Why RBI’s move to allow NRIs in pension scheme is a smart idea

  • N Madhavan, Hindustan Times
  • Updated: Nov 02, 2015 15:50 IST
The Reserve Bank of India recently allowed non-resident Indians (NRIs) to subscribe to the National Pension Scheme (NPS) governed by the Pension Fund Regulatory and Development Authority. (AFP File Photo)

The Reserve Bank of India recently allowed non-resident Indians (NRIs) to subscribe to the National Pension Scheme (NPS) governed by the Pension Fund Regulatory and Development Authority.

On the face of it, this move is of course a benefit for NRIs, but the other side is that it is also a potential source of economic stability in India. Here’s how.

Time and again, India has faced some kind of a problem on the external front, though the reasons have varied. In 1991, India went into a deep balance of payments crisis amid a political turmoil, even mortgaging its gold. In 1998, the nation staged nuclear tests that resulted in US sanctions that made the rupee weaker.

Again, between 2008 and 2013, India went through ups and downs as the global economic crisis hurt export demand, and domestic inflation caused its own weakenesses amid high oil prices, resulting in the rupee facing a big attack in 2013. Dependent on foreign exchange for oil and key food items like pulses, India always has to keep an eye on the rupee.

India had come out with its India Development Bonds after the 1991 crisis that raised $1.6 billion. Resurgent India Bonds after the 1998 woes raised $4.2 billion and India Millennium Deposit Scheme in 2000 fetched $5.5 billion.

In 2013, the RBI came up with some sophisticated currency swap arrangements to tide over the problems triggered by a weaker rupee, even as ideas popped up that India should be issuing bonds.

The simple fact is that NRIs have time and again helped India with their resources, but there is a catch to this. In 1990, it was the flight of short-term NRI deposits that precipitated the balance of payments crisis. While various special schemes bolstered foreign exchange reserves that stabilised the rupee, they were put together quickly when market pressures were high.

India is the world’s largest recipient of remittances from its citizens working abroad. The World Bank estimated in a report released last week that in 2015, the amount is expected to touch $72 billion (R 470,000 crore) – a new record! This is even higher than China’s $64 billion remittances.

The remittances are a great source of strength for India’s economy and so are schemes like the ones India came out with in the aftermath of the nuclear crisis. But a steady flow of remittances can insulate India relatively from the kind of ups and downs and high-interest-bearing schemes in times of crises.

The NPS is a quiet vehicle for inflow of foreign exchange that can boost India’s reserves. The notable factor is that the minimum annual subscription in NPS is as low as R 6,000. NPS investments mature when a participant turns 60.

Consider the fact that overseas Indians are estimated to number more than 20 million but a huge number of them are rich citizens of Western nations. They may not be interested in Indian pension schemes – but those eligible may be tempted to join as investors as India becomes an economy promising sustained high growth with prospects for a boom in equities. As much of 50% of NPS funds can be invested in equities.

At the same time, NPS also enables modest variants of NRIs to remit more into India. The Arabian Gulf area accounts for as much as 5 million Indian nationals, many of them not in the affluent category.

The NPS can lead to smaller trickles coming into India from such people in a steady flow, thereby stabilising the local currency.

The RBI may well have quietly opened an alternative to expensive bonds and deposits by allowing NRIs to invest in the National Pension Scheme.

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