The Unified Pension Scheme Combines The Best Of OPS And NPS: Free Press Journal: 31st August 2024

 The announcement of the unified pension scheme (UPS) has, as usual, drawn a first reaction of concern from critics and analysts on the fiscal balances coming under pressure. For some ideological reason, the view from outside the public sector is that any monetary benefit paid to employees is incorrect — whether it is pension or salary revision. But it has been seen at both the central and state government level, the fiscal balances have always been well managed.

The Pay Commission brings in changes in pay every 5 years which is also looked at as putting pressure on the fiscal balances. It is not an annual exercise as is the case in the private sector. However, the higher compensation paid in the private sector in the general course is never really questioned. The critics forget that running the government needs people who also have a right to be paid just as in the private sector. This issue needs impassioned discussion. And more importantly as will be shown, the amount may not be significant in the long run with the budget size increasing and tax income growing.

A pension is a deferred payment at a later date which adds to cost only when the individual retires from service. And to the extent there is an additional contribution coming from the state there is an immediate cost. The UPS is a well-crafted scheme which takes in a 10% contribution from the employee and a government equivalent of 18.5%. The latter was 14% under the NPS. Hence the outflow for the government will be only 4.5% of the basic income to begin with. Therefore, unlike the old pension scheme where there was no contribution coming from the employee, the new scheme is contributory. There have been conditions laid down in terms of the number of years the person must be employed as well as the minimum pension that would be paid. Further the terms of 50% of last drawn basic salary over the year would be the amount paid on retirement and a specified amount would be paid to the spouse on demise of the employee.

The government has upped its contribution by 4.5% and the total cost has been officially calculated as being Rs 7050 crore for FY25. This amount is 0.15% of the overall size of the budget which is Rs 48.20 lakh crore. The amount is not significant and will not really matter. Even if added to the projected fiscal deficit for FY25, the ratio would remain at 4.9%. Therefore, the fiscal targets will not really change.

The future outflows have also been highlighted by critics as being an additional cost. While the cost will be up, it will not really come in the way of the fiscal numbers. The reason is that just as is the case of insurance where as long as premia is paid by all policy holders, there is always a corpus on which interest is earned from which claims are settled, the same holds here.

All employees would be contributing to the corpus which is invested as per the decision taken by the government department. Typically GSecs give a return of say 6.5-7%, while equity could go higher at 12%. While the NPS could give a higher return, in this case the 6.5-7% return would be adequate to service the pensioners. Government data shows that the overall expense on ‘pay’ of employees is 50% of total expenditure at the aggregate. Hence a person who retires with a pay of say Rs 50 lakhs would have a basic pay of Rs 25 lakhs of which 10% would be contributed to the UPS. This amount of Rs 25,000 or lower equivalent over the previous years that is contributed to the fund would earn 6.5-7% on a reinvested cumulative amount. Therefore, a large part of the return would be generated by the fund. Besides the amount invested by a pensioner would not be returned and hence would act as a buffer for future payments for other employees. The final difference between the returns generated and the amount paid would be the cost to the government that can be absorbed.

The pressure could be only in the short run which involves staff retiring in the immediate future. Here too any switch if opted for from the NPS to UPS would involve a transfer of funds which in turn will still provide the buffer in terms of investable corpus.

Besides, with an economy growing at around 8% per annum in the next 20 years or so, the growth in tax revenue will remain in the region of 10-12% per annum on a conservative basis. The present pension bill is to grow by just around 2% in the FY25 Budget while it declined in FY24. Hence growth in revenue, especially tax revenue, would quite comfortably cover the additional cost imposed by the UPS. There is reason to hence believe that the fiscal impact will not be significant even in future.

The UPS can be considered to be the union of the OPS and NPS. Under the old pension scheme there was no employee contribution but a fixed known return. The NPS has both the employee and government contributing to the fund with no guarantee of income. That’s so because the NPS funds are run like mutual funds where the difference is that the investor can choose the combination of instruments for investment ie debt-equity division. Returns are guided by market conditions.

This should placate the entire set of employees of the centre who would now be assured of a pension on par with what their colleagues under the old scheme were receiving. It can be surmised that this would be extended to state government employees too as well as other enterprises which follow the government’s social security schemes. At the macro level this is important because for the economy to grow there is need for consumption to keep ticking. This can happen only if there is income generated that can be spent across the spectrum of income and age groups. Government employees are a crucial part of this story. Therefore, the assured income post-retirement will add to overall consumption in the economy.

