not care if you are praised or condemned in the process of creation of a good (saleable) story. The reporter, who has to be a good story teller, has to interest. He has to give the power of trial to the reader or viewer, often loaded with his own conclusions.
Most of the time reporters have already built up a context or theme and are working in the background of current popular importance, and are just gathering information or elements to fit into their story.
The most powerful weapon the journalists have is that of the ‘edit’. They filter unwanted information, plant you with tricky questions which appear as if you agree with a logical fallacy, making you look an idiot. Edit also means they have to condense and condense powerfully to evoke an image, a reaction, an emotion.
Often, your half hour interview is but four lines in text or 8 seconds on the screen. The media has an agenda, whereas you may have facts or a message. A common myth is that media is objective; but unfortunately they can’t be—else no one else will read or view their story.
How do you protect yourself from such an adversarial if not hostile experience (as almost any experience with the press can be)? Here are some rules which may help you stay on safe ground.
Rule one is that there are no rules. Hence any amount of homework is necessary particularly if you are a novice. The ground rules have to clarified before any interaction, and loads of skepticism will go a long way to insulate you from unwanted embarrassment. The context needs to be researched, not yours, but that of the interviewer. In fact, the more you know of the person on the other side of the table, the better off you are.
Always be in control of the situation. To do this, control your speech, expression, emotion. Get your message straight and clear, without fuzzing around.
Often it is said that the answer to the first question sets the tone. Rightly so, as the mind has its own limits.
Say what you have to say no matter what the question is, if need be with a bridging phrase or clause. Never attack back or contradict, unless it if it is a purely factual question, which is rarely the case.
There is no such thing as ‘off the record’. If you whisper a four letter or five letter word at any time during before or after the interview, even to the best journalist you knew on earth, you can be pretty sure it will find a place in the media if not immediately, months or years after it was uttered. Spot interviews are the worst culprits, where you are least prepared and highly vulnerable.
Happy interviewing!
Thursday, August 2, 2007
Thoughts on Indian budget 2007-8
The budget proposals presented recently have attracted lot of flak for lack of focus, industry orientation and weak steps to control inflation.
The growth-inflation conundrum has engaged economists for the past for decades. In the post war period, a negative relation was recognized and it was believed a low rate of inflation was good for the economy while higher rates of inflation were harmful for growth. Moderate inflation rates were deemed to be below 10 per cent, while rates above that were seen as detrimental to the growth of the economy in the long run. It is now widely believed that inflation is a key macroeconomic variable to be managed.
Is inflation in India high? Seen as a statistic, an inflation rate of 6 to 7 per cent can not be considered to be high. However, what is important is the perceived level of inflation, especially by the large masses in the lower and middle classes. The index perhaps can not capture the true significance of a 50 to 100% price rise in essential commodities which has a telling effect on the quality of life of the poor.
Has the budget impacted the industry? In one sense it has, by keeping the status quo intact, not imposing any fresh taxes or creating any further adverse impact. Industry therefore should be happy that these are no futher adverse policy constraints.
A direct proportional link between money supply and inflation (as envisaged by monetarists) is possible only under endogenous and full employment conditions. However these conditions don't obtain in India. Not only is there sufficient slack available on the supply side in all factors of prodution, there is more openness of the economy due to increasing globalisation, especially in the context of increasing FDI/FII levels.
The budget has rightly attacked the rigidities on the agricultural side. In fact much more should have been done to strengthen agricultural infrastructure, especially research, imputs, easier marketing and better price support mechanisms. This would have not only eased the inflationary pressures on foodgrains, but also provided the stability needed for industry to build up on.
Absence of negatives on the individual and industry fronts can itself be seen as a major positive. In short by steering a level course and curbing inflationary tendencies, the budget needs to be applauded by keeping the obstructionist forces in check, even if it means sacrificing growth rates by a percent or two. Overall it can be seem as a mid-course steadying exercise.
