Pension Fund Regulatory and Development Authority (PFRDA) and National Pension System

   Government of India constituted an Expert Committee for Old Age Social and Income Security (OASIS) in 1998 which submitted its report in 2000. In its report it pointed out that number of elderly people is likely to be 8.9% of the population in 2016 and 13.3% in 2026. Considering this large percentage the Committee recommended a new pension scheme covering both employees as well as self employed persons, in which the savings made by these individuals during their working years would be used for providing them pension after their retirement age. The Committee also suggested architecture for the scheme with PF Managers, Points of Presence, and Centralized Recordkeeping Agency etc and also recommended a strong regulatory body.

       In accordance with these recommendations, the Government of India set up “Pension Fund Regulatory and Development Authority (PFRDA)” on 23^rd August, 2003. By an executive order dated 10^th October, 2003, it was mandated to act as a regulator of pension funds in India.  The Authority has been recently granted legal status through PFRDA Act 2013 which came into force on 19^th September 2013. As per this Act, the Authority shall comprise of a Chairperson, three full time members and three part time members. The Act also provides that PFRDA will look after National Pension System or any other scheme not regulated by any other enactment. Schemes regulated by other enactments like (i) the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948; (ii) the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952; (iii) the Seamen’s Provident Fund Act, 1966; (iv) the Assam Tea Plantations Provident Fund and Pension Fund Scheme Act, 1955; and (v) the Jammu and Kashmir Employees’ Provident Funds Act, 1961 have been excluded from the provisions of the Act as are the Central Government employees appointed before 1^st January 2004.

Earlier Scenario

Prior to PFRDA, benefit of pensions had been limited to the Government sector. This was a Fixed Benefit Scheme as it meant giving a fixed sum to the employee on the basis of length of service and last pay drawn. However, as the pension had to be paid out of the Government funds at a much higher rate than the contributions and as the number of retired employees steadily grew, the pension started becoming a burden on the Government exchequer. A small section in the organized private sector received some amount in the form of Provident Fund or some other benefits. However, no pension was available to the employee apart from this amount. However, these sections constituted a small part of the population and sizeable section of the population did not have any social security scheme to fall back in their old age. These problems required devising of a scheme in which an employee or any other individual could provide for his own pension through savings made during his working years.

  

National Pension System

            In order to address these problems the Government launched the National Pension System. The system is a Fixed Contribution Scheme and amount of benefit received by the employee at the time of retirement depends upon the amount contributed by the employee and wealth earned after investment of this contribution. The scheme was made mandatory for all those Government Employee who have entered the service on or after 1.1.2004. The scheme was opened for all citizens in 2009, but is not mandatory for them. Main features of New Pension Scheme are as under:

• The scheme is available for Indian citizens only and is being looked after by the NPS Trust. Central Records Agency, Trustee Bank, Asset Holding Company, Pension Fund Managers, Points of Presence and Annuity Service Providers are other entities of the Scheme.
• NSDL e-Governance Infrastructure Ltd. has been made the Central Records Agency and Bank of India is to function as the Trustee Bank for the scheme.
• Number of Pension Fund Managers has not been restricted and is updated from time to time. However, presently eight companies have been authorized to work as Pension Fund Managers which have offered similar number of Pension Funds. Subscriber will have the option to choose his PFM as well as the schemes.
• Each individual will open an account with the Pension Fund Manager (PFM) and select a scheme. Each scheme will have Two Tiers. First one shall be a mandatory, non-withdrawable pension account for which minimum contribution shall be Rs.500/- per contribution. Minimum contribution per annum would be Rs.6000/- and every subscriber shall have to make at least one contribution per annum. A Tier-II account shall be an optional, withdrawable account with an aim to provide liquidity to the beneficiary. However, an active Tier-I account is a pre requisite for opening a Tier-II account.
• On exiting from the NPS, a fixed percentage of the amount in the account of the subscriber would be used to buy annuity which would provide pension to the beneficiary for the rest of his life. Percentage of this amount would depend upon the age in which the subscriber exits. In case of death, whole amount would be given to his nominee.
• Service providers like Central Record Keeping Agency, Points of Presence, Trustee Bank, Pension Fund Managers etc. are entitled to certain charges which are either collected upfront or as deductions from NAVs.
• Offer document of the Scheme makes it amply clear that there are no guarantees on the scheme and the investments are subject to market and other risks. There is no guarantee that investment objectives shall be achieved.
• Another model of National Pension Scheme i.e. NPS Lite was launched for lower income group people in 2010. One can register in the scheme with a minimum contribution of Rs.100/-. There is no annual minimum subscription, though the offer document recommends that contributions of at least Rs.1000/- per annum should be made. The scheme is simpler and has lower administrative charges.
• In order to promote NPS among the unorganized workers, the Government has launched Swavlamban scheme. Government will contribute Rs.1000/- per annum in the NPS account of the subscriber for four years starting from 2010-11 onwards subject to the condition that the per annum contribution of the subscriber in the scheme is minimum Rs.1000/- and maximum Rs.12, 000/-.
• In order to popularize NPS among corporate, NPS-Corporate Model was launched in December, 2011. This model would provide a platform to the corporate to co-contribute in the pension fund of employees. While the corporate would be granted tax exemptions, the employees would have better choice of investments of their funds.   