The mood swings of the forex market : Business Line 28th August 2024

 

revisit tax, expenditure policies: Financial Express: 28th August 2024

 

Subsidies and MSP: it makes most sense for farmers to be growing more rice and wheat: Mint 21st August 2024

 https://www.livemint.com/opinion/online-views/subsidies-msp-agriculture-rice-wheat-cultivation-oilseeds-pulses-tur-dal-crop-diversification-11724096959023.html

Next frontier for PSBs: Business India Aug5-18 2024

 

Words Worth: Inside the vault: Book review in Financial Express 18th August 2024

 A Fly on the RBI Wall is the restricted autobiography of a person who was possibly the first communications specialist of the RBI. It may be called a restricted autobiography because the author deals only with her career in the RBI and does not go beyond these contours.

Joining the organisation in the early 1990s when then governor S Venkitaramanan appointed her to this rather ambivalent position, the communications function in the central bank has evolved and matured to be one of the best in the world. Alpana Killawala, a former journalist, joined the RBI at a senior level of deputy general manager knowing well that upward movement could be a challenge given the rather hierarchical structure in the bank. But the excitement was in making this department not just relevant but crucial.

The importance of the communications function went beyond just the issuance of circulars and internal newsletters. These are rather ‘dry functions’ that can be monotonous because the department becomes a passthrough vehicle. Communicating with the outside world was the new experience for the organisation and going by what the author has covered in her book, all the governors were cognisant of its importance and gave the respect it deserved.

Killawala is a great storyteller and hence narrates her experiences with panache, which makes the book interesting to read. Dealing with the media on a regular basis was not a habit in the RBI, but the governors she worked with were on the same page when it came to speaking more to the press. This meant that there would be less room for speculation. Hence, having regular meetings with the media, which seem quite stylised today after the credit policy is announced, was an initiative jointly taken. Such continuous communications also helped to develop a healthy relation with the press, which would, in turn, also respect the confidentiality aspect when required.

The author writes about her working with various governors of the RBI in different chapters. Interestingly, she does not have a chapter with the title of Urjit Patel, though she had worked with him. In general, there was a spirit of camaraderie with the governors and her experiences were more than good with each one of them. They have been open to suggestions from the professional and rarely went against professional judgment. Also, any so called ‘goof-ups’ did not lead to any criticism or reprimand but taken in the stride.

By calling the book as a ‘fly on the RBI wall’ one interpretation that can be inferred is that it gives a view from inside by just being there. Just like how the fly gets to see everything without being a part of activity, the author was able to gather several inputs. For instance, there is a major class distinction in the RBI where the economists consider themselves to be superior to the generalists. Hence while inter-department transfers did happen, acceptance was limited with only secondary jobs being given to those coming in from the other group. Interestingly, she highlights the fact that when Raghuram Rajan came in as governor, everyone was in awe of him given his credentials and looks. However, the group of economists did not think much of him as he did not have an economics but a finance background, which they believed did not provide the gravitas that was required for the man at top.

Also, she writes about her own challenges while working at the bank. While the governors appreciated and consulted with her, there was resistance too down the line. The fact that she was junior to many seniors meant that her access to the governor was not looked at with positivity. Getting accommodation was an issue, and the feeling she got was that she would be ‘taken care’ of by the system once the governor changed! Fortunately, all governors were appreciative of her work. But that did not solve her problems, as department heads did not want her to change the communications from their side and wanted their script to be the final one. These could be called professional challenges for anyone.

Similarly, while she wanted to be part of several meetings where policies were discussed, the seniors below the governor did not like the idea. Her view was that by being in the meeting, she would understand the nuances and would be able to be the first point of contact with the media. The governors agreed, but the others were resistant. The author also highlights the hierarchical nature of the central bank, which basically meant that files had to move all the way up for decisions to be taken, which could take a lot of time. And while operationally she worked with governors, for policies, the papers would get stuck in the red tape.

The author has her take on the demonetisation process too, and takes a view that it may not have been required. Those days were challenging as rules were changed on a daily basis to the extent that the RBI came be to be called the Reverse Bank of India. Absence of clear communication created more panic and distress for all citizens.

The author, however, takes credit for leading the entire designing of the RBI website where she was given a free hand. Hence a lot of what we see and appreciate about the wholesomeness of the website would be because of her initiative. The narrative is smooth in the book and while highlighting issues where RBI communication mattered, she also explains them for the reader. Hence the Harshad Mehta scam or the devaluation crisis is explained for the layman, which makes the book readable and not esoteric. She has good things to say about all the governors, with each one contributing not just to the concept of central banking but also the well-being of employees. Bimal Jalan did get all the staff flats renovated and also saved the department heads the embarrassment of seeing off the commercial bank chiefs in their chauffeur-driven cars before hailing a taxi to go to office by providing this perquisite.

