Navroz Dubash on Climate-Related Challenges in 2022

Navroz Dubash is a Professor at CPR’s Initiative on Climate, Energy and Environment. His research interests include climate change, energy, air pollution, water policy, and the politics of regulation in the developing world. In this interview as part of the Leading Policy Conversations series, he discusses the climate-related challenges India confronts in 2022.

What do you think will be the climate-related challenges for India in 2022?

The past year was dominated by short term considerations of battling COVID-19, but at the end of the year, climate change re-emerged, driven by a high profile global meeting at Glasgow. In the build-up, countries were pressed to upgrade their national climate pledges. Our Prime Minister announced that India will reach net zero emissions by 2070, along with a series of other announcements.

In 2022, our challenge will be to figure out a way of credibly work toward these announcements, but also to clarify and deepen our collective understanding of their implications. A high carbon route to industrialisation is no longer desirable or possible, because a high-carbon path is a technologically backward path, and one that is likely to undercut India’s competitiveness. India has to embrace low-carbon development, but also has to do so while eradicating poverty, creating jobs, and building a just society. This is not an easy set of challenges.

2021 also threw up diplomatic challenges, as developed countries put a great deal of pressure on developing countries to update pledges. Yet, finance support from the north was limited, as were indications of leadership on carbon reducing policies. In 2022, climate negotiations will start a ‘global stocktake’ to assess progress. India will have to position ourselves for this process. It is not enough to claim the importance of climate equity; we will have to show what this means in terms of emission futures and development needs in different countries.

Finally, 2021 saw climate damages in India, as well as around the world. Climate change, it would seem, is no longer a future problem, but a now problem. Like other countries, India needs to reckon seriously with the ravages of climate impacts when we make development decisions.

How should policymakers address these challenges in the year?

  • First, India can more fully develop and implement a model of low carbon development, oriented around decarbonising the electricity sector, preparing for a decadal just transition away from coal-based power, building a renewable energy infrastructure that creates jobs, building public transport systems that support enhance quality of life and other such measures. To seize this opportunity, India needs to base its ‘nationally determined contribution’ around sectoral low carbon transitions that enhance development and job creation.
  • Second, these changes won’t happen automatically – they should be enabled by government institutions. This includes a low-carbon development commission that also supports states and cities to experiment with low carbon futures and work toward a dedicated climate law. The legal framework should enable and facilitate low-carbon development rather than forces carbon regulation.
  • Third, India has to take seriously the risks of climate impacts and plan for a more resilient society. This includes deepening state action plans, but also mainstreaming resilience into development decisions. The centre needs to help ensure financial resources are accessible for more vulnerable states.
  • Finally, India needs to proactively engage the global negotiation process, championing climate equity by both calling on richer countries to do more while serving as a model for low-carbon development and building resilience at home.

Shyam Saran on Foreign Policy Challenges in 2022

Shyam Saran is a Senior Fellow at CPR. He is a former Foreign Secretary of India and has served as Prime Minister’s Special Envoy For Nuclear Affairs and Climate Change. In this interview as part of the Leading Policy Conversations series, he discusses the foreign policy challenges India confronts in 2022 and how policymakers should address them.

India will confront both familiar and unfamiliar challenges in 2022. Managing India’s immediate sub-continental neighbourhood will remain a key preoccupation. Relations with China are likely to remain tense, with new points of contention emerging at the India-China border. Concerns over China’s expanding influence in our neighbouring countries will demand effective responses. Pakistan regards the victory of Taliban as giving it renewed geopolitical advantage and there could be a revival of Pakistan sponsored cross-border terrorism and militancy in Jammu and Kashmir. Pakistan’s alliance with China means that it will have a powerful shield in international fora when faced with allegations of being a sponsor of terrorism. This will be both a security and a diplomatic challenge for India.

Beyond the neighbourhood, India has done well to nurture closer relations with the Gulf states and the newly established Quad in the West, comprising of India, Israel, U.A.E and the U.S. is a promising initiative. The Quad in the Indo-Pacific is likely to see further consolidation as concerns over China continue to mount. In this context, India should re-energize its Act East policy and rethink its participation in regional trade arrangements such as the Regional Comprehensive Economic Partnership (RCEP). It should revive its application to become a member of the Asia-Pacific Economic Cooperation forum (APEC). To think out of the box, India may consider its membership of the more ambitious Comprehensive and Progressive Trans Pacific Partnership (CPTTP) in which China is not yet a member. This will strengthen the economic pillar of India’s Act East policy.