FDI in pension fund

            In India, FDI has always been a politically sensitive issue. Certain political sections are opposed to FDI, though this may not have much sense. Pension market has already been opened to private players and the funds are already being invested into the market. Collaborating as well as non collaborating companies are equally susceptible to market risks and it may not be of much concern to the subscriber. Further, the Government needs FDI, primarily for investment in infrastructure. As per a study conducted by ASSOCHAM published in January 2012, an expenditure of one trillion dollars would be required to be invested in infrastructure during the 12^th five year plan i.e. 2012-17. This demand would be difficult to be met from local resources and FDI provides a possible solution. The study also states that Pension Funds across the world hold a capital of 16.2 trillion dollars and even if India is able to tap 1% or 2% of this amount, it would ease the situation substantially.  This is quite possible as the Indian market has hitherto remained untapped in the pension sector and can attract the interest of the investors. Considering these factors, the Government has brought FDI in the pension sector. Section 24 of the PFRDA Act 2013 provides for foreign equity in pension up to a limit of 26% or such percentage as approved for an Indian Insurance Company.  The Government has also introduced The Insurance Laws (Amendment) Bill, 2008 which provides for FDI in insurance sector up to 49%. If passed, this would also raise the limits of FDI in pension funds.  

Present Status

            As per data of PFRDA as on 7^th May 2013, there were about 49.90 lakh NPS subscribers. Out of these about 28.4 lakhs have been from the Government sector (both Central and the State Governments) and 19.23 lakhs are NPS Lite accounts. Subscribers from private sector are only about 2.27 lakhs. This shows some lack of confidence in these schemes in some sections. This is also borne by the fact that against about 50 lakh subscribers only 8817 Tier-II accounts have been activated.

            This could be due to a number of reasons. First could be that the scheme provides no guarantee whatsoever, not even like the assured sum given by most life insurance companies after maturity of the policy. Another reason could be that there is no clarity on the amount of pension which a subscriber would get as the same would depend upon the pension wealth which in turn would depend on NAV of the fund and hence on the share market. As share market is highly volatile, pension wealth of the subscriber is likely to fluctuate for a number of reasons with which he is not even remotely connected. Political instability, terrorist attacks, natural calamities and similar other things take a toll on the share market and subscribers retiring at those points of time will suffer heavily. Last but not the least, the amount of benefit received by a subscriber would depend on the performance of Fund Managers. Subscribers in some of the funds would receive less than others because their fund managers had not made investments that efficiently.

           NPS has relieved the Government of the burden of paying pension to its employees and hence is going to stay in the public sector. However, its prospects in the private sector would depend upon the performance of various entities particularly the Fund Managers. As investments in the pension sector are long term and scheme is still at a nascent stage, it is difficult to judge the performance of fund managers at this stage. This will become clear only in the times to come when the subscribers would actually receive the benefits. 

Unorganized or the Informal Sector

        The terms “Informal Sector” and “Unorganized Sector” are generally used interchangeably. Although a specific definition of the sector is not possible it can be loosely defined as the sector engaged in economic activities which do not fall under the category of modern industrial activities. The Unorganized Workers’ Social Security Act, 2008, defines unorganized sector as “an enterprise owned by individuals or self employed workers and engaged in production or sale of goods or providing any kind of service whatsoever, and where the enterprise employs workers, its number is less than ten.” The Act also defines an unorganized worker as a home based worker; a self employed worker; a wage worker in the unorganized sector or a worker who is not covered by any of the labour laws specified in the said Act. 

       Although, the sector has been termed as informal, it is the primary source of employment in India and provides employment to about 93% of the labour force. The sector also makes substantial contribution to the GDP. The sector displays diversity in the nature of trades as well as in the economic condition of the people involved in such activities. At the higher end are the small entrepreneurs, contractors and retail shopkeepers etc. who are the employers and are comparatively well off while at the lower end are the workers of these units, wage earners, rickshaw pullers etc. who can barely make the ends meet.