This book is a must for anyone in the communications department of any company as it acts as a guide on what needs to be done to ensure proper messaging to the media and also protecting the brand.

Book: A Fly on the RBI Wall: An Insider’s View of the Central Bank

Author: Alpana Killawala

Publisher: Rupa Publications

Pp 248, Rs 595

India’s 77 Years Of Independence: Something To Be Proud Of: Free Press Journal: 17th August 2024

 

India does appear to be a leading economic power, and this is something that has been recognised by the world

As we celebrate our 78th Independence Day, there is a lot to cheer and be optimistic about on the economic front. And this is not just because we are talking of reaching a size of $5 trillion or $10 trillion or even a developed country in 2047. One could say that for any country which will achieve nominal targets at some point of time. But what is more important is the qualitative changes or transformation that has taken place in the Indian economy over the last seven decades or so. The big push came post 1991 but a silent change took place even before reforms came in, albeit at a gradual pace as socialist ideology came in the way.

Let us see the main areas of change which probably the millennials and Gen-Z will not be familiar with, as the last 30 years have been very different from the preceding period. First, on the agricultural front India is a nation of surpluses on almost all counts and with proactive policy can actually be a supplier of foodgrains to the rest of the world. The pre-reforms period was characterised by shortages and rationing of essential commodities which is now a thing of the past. Those who made a living in the pre-reforms era were used to standing in lines to get even humble products like sooji and maida which were available only in ration shops. India is one of the largest producers of rice, wheat, pulses, groundnut, sugar, milk and horticulture. In the last three decades there has never been an instance of going back to rationing of food products and any fall in supply is met through imports quite seamlessly.

Second, the scale of industry has widened and become all encompassing. There is no manufactured good which is not made available in India and hence the overall structure is at par with any developed country. Liberalisation coupled with the opening of foreign investment and permission to single brand products to enter post 1991 has brought to the doorstep all manufactured products. In the pre-reforms era, the fortunate ones who travelled overseas or had relatives and friends visiting would bring along shaving foam and shaving blades along with perfumes. Today all these products are available at the local store.

Third, the almost five-fold increase in road length over the last five decades bears testimony to the progress made on the infra front. This can be juxtaposed with the almost 10-fold increase in air passengers making access available to more people. This has been a major achievement with some of the national highways being comparable to those in the west. Similarly the privatisation of airports and entry of competition has changed the landscape of air travel. Here again the new airports using advanced technology, the airports are something to be proud of.

Fourth, the tremendous stride made in export of services has been at an unprecedented scale. Earlier, any talk of exports concerned goods and less of services. The IT sector has grown in stature and has contributed not just to the nation building cause (Jan Dhan and Aadhaar for example) but also become a major earner of foreign exchange for the country which supports the current account balance as well as balance of payments.

Fifth, the financial system is best in class. The RBI can be credited for not just ushering in competition in the banking system by opening the doors to private players and technology but also ensuring there has been systematic growth without compromising on prudence. History shows that even while the global financial systems went through traumatic times during the Asian crisis or the Lehman debacle, the Indian system stood out in terms of resilience. On the innovation side, UPI stands out as this is something which several countries now would like to adopt for ease in payments.

In parallel, the capital market has not just developed to become a global system, but also has heralded change and transformation in terms of being far ahead in terms of getting in online trading as well as dematerialisation into the system. Here, the regulator SEBI needs to be credited as it has taken a lead to bring about harmonious growth in all segments of the market. NSE as we know is one of the pioneers and leaders in the world when it comes to derivative trading.

Sixth, the entire retail space has changed and while the local kirana continues to do business, the springing up of retail malls and online delivery has offered options to all consumers irrespective of income class. This has been one leveler in society that is creditable.

Seventh, while it can always be argued that countries do think that their economies are doing very well, the ultimate vindication is seen by how investors perceive the story. Here India has been one of the biggest hits with both FDI and FPI flowing in large numbers. The proactive policies pursued by the government along with the large potential seen in the market has drawn FDI in large numbers over the years. In the last 5 years over $380 bn of FDI has come into the country across various sectors.

Further, the FPIs have found Indian markets very attractive and in a way have also worked in tandem to the development of the equity segment. More recently the inclusion of Indian government bonds in the Morgan Stanley Bond index which will be followed by Bloomberg next year does reflect the internationalization of Indian markets. The fact that the RBI and the government have taken baby steps to internationalize the rupee is also significant as the world seeks to move away from an extreme dollarised economy.