There has rightly been a focus in development of social and physical infrastructure which should provide the right wherewithal for a speedy, sure and steady growth rate of 8 to 9% envisaged in the next plan period. Education, health, agriculture and increasing globalisation have rightly received the attention required in the current scenario. Even reduction of excise duties and price controls on steel and cement may indirectly aid growth by hastening the development of infrastructure at a reasonable cost. At the same time, making credit a wee bit difficult and costly is probably a way to curb too much money chasing too few goods leading to better utilization of resources and reduction of slack in the system, financial and physical.
Overall, the budget proposals have indicated that in the breakneck speed for growth, there is need for moderation, control of inflation, and a mid course steadying exercise towards inclusive development.
The growth-inflation conundrum has engaged economists for the past for decades. In the post war period, a negative relation was recognized and it was believed a low rate of inflation was good for the economy while higher rates of inflation were harmful for growth. Moderate inflation rates were deemed to be below 10 per cent, while rates above that were seen as detrimental to the growth of the economy in the long run. It is now widely believed that inflation is a key macroeconomic variable to be managed.
Is inflation in India high? Seen as a statistic, an inflation rate of 6 to 7 per cent can not be considered to be high. However, what is important is the perceived level of inflation, especially by the large masses in the lower and middle classes. The index perhaps can not capture the true significance of a 50 to 100% price rise in essential commodities which has a telling effect on the quality of life of the poor.
Has the budget impacted the industry? In one sense it has, by keeping the status quo intact, not imposing any fresh taxes or creating any further adverse impact. Industry therefore should be happy that these are no futher adverse policy constraints.
A direct proportional link between money supply and inflation (as envisaged by monetarists) is possible only under endogenous and full employment conditions. However these conditions don't obtain in India. Not only is there sufficient slack available on the supply side in all factors of prodution, there is more openness of the economy due to increasing globalisation, especially in the context of increasing FDI/FII levels.
The budget has rightly attacked the rigidities on the agricultural side. In fact much more should have been done to strengthen agricultural infrastructure, especially research, imputs, easier marketing and better price support mechanisms. This would have not only eased the inflationary pressures on foodgrains, but also provided the stability needed for industry to build up on.
Absence of negatives on the individual and industry fronts can itself be seen as a major positive. In short by steering a level course and curbing inflationary tendencies, the budget needs to be applauded by keeping the obstructionist forces in check, even if it means sacrificing growth rates by a percent or two. Overall it can be seem as a mid-course steadying exercise.
There has rightly been a focus in development of social and physical infrastructure which should provide the right wherewithal for a speedy, sure and steady growth rate of 8 to 9% envisaged in the next plan period. Education, health, agriculture and increasing globalisation have rightly received the attention required in the current scenario. Even reduction of excise duties and price controls on steel and cement may indirectly aid growth by hastening the development of infrastructure at a reasonable cost. At the same time, making credit a wee bit difficult and costly is probably a way to curb too much money chasing too few goods leading to better utilization of resources and reduction of slack in the system, financial and physical.
Overall, the budget proposals have indicated that in the breakneck speed for growth, there is need for moderation, control of inflation, and a mid course steadying exercise towards inclusive development.
Letter to Yashasvi
This is my new article-does it address the new generation?
Dear Yash
You are about to leave the protective precincts of your prestigious school and join college. And we are trying to locate a college just as prestigious as your school. IITs are tough but we still hope you can make to its hallowed portals.
These seventeen years have been one of sacrifice, patience and determination. Sacrifice of food, water, sleep, petty pleasures and job opportunities. Patience in waiting for you to arrive from school, finish your various meals of the day. And job opportunities. Though your mummy had a management and NET qualification in a booming economy, she acquiesced with a humble teacher’s position to be able to give enough time to you.
You are everything for your mummy. One day she sneaked out for a karnatic music recital and you gave hell to the your ‘history congress peddamma’. She was called so because she kept on participating in history congresses all over the country. You will be surprised your mother can sing very well too—she can beat any rock or classical star given a chance.