Characteristics

       While submitting its Second Report in the year 2002, the National Commission on Labour has devoted one chapter to the unorganized or informal sector. The Commission points out that the informal sector is too vast to be defined by way of a conceptual definition although its characteristics can be identified. Some of the important characteristics are as under:

• Organizations, both in terms of number of people involved and level of management are of lower level.
• Labour relations are either on casual basis or kinship including family labour or personal relations.
• Small amount of capital with business expenditure indistinguishable from household expenses.
• Easy entry and exit from the business and free mobility within the sector.
• Use of indigenous resources and labour intensive technology.
• Long working hours and lack of employment security.
• Lack of support from government.
• Generally a low wage and low earning sector.
• Has a high percentage of migrant as well as women workers.
• The sector is a prominent employer for child labour.
• Piece rate payment, home based work and contractual work is prevalent.
• Some types of work are seasonal which means there would be no work for some part of the year.
• Workers are not organized into trade unions which adversely affects their bargaining power.
• Health hazards exist in a number of occupations.

Relations between the formal and informal sector

            The informal or the unorganized sector does not exist independently of the formal sector. It is linked to and in some case dependent upon the organized sector. It depends on the organized sector for raw materials and other capital requirements and for marketing facilities etc. In a large number of cases informal sector does the actual production of goods for the formal sector through a channel of outsourcing. On the other hand, a large part of the formal sector, particularly the industries, has started hiring labour through a contractor, which is largely informal in nature.

Problems of informal sector

• The sector provides low wages which at times are even less than the minimum wages prescribed by the Government which makes the life of the worker quite difficult.
• As informal units have small capital, they are not able to provide proper facilities at the work place leading to health problems to the workers.
• The workers do not have any social security to fall back in times of need.
• As the units do not have sufficient capital, they usually resort to illegal cost cutting measures which include hiring of children as a cheap labour and avoiding of legal requirements.
• As these units are not covered under any labour laws, employees do not have facilities like PF and ESI which are available to workers of the organized sector.
• As the workers get low wages they are not able to afford proper housing due to which the migrant labour resorts to living in slums. Incidentally, a number of such informal units are located in slums. Bigger slums like Dharavi in Mumbai house thousands of such units.
• These units do not have proper waste disposal facilities and hence are a cause of environmental concerns.
• In some cases, particularly in rural and tribal areas, this sector faces problems due to depletion of resources like forests etc.

Efforts of the Government

            Although the sector is huge both in terms of participating people and also in terms of its contribution to the GDP, it is extremely heterogeneous with each group having its own problems. Due to this and also due to the fact that the workers are not organized into trade unions or associations, the sector did not get similar benefits accruing to workers of the organized sector. However, situation has tended to improve in the last few years and a number of schemes have been launched for benefit for this sector. Some of the benefits/protections available to workers of this sector are as under:

