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HindustanTimes Sat,19 Apr 2014

FDI in pension hiked to 26% - demographic dividend or penalty?

Dhirendra Kumar, Hindustan Times   October 14, 2012
First Published: 21:58 IST(14/10/2012) | Last Updated: 22:01 IST(14/10/2012)

Allowing 26% foreign direct investment (FDI) in pensions is a cosmetic announcement that won't contribute to solving India's looming retirement benefits problem.

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For the most part, the flurry of reforms announcements that have come from the government in this past month are things that are badly needed. You might argue whether something will actually get operationalised but not about whether it's useful.

The one exception is the declaration that up to 26% FDI will be permitted. This 'reform' is a puzzle because to put it bluntly, it's not needed and no one will probably be interested in it.

The logic of FDI is that there are sectors where either the amount of money is needed is too large for domestic players to risk (insurance, for example) or there is technology or management skills that may only be available with foreign players (autos, for example). Pensions don't fit into either category.

There are four players permitted in all and the investment required is Rs. 50 crore for each. 26% of all four adds up to Rs. 52 crore of FDI that can possibly flow in. That's a ridiculously small sum to be excited about.

As for the need for foreign technology or management skills, that's an even more ridiculous - it's just an asset management business and there are plenty of existing financial sector players of all kinds who've been running such businesses perfectly well for years, if not decades.

So why was this reform needed? No particular reason, I guess. It was just a general 'talking up the market' announcement or perhaps it was part of Timothy Geithner's red carpet.

Meanwhile, there's a real pension sector out there that's in need of some real reforms. The two biggest items on a realistic agenda should be an urgent overhaul of the EPFO; and of somehow finding a way of getting the NPS to make inroads into the unorganised sector.

Otherwise, that demographic dividend is going to turn into a demographic penalty a few decades down the line. Around 2040 onwards, we could have a large population of distressed senior citizens. R52 crore of FDI is not going to prevent that.

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