India is a maritime power and it commands the sea lanes connecting the Indian Ocean to the Pacific. It is important that India retains and enhances this geopolitical asset it possesses. It is hoped that in 2022 there will be a clear priority to maritime power and a strengthening of partnerships with other friendly maritime powers including India’s partners in the Quad.

2022 should see India augmenting its multilateral diplomacy capacities as most of the defining challenges in the new millennium are cross-cutting and global in dimension. These include global public health issues such as the pandemic we are suffering from and the looming Climate Change emergency. These are not amenable to national or even regional solutions. They demand global, collaborative responses, delivered through multilateral processes and empowered international institutions of governance. India has a tradition of activism in the multilateral arena and is well placed to play an active, even leading role in this respect.

2022 will be a year of continuing change. Some changes will be unexpected and uncertainty may be the only certainty we can count on. But periods of change create risks but also generate potential opportunities. Indian foreign policy will need the capacity to manage risks but without foregoing the chance to profit from opportunities which may also emerge. Diplomacy will need to be marked by both prudence and agility.

Uncovering the Historical Aspects of Sino-India Ties

We are delighted to present a brand new series hosted by Sushant Singh (Senior Fellow, CPR), featuring leading experts on the multiple facets of Sino-India relations. In the first episode of the series, we are joined by Arunabh Ghosh (Historian and Associate Professor of Modern Chinese, History Department, Harvard University) to unpack Sino-India relations through a historical lens.

Together, Singh and Ghosh uncover the relationship between the two neighbours through documented exchanges in the 1950s involving statistics, mathematics and discussions on transnational institutions and scientific networks. They discuss the decline of these exchanges after the 1962 war, why the inadequate academic scholarship has not improved since and the dangers of intermediation of knowledge through a western prism. With China’s economic success creating a sense of envy in India, it is important to acknowledge the history of this success, the role of imperial legacies in the border crisis and the need to understand the nature of the Chinese state and what exactly happened between the two great nations.

Arunabh Ghosh website:

Books mentioned:

  • Making it Count: Statistics and Statecraft in the early People’s Republic of China, Arunabh Ghosh (2020)
  • Great State: China and the World, Timothy Brook (2019)
  • From Rebel to Ruler: One Hundred Years of the Chinese Communist Party, Tony Saich (2021)
  • The Cowshed: Memories of the Chinese Cultural Revolution, Ji Xianlin (2016)
  • Eight Outcasts: Social and Political Marginalization in China Under Mao, Yang Kuisong (2019)
  • How China Escaped Shock Therapy: The Market Reform Debate, Isabella Weber (2021)

Dr KP Krishnan joins CPR as Honorary Research Professor

The Centre for Policy Research (CPR) is delighted to welcome Dr KP Krishnan who joins as Honorary Research Professor.

Dr Krishnan was educated in Economics at St. Stephens College and Law at the Campus Law Centre, University of Delhi and obtained his Ph.D in Economics from IIM Bangalore. He joined the IAS in 1983 and superannuated from the service in 2019.

Before retiring as Secretary Ministry of Skill Development and Entrepreneurship, he served in various positions in Government of Karnataka, Government of India and the World Bank, primarily in the areas of Economic Affairs and Macro Policy and Rural and Urban Development.

Yamini Aiyar, President and Chief Executive, CPR, said, “We are delighted to welcome Dr KP Krishnan to the CPR family. Amongst India’s foremost bureaucrats, his diverse, multi-sectoral experience will strengthen our work on state capacity, regulation, and economic policy.”

Dr Krishnan has authored a number of reports and published many academic papers. In 2012, he held the BoK Visiting Professorship in Regulation in the University of Pennsylvania Law School. In 2017, he was conferred with the Distinguished Alumni Award of IIM Bangalore. From August 2020 to December 2021 he served as the IEPF Chair Professor at the National Council of Applied Economic Research (NCAER). He has been a Visiting Professor of Economics, Public Policy and Regulation at the LBSNAA Mussorie, ISB Hyderabad and Mohali, Ashoka University and IIM Bangalore.

