February 1, 2019 / 1:20 PM / 6 months ago

India announces pension scheme targeting 100 million unorganized workers

NEW DELHI/MUMBAI, Feb 1 (Reuters) - India on Friday announced a pension scheme targeting at least 100 million workers in the unorganized sector, such as drivers, maids and cobblers, in a bid to woo a critical voter group that Prime Minister Narendra Modi is seeking to sway ahead of a general election due by May.

In the interim budget for 2019/20, acting finance minister Piyush Goyal said the government would spend 5 billion rupees ($70.06 million) to launch what could become “the world’s largest pension scheme”.

The unorganized sector of India’s economy is vast, employing an estimated nine out of 10 workers. But experts note that such targeted pension schemes already exist, and would likely have limited benefits. Others said that such schemes have failed to win much buy-in previously, and so might disappoint as a vote winner.

“Right now, the value would be in that they have announced it. By the time, it’s actually done the elections will be over,” said Sebastian Morris, an economics professor at the Indian Institute of Management in Ahmedabad.

The new programme, to be implemented this year, will provide an assured monthly pension of 3,000 rupees once workers reach 60 years.

“A worker joining the pension yojana (scheme) at 18 years, will have to contribute as little as 55 rupees per month only,” Goyal said in his budget speech, providing few other details.

India’s estimated 420 million unorganized workers - including daily-wage labourers, rag-pickers, rickshaw drivers and maids - have few social security nets, and were stung by Modi’s controversial decision in 2016 to withdraw overnight most of the country’s high-value banknotes from circulation.

“A programme along the lines of social security driven by worker contributions makes a lot of sense and provides a sense of security to the vast bottom of the pyramid,” said Sunil Sharma, Chief Investment Officer at Sanctum Wealth Management.

But pensions are not a popular investment option in India. A 2017 report by the country’s central bank noted that “Indian households are woefully under-pensioned relative to their counterparts in other countries”.

The bank also pointed to a 2015 study that showed 50 percent of those surveyed in a government pension scheme for the unorganized sector did not pay the required 1,000 rupees over a 12-month period, instead making smaller contributions.

There are also existing government pension schemes for India’s unorganized workers, including the Atal Pension Yojana (APY) that was launched by the Modi government in 2015. The APY has so far only drawn 12.4 million subscribers, according to government data released last November.

Ashok Varma, a partner at PwC India, said the new scheme seems to be an extension of the APY, but it would likely have different eligibility criteria and target a larger worker base.

For the government, however, the expenditure for a new programme would be limited in the short-term. “The corpus is built over a period so the government doesn’t actually have to provide for this outlay at this point of time,” Varma said.

Some experts are sceptical of the actual benefits it would bring down the line even if workers regularly invested in the proposed pension plan.

“Let’s assume that you are 30-35 years of age, for the next 30-35 years you will keep contributing something and the end of the time, when you are 60 years of age, you will get 3,000 rupees,” said Himanshu, an associate professor at Jawaharlal Nehru University, who specializes in development economics.

“Tell me what will be the value of 3,000 rupees 30 years from now?” (Reporting by Devjyot Ghoshal and Abhirup Roy; Additional reporting by Promit Mukherjee; Editing by Euan Rocha and Alex Richardson)

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