• Minimum Wages Act, 1948 provides for prescribing minimum wages for unskilled and skilled workers in some of the unorganized sectors. Minimum wages are revised from time to time.
• Welfare funds have been established for some specific categories of unorganized workers like beedi makers, miners working in mines other than coal mines and for cine workers. These funds are regulated through The Mica Mines Labour Welfare Fund Act, 1946; The Limestone and Dolomite Mines Labour Welfare Fund Act, 1972; The Iron Ore Mines, Manganese Ore Mines and Chrome Ore Mines Labour Welfare Fund Act, 1976; The Beedi Workers Welfare Fund Act, 1976; and The Cine Workers Welfare Fund Act, 1981.
• National Scheme for Welfare of Fishermen was launched in the year 1991-92 and is specifically dedicated for welfare of fisherman. The scheme has four components, Saving-cum-relief, Development of model fisherman villages, Group accident insurance for active fisherman and Training & Extension.
• The Building and Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996 has been enacted to regulate the working conditions, safety & health measures and payments of wages and compensation.
• National Commission for Enterprises in the Unorganized Sector was set up in the year 2004 to look into the problems faced by the enterprises in the unorganized or the informal sector. The Commission has submitted reports on National Policy of Vendors, Unorganized Sector Workers Bill, Framing Legislation for minimum conditions of work and social security for unorganized workers, financing of enterprises in unorganized sector and creation of a national fund for unorganized sector.
• Handicraft Artisans’ Comprehensive Welfare Scheme comprising of insurance as well as health insurance was launched for benefit of artisans. Major part of the premium is paid by the Government while a small is paid by the beneficiary. A similar scheme was launched for the handloom weavers under the name Handlooms Weavers Comprehensive Welfare Scheme.
• The Unorganized Sector Social Security Act was enacted in 2008. The Act defines unorganized sector as well as unorganized worker as provides for framing social security schemes for the unorganized sector as well as formation of National and State Level Boards.
• The Government has launched a scheme “Rashtriya Swasthya Bima Yojana” (RSBY) with effect from 1^st April 2008. The scheme provides smart card based health insurance up to Rs.30, 000/- to BPL families. Premium of the insurance is paid jointly by the Central Govt (75%) and State Govt (25%).
• Aam Aadmi Bima Yojana (AABY) has been started for providing insurance cover for the head of the family or earning member of a rural landless household. The scheme provides for Rs.30, 000/- in case of natural death, Rs.75, 000/- in case of accidental death and permanent disability and Rs.37, 500/- in case of partial disability. Premium amount is shared equally by the Central and State Governments.
• National Rural Employment Guarantee Scheme has been launched to provide employment of a minimum of 100 days to any rural household willing to do unskilled manual work.
• Indira Gandhi National Old Age Pension scheme has also been launched to provide old age pension to all citizens who are more than 60 years of age and living below poverty line.
• Government has enacted National Policy on Street Vendors in 2009, with the objective of providing legal status, a regulated mechanism, credit facilities and civic facilities to the street vendors. The policy aims to serve as a model to the State Governments for enacting suitable legislation.
• The Government has also introduced “The Street Vendors (Protection of Livelihood and Regulation of Street Vending) Bill, 2012”. The bill provides for setting up of a Town Vending Committee (TVC) which shall also have representatives of street vendors. The bill also provides for framing of a scheme of street vendors by the State Governments. As per the bill the local authority along with the planning authority shall prepare a vending plan every five years. The bill has recently been passed by the Lok Sabha.

Present Status

            Despite the efforts of the govt, the position of people engaged in this sector is far from satisfactory. The sector is heterogeneous in nature and many of the professions still lack adequate legal regulation and protection. Apart from adequate laws, workers are usually unorganized and ignorant about their rights. Apart from a few organizations like Self Employed Women Association (SEWA), a trade union working primarily for women workers; Cine Workers Union; National Association of Street Vendors and few other organisations, trade unions and associations are usually nonexistent.  Poor implementation of laws is another problem. Minimum wages are rarely given but the worker is forced to work for lower wages due to pressure of unemployment. Social security schemes like RSBY and AABY have helped these people to some extent but the relief under these schemes is highly inadequate.  In the present scenario, providing adequate means of livelihood as well as adequate social security to all the workers in the unorganized sector remains a challenge before the policy makers. 

Position of India in Global Competitiveness Report 2013-14

            World Economic Forum has just released the Global Competitiveness Report, 2013-14. The report defines three stages types of economy. The first stage is factor driven wherein countries compete on the basis of their factor endowments—primarily unskilled labor and natural resources.  Competitiveness at this stage depends upon factors categorized under basic requirements i.e. public and private institutions, infrastructure, macroeconomic environment and a healthy workforce that has received at least a basic education. In the second stage countries move into efficiency-driven stage of development,  which requires development of more efficient production processes and increasing product quality. In this stage competitiveness is driven by higher education and training, efficient goods markets, well-functioning labor markets, developed financial markets, the ability to harness the benefits of existing technologies and a large domestic or foreign market. In the final stage countries move into the innovation-driven stage of development where increased wages and associated standard of living could be sustained only if their businesses are able to compete with new and unique products. At this stage, production of goods by using the most sophisticated production processes and by innovating new processes become the driving factors.

            The report lists 148 countries. As per the report, Switzerland is the most competitive country with the first position and Chad is the last at 148^th position. India is at the 60^th position one down from the report of 2012-13, four down from the report of 2011-12 and 11 down from the report of 2009-10. India has been placed along with 38 other countries in the stage 1 (factor driven economy).  Our regional competitor, China is at 29^th rank and has been placed in the second stage of Efficiency driven economy.  Important indicators of Indian economy as per this report are as under:

Rank of India as per indicators in the Global Competitive Index 2013

Sl. No.	Category/Pillars as per the report	Score 1-7	Rank	Details of important indicators
Basic Indicators (60%)		4.2	96
1	Institutions	3.9	72	This category is further divided into 21 indicators. Out of these in four cases India ranks below 100. These are Public trust in politicians (115), Irregular payments and bribes (110), Burden of Government regulation (104) and Business cost of terrorism (113). In three cases the country ranks above 50. These are Judicial Independence (40), Efficiency of legal framework in challenging regulation (48) and Strength of Investor Protection (41).
2	Infrastructure	3.7	85	This category is divided into nine indicators. Out of these in three cases the country ranks below 100. These are Quality of Electric Supply (111), Mobile Telephone Subscriptions/100 population (123) and Fixed Telephone Lines/100 population (118). In two cases the rank is below 50. These are Quality of Railroad Infrastructure (19) and Available airline seat per km/week (13).
3	Macroeconomic Environment	4.1	110	The category comprises of 5 indicators. In three cases the country ranks below 100. These are Government Budget Balance-% GDP (141), Inflation-annual % change (130), General Government Debt-% GDP (116). In other two indicators rank of the country is below 50. These are Gross National Savings - % GDP (28) and Country Credit Rating (47).
4	Health and Primary Education	5.3	102	This category has 10 indicators out of which India ranks below 100 in six. These are Business Impact of Malaria (112), Malaria cases per 100,000 population (116), Business Impact of Tuberculosis (103), Tuberculosis cases per 100,000 population (114), Infant Mortality-deaths per live 1000 births (120) and Life Expectancy (111).
Efficiency Enhancers (35%)		4.4	42
5	Higher Education and Training	3.9	91	The category has eight indicators out of which in one case rank is below hundred. This is Secondary Education Enrolment (110). In four indicators, the rank is below 50. These are Quality of the Educational System (33), Quality of Math and Science Education (32), Quality of Management Schools (30) and Availability of Research and Training Services (47).
6	Goods Market Efficiency	4.2	85	The category has 16 indicators out of which in 5 cases the rank is below 100. These are Total Tax Rate-% profits (128), Number of procedures to start a business (129), Number of days to start a business (103), Trade Tariffs-% duty (128) and Imports as a percentage of GDP (107). In four cases, rank is below 50. These are Intensity of local competition (24), Extent of market dominance (26), Effectiveness of Anti-Monopoly policy (29) and Effect of taxation on incentives to invest (44).
7	Labor Market Efficiency	4.1	99	The category has 10 indicators in which in one case the rank is much below 100. This is Women in Labor Force-ratio to men (137). In two cases the rank is 50 and above. These are Reliance on professional management (46) and Country capacity to retain talent (50).
8	Financial Market Development	4.8	19	The category has 8 indicators and in all of these the rank of country is below 50. These are Availability of financial services  (45), Affordability of financial services (38), Financing through local equity market (18), Ease of access to loans (38), Venture capital availability (27), Soundness of banks (49), Regulation of securities exchanges (27) and Legal Rights Index (28).
9	Technological Readiness	3.2	98	The category has 7 indicators out of which in 3 cases rank is below 100. These are Individuals using internet (120), Fixed broadband internet subscription (106) and International Internet bandwidth (113). In two cases, the rank is below 50. These are Firm level technology absorption (48) and FDI and technology transfer (32).
10	Market Size	6.2	3	The market has four indicators out of which one has a rank below 100. This is Export as a percent of GDP (125). In all other three cases the rank is below 5. These are Domestic Market Size (3), Foreign Market Size (4) and GDP (PPP) (3).
Innovation and Sophistication Factors (5%)		4.0	41
11	Business Sophistication	4.4	42	The category has 9 indicators out of which one is below 5 and three lie between 16-40. These are Local Supplier Quantity (2), State of cluster development (16), Value chain breadth (40) and Control of International distribution (38).  The remaining five indicators rank between 50-80.
12	Innovation	3.6	41	The category has 7 indicators which are Capacity for innovation (41), Quality of scientific research institutions (37), Company spending on R&D (39), University-industry collaboration in R&D (47), Government procurement of advanced tech products (92), Availability of scientists and engineers (15) and PCT Patents (64).

Most Problematic Areas for Conducting Business

Sl. No.	Problematic Area	Weightage of response
1	Inadequate supply of infrastructure	18.1
2	Inefficient Government Bureaucracy	17.5
3	Corruption	17.3
4	Tax regulations	7.6
5	Policy Instability	6.6
6	Restrictive Labor Regulations	5.8
7	Inflation	4.3
8	Access to Financing	3.9
9	Tax Rates	3.4
10	Poor work ethic in national labor force	3.0
11	Foreign currency regulations	2.9
12	Government instability	2.8
13	Insufficient capacity to innovate	2.8
16	Inadequately educated workforce	2.2
17.	Crime and Theft	1.2
18.	Poor Public Health	0.7