He writes a monthly column (Artikam Chintanam-thoughts on the economy) in the Business Standard focusing on the Indian economy and financial sector issues since August 2020.

Telecom Regulatory Authority of India: Briefing Note

Setting the Context for Regulating the Telecommunications Sector

The Telecom Regulatory Authority of India (TRAI), an independent regulatory authority for the telecommunications sector was created by an Act of Parliament, the TRAI Act, 1997. The establishment of TRAI was a momentous event in India’s telecom development story.

Economic liberalisation ushered in significant changes to the telecom sector in India. Telecom transitioned from being a government monopoly to an industry with multiple private participants. The process of strengthening the telecom sector had begun in the early 1980s, with the creation of the National Electronics Policy, 1984 and the setting up of two corporatised entities – the Mahanagar Telephone Nigam Limited (MTNL) and the Videsh Sanchar Nigam Limited (VSNL). Until such time, the Department of Telecommunications (DoT) within the Ministry of Communications was the only service provider, since telecom was believed to be a “natural monopoly”. This change marked the beginning of the corporatisation of services previously only provided by a government department. In the early 1990s, the National Telecom Policy (1994) was announced. Among other things, it allowed private investment in basic telephone services for the first time in India. The constitutional validity of the 1994 policy was challenged on the ground that telecommunications, being a sensitive service, ought to remain under the exclusive control of the government. The Supreme Court of India upheld the policy and cited countries where telecommunications had been privatised and regulatory authorities had been established for the same.

As more private investment was allowed in the telecom sector in India, there were concerns of an unequal playing field between private service providers and DoT (as a service provider and policy maker). It was proposed that an independent and impartial sectoral regulator, at arm’s length from the government, should be established. This led to the inception of TRAI.

In its original form, TRAI was vested with administrative and adjudicatory functions. Its adjudicatory powers were, however, limited. For instance, it could not adjudicate disputes between DoT and other telecom players. Further, on the policy-making side, TRAI could only provide recommendations on significant aspects of telecom regulations and DoT was not obligated to seek the advice of TRAI. Officials of DoT were members of TRAI as well. While TRAI was a regulator and a dispute settlement body, DoT continued making policies for the sector. Expectedly, this led to a conflict between TRAI and the Ministry. There were also concerns about TRAI being able to execute its functions in an independent and impartial manner. In the year 1999, the New Telecom Policy was released. It clarified that DoT was one among the many providers in the telecom market and stated the government’s commitment to a “strong and independent regulator with comprehensive powers and clear authority to effectively perform its functions”.

With the objective of enabling the effective regulation of the telecom sector, the government amended the TRAI Act in the year 2000. This brought changes to TRAI’s regulatory remit. The Authority’s adjudicatory functions were shifted to the Telecom Disputes Settlement and Appellate Tribunal (TDSAT). The TRAI Act was amended to state that, both, TRAI and TDSAT will regulate telecommunication services, adjudicate disputes, dispose of appeals, and protect the interests of service providers and consumers of the telecom sector, with the aim of promoting and ensuring its orderly growth.

Powers and functions of TRAI

Section 11 of the TRAI Act specifies the powers and functions of the Authority. Broadly, the telecom regulator’s functions can be classified under the following heads:
● Making recommendations, either suo-moto on or request from the Government, on issues concerning licenses, competition and technological improvements, development of telecommunication technology, equipment used by service providers, and efficient spectrum management.
● Discharging functions relating to compliance with license conditions, technical compatibility and interconnection between service providers, revenue sharing arrangements between them, specifying the quality of services and conducting periodic surveys on services provided etc.
● Levying fees and other charges at rates specified by regulations.
● Notifying rates at which telecommunication services will be provided.
● Undertaking and performing any other functions as entrusted to it by the Central Government.

The recommendations provided by TRAI are not binding on the Central Government. With regard to recommendations pertinent to licensing issues, TRAI can request, and the Government is bound to provide, information/documents necessary for the purposes of making recommendations.

