In June, our thoughts turn to power, or the lack of it. The average Indian household faces four hours of outage every day in peak summer despite it needing a tenth of the electricity to run a house anywhere else on the planet.
This week, Prime Minister Manmohan Singh's thoughts turned to
power as well. First, when on Wednesday he reviewed the status of infrastructure projects. And a day later, when his Cabinet decided not to discuss a controversial pension law. Over the next ten months, the government, with a little help from private investors, wants to set the ball rolling on 18,000 Megawatts of additional power, 9,500 km of highways, two ports, four airports, a bullet train and a lot more coal. Sounds good when the Congress party wants its government to show some spit and polish.
India's creaky infrastructure needs both. Trucks trundle 200 km a day here, they clock 800 km worldwide, according to Goldman Sachs. Chinese freight trains run at 150 km an hour, six times faster than ours. India's ports are choked all the time and its airports cater to a very small slice of the population.
Where do pensions fit in all of this? We'll get to that in a bit.
This is how India is building its infrastructure. Of the 567 big projects the Centre monitors month by month, 244 were running late in May 2011. Over 100 will be completed between two and five years after schedule, and 33 will take even longer. The delays have bumped up costs by 20% from the original $115 billion estimate. The government doesn't have enough money to build all this in time, and ends up overspending.
Over the next five years, planners estimate, the country will need $1 trillion to build ports, power plants and highways. Some money may come from companies that see an opportunity here. But that won't cover everything. This is where pensions come into the picture. Ordinary Indians - you and I, not companies or governments - can pay for every inch of road and every unit of power they need if they were to park more of their savings in pension funds.
We save enough - last year Indian households put aside $350 billion, and $150 billion found its way into bank accounts, insurance policies and pension plans. The rest flowed into houses and gold. Over the next five years, household financial savings alone can foot three-fourths of our infrastructure bill. A pay-as-you-go pension plan for every Indian makes the chore of saving much easier than actively seeking out investments to preserve wealth. Chileans and Mexicans have paid for their infrastructure through government-sponsored pension schemes run by professional managers. The PM hopes Indians will do the same.
What sets pensions apart from other financial instruments is a unique fit between the working life of an individual and the lifecycle of an infrastructure project. Both are around 30 years. Banks find it difficult to lend for such long periods, forcing the government to either stand guarantee for these loans or dip into its own pocket for some exotically named 'viability gap financing'. If, on the other hand, every worker puts a fraction of his first month's wage into a pension fund and keeps doing it till he retires, he can walk away with a nest egg, secure in the knowledge that the power will not trip next summer.
The Pension Fund Regulatory and Development Bill has found backing from the BJP, which has managed to extract two concessions from the draft that was put up for parliamentary scrutiny. One, the new draft explicitly caps the foreign holdings in pension funds at 26%. Two, fund managers will now be required to offer at least one assured ret-urn scheme among their bouquet of products. Neither is a deal-breaker for shifting the onus of infrastructure building on to the people who will gain most from it. Foreign capital is not a necessity for a modern pension industry in India and a fund invested in gilts can yield a pretty close approximation to an assured returns scheme. In a season of extremely partisan politics, the movement of the Pensions Bill offers a glimmer of hope that policy is not completely held hostage.
The PM has managed to get the issue-based opposition on board. He must work on the Trinamool Congress, whose reservations to the Bill are about exposing workers' pensions to market risks. Since the New Pension Scheme was launched in 2004 for central government employees, 27 state governments have signed up. At the very least, the 2.5 million subscribers in the scheme deserve a watchdog looking out for their interests.
If Mamata Banerjee is still not convinced, she could run her eye through the list of languishing infrastructure projects. Twenty-six of them are in Bengal.
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