Looked at from this perspective, India does appear to be a leading economic power, and this is something that has been recognised by the world. The entire superstructure has been created rather rapidly in a thorough manner over the years. The government has simultaneously worked at the bottom of the pyramid through targeting of schemes. Subsidies have been rationalised and income transfers and employment cards have been streamlined through the use of technology. Here the digital revolution has helped in the transformation. Hence the model which has been followed has been truly inclusive as the equilibrium has been maintained given the differences in opportunities and income at the micro level.

Why target core inflation? Business Line 12h August 2024

 

Not exactly a status quo policy: Businessline 9th August 2024

 

Influencing the markets: Book review Financial Express August 4, 2024

 SEBI has been voicing a lot of concern on the role of influencers who tend to ‘guide’ naïve investors into investing in the market and take a lot of risk. Another trend that SEBI has been flagging is the retail participation in the F&O (futures and options) segment. This is very specialised and not meant for lay investors. One needs to understand the concepts and also be aware of the dynamics of how they work; and hence requires professional knowledge. But the allure is always there and individuals have been taking very large positions in this market. This has been going on for quite some time now and the regulator is at pains to warn investors and control such influencers.

The regulator’s concerns fit in very well with the book under review, The Trolls of Wall Street by Nathaniel Popper, which gives a real-life account of how trolling—which is basically opinion gathering on stocks through social media— bloomed, especially during Covid times. In the part-biographical book, the protagonists are described as being self-proclaimed “degenerates” who made an obscure subreddit into a cultural movement that moved from the fringes of the Internet to the heart of Wall Street. It was a way of changing the way one looked at global financial markets and marked a different kind of thinking on money and investing.

There were young people who were generally dissatisfied with the pace of their lives and wanted to do ‘something exciting’. What better way than to start their own group on Reddit, which becomes a subreddit, and then discuss and exchange notes on where to invest. The passions were high and the approach was aggressive as decisions are made by those in the group. More people join the sub-reddit and large investments are made. And the trolling just continued to spread across the community.

The book is written more like a story as it tracks the life of Jaime Rogozinski and how he got this idea and developed it. Jaime and Jordon Zazzara were not really significant players in the market, but their obscure subreddit called WallStreetBets focused on risky trading, which made it a major disruptive force in the market. WallStreetBets was founded when the process of ‘Occupy Wall Street’ was happening. While they were co-founders, they were also rivals. There had been an alienation and disenchantment with the financial world, and people had largely pulled out of stocks post the financial crisis. Such a venture attracted over 15 million members, which then made it easy to influence share prices. This was disruptive because the amount invested at one time could disturb the prices of the companies that they were targeting. While it was set up in 2012, it gained traction during the Trump years when the youth was generally an angry lot who wanted to make money quickly and distrusted the world and its conventional ways. The community gained traction at a time when several young men decided that they were just aggrieved enough to become vocal Trump supporters. Also, they were piqued by what they felt were the ‘unfair economic cards’ they had been given post the recession of 2008.

The problem in such actions is that Wall Street boomed when the Fed was pursuing quantitative easing when a lot of money was provided to the system. This was also the time when cryptocurrency gained prominence, as witnessed by the very high valuation of digital currencies like Bitcoin. In fact, a lot of parallels are drawn by the author on investing in crypto with this ‘trolling’ as the mind-set was the same. Once the withdrawal started taking place, there was necessarily less money left to invest, which also caused markets to shrink. This is one where investors were caught in a cesspool. While some continued to stay invested and moved away from the riskier portfolios, the rest left after suffering losses. This market is anyway a zero-sum game.

There is data provided by the author to show how first-time investors fell into the trap and lost money. This is the constant fear in such cases where a follow-the-leader approach to investing is taken. The hard-hitting lesson was that investors have to be careful when balancing risk and, more importantly, keep out of derivatives unless they have a thorough understanding. But the story out here just reveals the power of social media where large investments are made with fair chances of gains or losses.

There is this example given where this class of investors attacked GameStop. There was the build-up of crowdsourced research effort that was used to understand and dissect what went into this stock and the company. Interestingly, after Covid, retail traders really dived into the markets and this was a time that Wall Street was incredibly bearish as it was assumed that the world was moving towards a huge recession. Retail traders were the only group that was betting on economic recovery. They seemed to do a lot better than hedge funds and institutions.

These are hence warnings to all regulators and investors of the power of this force that has caught on across the world and could be difficult to track and control. One may never know how decisions are taken by such groups. The Trolls of Wall Street is more of how such collective group thinking could pull stocks up or down. But the larger concern is the temptation for individuals with little knowledge to follow these actions. This book clearly endorses SEBI’s concerns on influencing and is quite powerful as the messaging is direct.

Controlling challenges and fallouts from spread of financial inclusion: Free Press Journal : 3rd August 2024