Under Section 35 and 36 of the Act, TRAI is empowered to make regulations consistent with the Act and the rules to carry out the provisions of the Act. It has issued regulations on consumer protection, grievance redressal system, mobile number portability, reporting systems, standards for quality of services, fees and charges levied etc. In addition to these legislative functions, it is also expected to perform executive functions involving information gathering, monitoring, and supervising the conduct of service providers. TRAI is vested with powers to call for information from service providers, appoint persons to make inquiries into their affairs, and inspect their books and accounts whenever necessary. It may also issue directions for the proper functioning of all service providers and for them to comply with its rules and regulations. While the adjudicatory functions of TRAI were moved to TDSAT, it still has some residual judicial powers to ensure effective enforcement. For instance, under Section 29 of the Act, the Authority has been given the power to impose penalties for the contravention of its directions and regulations.

Section 11 of the TRAI Act requires the Authority to ‘ensure transparency’ while exercising its powers and discharging functions. In view of such a requirement, TRAI has adopted good regulatory practices. For instance, it has developed a mechanism to promote stakeholder participation in, both, the regulation-making and recommendation-making processes. It issues a consultation paper laying out issues for discussion and invites public comments on it. The comments are released on the TRAI website. It also organises open house discussions and provides an opportunity for stakeholders to present their views in public and interact with TRAI officials. Another way in which it promotes transparency is by releasing ‘explanatory memorandums’ along-with regulations issued by it. These memorandums provide the rationale for the Authority’s regulatory interventions and decisions.

The definition of “telecommunication service” under the TRAI Act was revised, in the year 2000, to provide that the Central Government may expand TRAI’s mandate under the Act by broadening the definition to include any other service. In January 2004, broadcasting and cable services were added to TRAI’s mandate.

The telecom sector in India

India’s telecom sector is second only to China’s and is also among the fastest growing networks in the world. The market size is primarily driven by wireless networks. As per the quarterly TRAI Telecom Services Performance Indicators Report (July – September 2021), 98.19% of India’s 1.2 billion telecom subscribers are on wireless networks. Similarly, 97% of the subscriber base in internet services is on wireless networks. There has also been significant growth in the mobile services industry. Around a decade back, there were 10-14 mobile service providers in the country. This competition enabled the adoption of wireless services, and brought down tariffs. Data usage charges, however, are understood to have stayed high until the telecom market witnessed the disruptive entry of Reliance Jio. As per analysis done using TRAI Performance Indicators Reports, data prices saw an immediate decline from Rs. 180 per GB in September 2016 to Rs. 160 per GB in December 2016 and a drastic decline to Rs. 6.98 per GB in 2019. Simultaneously, many smaller players were acquired and the market presently has three large private sector operators – Reliance Jio, Vodafone-Idea and Airtel. These 3 private players together are understood to own almost 88% of the market.

The Indian telecom sector is now data-driven, predominantly due to lower tariffs, and easier accessibility and availability, however, it remains skewed in favour of urban dwellers. While India is touted to be one of the lowest priced telecom markets in the world, the focus ought to shift to the quality of these services. For instance, call drops are an indicator of poor service quality. It is understood that the drastic cut in tariffs which many operators were forced to introduce due to Reliance Jio’s extremely low tariffs, shrunk their revenue streams and led to lower investments in network infrastructure itself. The sectoral regulator is often criticised for focusing unduly on price based competition and not enough on longer-term consumer interests in terms of the quality of services.

In recent years, the industry debt burden has increased – primarily owing to spectrum acquisition and network upgradation. With the industry’s sustainable future at risk, some incumbents including the Cellular Operators Association of India (COAI) made a request to TRAI regarding the introduction of floor prices, i.e. a minimum amount of profit for telecom operators for an interim period in order to help them recover financially.

More generally, there has also been debate regarding ‘competition regulation’ in the telecom sector. While the TRAI Act empowers the regulator to undertake “measures to facilitate competition and promote efficiency in the operation of telecommunication services”, competition as a subject also falls under the direct regulatory ambit of the Competition Commission of India (CCI). In 2018, the Supreme Court of India ruled on the overlapping responsibilities of TRAI and CCI and decided that once the technical fact is determined by the sectoral regulator, then CCI can proceed to examine the anti-competitive nature of the agreement concerned.