I envy her patience. She can wait for hours while you nibble your breakfast, lunch and dinner and kill a cool four hours in the process. And milk, well, you know that the temperatures of its reaching the table and that of your drinking have to be perfect, without the ever irritant malai. Like the golden brownness of your paratha and toast. And the right cake from the right shop on your birthday.
Premlata was engaged to chase you from room to room to feed you. But you managed to fool her most of the time.
I still remember you drove our driver Viswanath nuts giving him no time to reach school. But he managed to reach you. So could I, though in the process I had to get a few knocks on the new maruti 800. I got it painted after the school bus was arranged, but nevertheless we had to chase it often as you missed it.
Nowadays we are unable to sleep at night. You want loud music, a crashed computer due to overgaming, dirty adidas, low hip jeans and the ultimate IPOD. We are petty government servants and though we could not afford these, we pushed for all of these.
Of late, you are also irritable. Is it the genext trait? We cannot satisfy all your wants, but you cannot understand it, with all the peer pressure from materialistic environs. You throw tantrums, speak loudly and rudely. We grin and bear it.
We hope you will be able to get into a good college. If not the IIT, something close to it. After a good degree, you may get into IIM and get a job with a multinational.
But we are more worried about the quality of your life. Where are the simple pleasures gone? Why this loud, brusque behavior? Are mummy and daddy mere providers? Can’t we spend peaceful moments together, respect each other and nurture our family values?
I hope you will emerge as a complete gentleman, not just a successful man, earning dollars. Dollars are easy to come by, but daddy and mummy don’t come back again.
Dear Yash
You are about to leave the protective precincts of your prestigious school and join college. And we are trying to locate a college just as prestigious as your school. IITs are tough but we still hope you can make to its hallowed portals.
These seventeen years have been one of sacrifice, patience and determination. Sacrifice of food, water, sleep, petty pleasures and job opportunities. Patience in waiting for you to arrive from school, finish your various meals of the day. And job opportunities. Though your mummy had a management and NET qualification in a booming economy, she acquiesced with a humble teacher’s position to be able to give enough time to you.
You are everything for your mummy. One day she sneaked out for a karnatic music recital and you gave hell to the your ‘history congress peddamma’. She was called so because she kept on participating in history congresses all over the country. You will be surprised your mother can sing very well too—she can beat any rock or classical star given a chance.
I envy her patience. She can wait for hours while you nibble your breakfast, lunch and dinner and kill a cool four hours in the process. And milk, well, you know that the temperatures of its reaching the table and that of your drinking have to be perfect, without the ever irritant malai. Like the golden brownness of your paratha and toast. And the right cake from the right shop on your birthday.
Premlata was engaged to chase you from room to room to feed you. But you managed to fool her most of the time.
I still remember you drove our driver Viswanath nuts giving him no time to reach school. But he managed to reach you. So could I, though in the process I had to get a few knocks on the new maruti 800. I got it painted after the school bus was arranged, but nevertheless we had to chase it often as you missed it.
Nowadays we are unable to sleep at night. You want loud music, a crashed computer due to overgaming, dirty adidas, low hip jeans and the ultimate IPOD. We are petty government servants and though we could not afford these, we pushed for all of these.
Of late, you are also irritable. Is it the genext trait? We cannot satisfy all your wants, but you cannot understand it, with all the peer pressure from materialistic environs. You throw tantrums, speak loudly and rudely. We grin and bear it.
We hope you will be able to get into a good college. If not the IIT, something close to it. After a good degree, you may get into IIM and get a job with a multinational.
But we are more worried about the quality of your life. Where are the simple pleasures gone? Why this loud, brusque behavior? Are mummy and daddy mere providers? Can’t we spend peaceful moments together, respect each other and nurture our family values?
I hope you will emerge as a complete gentleman, not just a successful man, earning dollars. Dollars are easy to come by, but daddy and mummy don’t come back again.
a write up published
I have just published a write up on doorways. I shall try to publish all my writings.
Who read it? I don't care. At least it is safe on the web.
Who read it? I don't care. At least it is safe on the web.
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