It is fashionable, even understandable, to talk of India’s youth bulge and the demographic dividend that will result from this. But, at the same time, it is important to recognise that India has an ageing crisis, and a serious one at that. This is something credit-rating firm Crisil brings out when it says that, from around 9% right now, over 12% of India’s population will be over the age of 60 by 2030, and over 18% by 2050—as a proportion of the working population, the number is even more stark and doubles from around 14% right now to just under 30% by 2050. Normally, though much of the population does not have old-age security in the form of pensions, this wouldn’t really matter as it would be up to them—or their children—to find the necessary funds. But, and this is Crisil’s fundamental belief, when the size of the old—and unfunded—population becomes big enough, it will become a political problem and the government will have no option but to fund such pensions. An instance of this, perhaps, is how before the election code of conduct came into effect, the UPA decided to double, and finance, monthly pensions from the Employees Provident Fund Organisation’s (EPFO) Employees Pension Scheme (EPS)—while the level of financing required was low at R1,217 crore, the amounts get larger as the population gets older and, in any case, the EPFO covers just a small fraction of the population.
According to Crisil’s calculations, were the government to provide an extremely modest R 2,000 monthly pension (at today’s prices) to even 30% of the population, the amount will add up to around 3.4% of GDP. And this would jump to 4.1% of GDP by 2030 if all the old population were to be given a pension of R1,000 per month—it would rise to 6% of GDP if the pension were to be raised to R2,000. A useful benchmark, in this context, is that this year’s fiscal deficit is supposed to be 4.1% of GDP. So what we are talking about is a scenario where the fiscal deficit will be more than doubled due to pension expenses.
The best way to urgently start acting on the problem is to aggressively push the New Pension Scheme (NPS) which actively encourages earners to take charge of their own destiny. Interestingly, the government was itself heading into a pension trap but decided to, a decade ago, move to a self-contributory NPS where retirement pensions depended upon what people contributed. One way to popularise the NPS for even the poor is for the government to contribute a few hundred rupees to this each month for a certain number of years and to get the regulators to relook commission structures for the scheme—if commissions are low, there is no incentive for agents to actively push the scheme. The flipside of this, as Crisil points out, is also huge. Even a 50% coverage of the population, where the corpus is sufficient to generate R3,500 per month in real terms, would imply the pension corpus reaching R138 lakh crore (that’s 19% of GDP) by 2030 and R1,813 lakh crore (37% of GDP) by 2050. Imagine what such a corpus would do for funding of infrastructure since, by their very nature, such funds invest in long-gestation projects.