As India’s telecom development story shifts focus to the quality of services offered, it must also find ways to address long-standing challenges such as the digital divide, which has further deepened due to the Covid-19 pandemic. In view of this, expanded telecom infrastructure capacity will be necessary. Further, for the quick adoption and roll out of the 5G technology, the challenge of high spectrum pricing will have to be resolved in the context of the overall health of the telecom industry. In addition to these, potential challenges in the form of bundling of services, pressures from online businesses etc. may require interventions in the future. In a fast-evolving sector such as telecom, the regulator will continue to play a tremendous role in straddling consumer expectations, investments, pricing, competition and the quality of telecommunication services in India.

Dissecting Electoral Trends for Assembly Elections 2022

With crucial assembly elections, all eyes are on the states of Uttar Pradesh, Uttarakhand, Punjab, Goa and Manipur. Why are these elections important? What are the key electoral issues in these states? How will these elections shape the political narrative for the 2024 Lok Sabha elections? In episode 13 of India Speak: The CPR Podcast, Yamini Aiyar (President and Chief Executive, CPR) is joined by Rahul Verma (Fellow, CPR) to determine the current political trends and his outlook for the 2022 assembly elections. With the Aam Aadmi Party (AAP) and Trinamool Congress (TMC) emerging as new actors in the opposition, they discuss what this means for the Congress. They also discuss where the Bharatiya Janata Party (BJP) and Samajwadi Party (SP) stand in the race. Further, Aiyar and Verma focus on the role of political economic dynamics in the political outcome of any electoral campaign, the long term implications of these polls for national politics and what they signal for 2024.

Comment on Budgetary Allocations for the Defence Ministry FY 22-23

2 February 2022
Comment on Budgetary Allocations for the Defence Ministry FY 22-23
Following the trend set by his predecessor, Arun Jaitley, the finance minister Nirmala Sitharaman did not mention budgetary allocations for the defence ministry in her budget speech in Lok Sabha on Tuesday. It is a bit jarring because no other ministry can boast of a share of the total budgetary allocations of the union government close to the 13.31% for the defence ministry. Moreover, the budget speech comes at the time of a major border crisis with China in Ladakh which has not been resolved after 21 months and witnessed a massive commitment of the armed forces in a very tough environment.

The allocation for four demands of the defence ministry is Rs 5.25 lakh crore (approximately $72 bn), which is an increase of 4.43% over the revised estimates for the previous year. Considering the high rate of inflation in India, this amounts to a reduction in real terms. As has been witnessed after the implementation of One Rank One Pension scheme and the implementation of the Seventh Pay Commission’s recommendations, the allocation for defence pensions has shot up to 1.197 lakh crore (approximately $16.4 bn). Nearly 86% of the pension budget is allocated for retired Army personnel, while the rest goes to retired personnel of the Indian Air Force and the Navy.

Another major item of expenditure is the salaries, where the total budgetary allocation is Rs 1.536 lakh crore ($21 bn), the lion’s share again going to the 13.5 lakh strong Army. The expenditure on human resources thus consumes 52% of the allocations for the defence ministry, a problem area that has become critical over the past few years but remains untackled, often masked by the big headline numbers of defence spending put out by the government. It was part of the amended terms of reference of the Fifteenth Finance Commission which submitted its report in 2020.

Due to “overall fiscal constraints”, the Fifteenth Finance Commission was forced to recommend that the government “should take immediate measures to innovatively bring down the salaries and pension liabilities”. Recommendations of the commission, such as those of “bringing service personnel currently under the old pension scheme into the New Pension Scheme (NPS) or a separate NPS for the armed forces” are unlikely to find any political support or traction from the defence services. The commission essentially wants the government “to ensure [that] the growth of defence pensions are at par with non-defence pensions,” which is a logical impossibility unless some painful reforms are undertaken in the provision of defence pensions.

At Rs 1.52 lakh crore, the capital allocation for the defence ministry saw an increase of 9.7% over the revised estimates of last year. Of this, Rs 1.24 lakh crore ($17 bn) is budgeted for the capital acquisition by the defence services, the actual amount to be spent towards scheduled payments of already contracted procurements and for the first instalment of new contracts that will be signed this year. Of this, the government has stipulated that 68% will reserved to be spent on domestic industry; last year, the stipulation was 64% but the actual figure achieved was only 58%. These figures, as many experts have pointed out, are also misleading as major sub-systems of these indigenous platforms are often imported from foreign countries. For eg., Tejas Light Combat Aircraft manufactured by Hindustan Aeronautics Limited for the IAF is only 62% indigenous by value.

The armed forces have been crying out for modernisation, with the Army complaining of more than two-thirds of its weapons, platforms and equipment being vintage, the IAF asking for resources to make up its depleting fleet of fighter jet squadrons while the Navy has curtailed its ambitions now to only being a 175-vessel force. While the IAF and the Navy spent more than their capital BE allocations in FY 21-22, the Army returned more than 30% of its BE allocations at the RE stage. The Army’s inability to spend the allocated amount is a very worrying development, considering that India’s emergent security challenges remain continental, both versus China and Pakistan.

In August 2020, defence ministry submitted a note to the Fifteenth Finance Commission which showed that between FY 2021-22 and FY 2026-27, there will be a shortfall of Rs 8.45 lakh crore even if there an increase of 16% per year in capital expenditure. It also said that “consistent shortfalls in the defence budget over a long period has resulted in serious capability gaps, compromising the operational preparedness of the services. Consequently, they have to resort to ad-hoc mechanisms such as postponement of a few procurements and delaying payments, resulting in high carry forward of unmet requirements and committed liabilities”. Nothing has been done to change this perilous state of affairs for India’s national security in the current budget.

The Future of Multilateralism

28 January 2022
The Future of Multilateralism

In this episode of India Speak: The CPR Podcast, Shyam Saran (Senior Fellow, CPR and Former Indian Foreign Secretary) is joined by Asoke Mukerji (Former Permanent Representative of India to the United Nations). With illustrious careers in diplomacy, Saran and Mukerji unpack the future of multilateralism and its potential for cooperation amongst states, particularly as the world confronts cross-cutting global challenges like the COVID-19 pandemic, cyber security, terrorism and climate change. They discuss the potential of multilateralism to help deliver solutions through Agenda 2030, its structure through the UNSC and the 1945 Charter of the United Nations, the decline in US leadership in the UNSC and the calls for a restructuring of the UNSC. Finally, they discuss India’s legacy of multilateralism, how it can play a leadership role in international relations, its limitations in resource allocation and capacity building and the importance to maintain its claim on a UNSC seat.

The Pension Fund Regulatory & Development Authority

Setting the Context for Regulating Pensions

The Pension Fund Regulatory & Development Authority (PFRDA) was first established in 2003 as the Interim Pension Funds Regulatory and Development Authority by Gazette notification in tandem with the Government of India’s decision to introduce a new restructured pension system for entrants to central government service. The new pensions system was to be called the National Pension Scheme (NPS). It was also subsequently made available on a voluntary basis to all persons including self-employed professionals and workers in the unorganised sector. The Interim Authority was set up to regulate, promote and ensure the orderly growth of the pension market, but in effect this was limited to the NPS as other pension systems (including the Employees Provident Fund, as well as a number of other statutory, mandatory and voluntary pension systems) were already covered by other legislation and governance structures.

PFRDA was constituted in its present form in 2014 through the Pension Funds Regulatory and Development Act, 2013. Its scope of activity was expanded to include other pension schemes that are registered under it and not covered by any other statute. In particular this includes the Atal Pension Yojana, a government pensions scheme that provides a guaranteed minimum income to eligible unorganised sector workers.

PFRDA and NPS are of great salience for government employees. Until 2004, their pension schemes were managed on ‘defined benefit’ principles, or in other words, that they had fixed pension benefits which were calculated in the basis of their last drawn salary, years of service etc., and were in addition ‘cost-indexed’ at current rates. The establishment of PFRDA and NPS have signaled the transition in India from ‘defined benefit’ to ‘defined contribution’ schemes. This means pension benefits are directly linked to individual pension accounts, to which both employees and employees contribute during the term of employment. The quantum of benefit is however variable and dependent on the performance of the fund. Central government employees (except armed forces) who came into employment after 2004 have been mandatorily enrolled in the NPS. The state governments have also subsequently transitioned their pension systems to NPS as well. The NPS, and Atal Pension Yojana are open to the non-government subscribers as well, but it is not mandatory for them and is one among several investment options for them.

PFRDA and NPS also reflect the transition of government pension systems from a public-administered pension system to a system with a number of private operators, and one in which the benefits available to government employees was closely connected with the performance of markets.

The NPS is both mandatory (for most of its subscribers) and partly privatised. The central role of PFRDA is therefore to ensure stability and orderly growth of this system, and to protect subscribers from fund mismanagement, and from high rates and malpractice by intermediaries.

According to official data, as of November 2021, there are 76.8 lakh total members of central and state government employees in NPS, and the total Assets Under Management (AUM) for the central and state government schemes is INR 5.5 lakh crore. In addition, total membership under private NPS schemes stands at 32 lakh individuals, whereas their AUM is INR 1 lakh crore. Total membership under the Atal Pension Yojana is 3.2 crore individuals, and the AUM is INR 19 thousand crore.

Scope and Design of PFRDA Regulation

PFRDA is responsible for protecting the interests of pension fund subscribers. For this, it has power to regulate ‘intermediaries’. Pension funds are included within the definition of ‘intermediary’ in the PFRDA Act. Intermediaries also include central recordkeeping agencies, pension fund advisers, retirement advisers, points of presence and all other persons and entities connected with collection, management, recordkeeping and distribution of accumulations.

The NPS Trust, which was established by the Authority in 2008 under as per the provisions of the Indian Trusts Act of 1882 for taking care of the assets and funds under the NPS is also an intermediary which is regulated by NPS. The powers, functions and duties of NPS Trust are laid down under the PFRDA (National Pension System Trust) Regulations 2015, besides the provisions of the Trust deed dated 27.02.2008.

The Authority is responsible for registering intermediaries, and to make regulations for eligibility norms, including minimum capital requirement, past track-record including the ability to provide guaranteed returns, costs and fees, geographical reach, customer base, information technology capability, human resources etc. Further, the Act provides that intermediaries can only carry out business activities in accordance with the terms of the certificate of registration issued by the Authority. The Authority has range of powers to inspect and investigate the operations of intermediaries and to enforce its regulations and directions.

The Authority has adjudicatory power to decide on inquiries made in respect of intermediaries. It can also adjudicate disputes between intermediaries, and between intermediaries and subscribers.

The Authority is statutorily required to undertake steps to educate subscribers and the general public on issues relating to pension and retirement savings.

In addition, for NPS, the Authority also has some roles in relation to the actual management of the pension fund. It makes key appointments to the NPS Trust, including its Chairperson, CEO and Trustees. This has however been considered a conflict of interest, and a clear delineation of powers between the regulator and the NPS Trust is considered necessary. The Union Budget 2019-2020 proposed the separation of the NPS Trust and the PFRDA in view of this issue. It is understood that an amendment to the PFRDA Act is awaited in relation to the separation of the Trust (operational supervisor) from the PFRDA (legal regulator).

Issues and Challenges

Worldwide, pension system supervisors and regulators face the challenge of having high administrative charges for private pension funds, which leads to poor rates of return for pension fund members. There are often detrimental rules which govern the withdrawal of accumulated funds at retirement, and the risk of potential mis-selling when the retail channel is used to ‘sell’ financial products like pension plans. In this perspective, NPS is considered one of the most low-cost pension system designs in the world. However, consistent regulatory interventions are necessary to ensure that the NPS can continue serving the old-age income needs of individuals and protect their interests on a sustainable, reliable and cost-effective basis.

However, much more needs to be done to expand the low coverage of pensions in India. Out of an estimated Indian workforce of approximately 47 crore individuals[1], around 10.2 crore are covered under mandatory and voluntary pension schemes. In other words, only 21-22% of India’s workforce is covered by some form of pension plan. While pension coverage has incrementally risen in the past decade, a very large fraction of the working population still remains outside the formal pension system.

Expert committees in the past have highlighted the low pension participation rates among households in India – these include the Reserve Bank of India Committee on Household Finance, and some committees of the PFRDA. Risks to income security in old age are increasing due to a few reasons. First, the shifting demographic patterns in the country including the rise of the nuclear family, second, the high levels of unsecured debt (due to borrowings from non-institutional sources such as moneylenders) when approaching retirement age, and third, an increase in the elderly cohort. The general absence of effective formal sources of retirement income exposes the elderly cohort to economic shocks in the non-working segment of their lives.

The Atal Pension Yojana was established with a view of addressing this challenge, especially for unorganised sector workers. However, the challenges to increasing pension coverage in the low-income and heterogeneous unorganised sector in India are rather complex. The design of the savings instrument has to be customised to suit a financially semi-literate individual who may be unable to make regular contributions.

Further, India’s pension sector suffers from a fragmented regulatory landscape and exercise of regulatory oversight. While the NPS and Atal Pension Yojana are ‘regulated’ by PFRDA, the equivalent functions for the Employees Provident Fund and other pension systems are performed by their Board of Trustees or through other governing arrangements. This has led to disparate governance standards, outreach strategies, funding patterns, and investment guidelines across various pension schemes and programmes. These issues could be addressed through a comprehensive national pension policy, but this would require significant changes across the various laws, schemes and organisational structures.

Key Takeaways from Union Budget 2022

2 February 2022

The Finance Minister, Ms Nirmala Sitharaman presented the Union Budget on 1 February 2022. What does the budget mean for India’s economy? What are some of the hits and misses? In this piece, scholars at CPR share key takeaways.

Despite being presented ahead of crucial assembly elections, this is a remarkably non-political budget with neither positive nor negative surprises. There are no income tax cuts for the middle class. There is no increase in PM-Kisan direct benefit transfer payments from the current Rs 6,000/year to, say, Rs 9,000. Increasing this amount would have made political sense, given that small and marginal farmers would benefit the most from DBT. PM-Kisan, it may be recalled, was introduced first ahead of the 2019 Lok Sabha elections. Clearly, the government wants to keep the gun powder dry for 2024 elections.

The budget has announced measures for promoting zero budget natural farming and discourage chemical-based agriculture. One way to do this would have been to rationalise fertiliser subsidies, raise PDS issue prices and cap the current open-ended MSP procurement of paddy and wheat. The resources released from these could have, in turn, been ploughed back into increasing PM-Kisan benefits. That would also signal a policy shift from input- and product-based subsidies to income support to farmers.

Despite ongoing tensions on the China border, this is a regular defence budget with an allocation of Rs 5.25 lakh crore, a mere 4.3% increase over the previous year which will not even cover for inflation. More than half the amount will go towards salaries (1.54 lakh crore) and pensions (1.19 lakh crore). Capital budget has seen a 9.7% rise but the Army’s inability to spend 30% of its allocation in the current year, when it desperately needs to modernise, is a cause of worry.

Read a more detailed piece on defence allocations in the budget here.

The Budget announcement to facilitate opportunities in tier 2 and tier 3 cities, especially for women and children, is very welcome. CPR’s research demonstrates that secondary cities can be low-cost low-risk action spaces for rural and small-town youth – and women – to leverage existing social networks to explore economic opportunities. A ‘paradigm shift’ that combines land-use, economic and social planning and adopts place-based planning approaches, empowering urban local bodies and enabling regional planning approaches would be welcome.

Investments in the social sector remain neglected in this year’s budget. What has been particularly surprising is the low investments for health and also for some of the key schemes that formed an important safety net during the peak of the COVID-19 crisis. For instance, while there remain 77 lakh households that had demanded work under MGNREGS still to receive it, allocations for the scheme saw a 26% decrease over last years Revised Estimates. Food subsidy has seen a 28% decrease even as the Pradhan Mantri Garib Kalyan Yojana providing additional free grains to families was extended till 2022. Similarly, Ministry of Health and Family Welfare, sees only a Rs. 200 crore increase this year.

The budget appears to be a digital budget, and one must be careful it does not become a virtual budget because while technologies can be very transformative, e.g., the inclusion of post offices as part of the core banking system has great potential, the reliance on TV channels to remediate the loss in education during the past two years is a very risky strategy with potentially high downsides.

On urban areas, the move to kickstart green urban transport solutions including battery swapping is laudable as is the recognition of the need to develop a sui generis approach to urban areas but perhaps the fetishisation of metro rail needs some tempering. The thrust on logistics is very welcome but overall, the excessive attention to capital expenditure, including the quantum increase in support to the states, takes the focus away from insufficient allocations for necessary maintenance of existing assets at central and especially at the state and levels.

Gati Shakti provides much needed economic stimulus through infrastructure spending. But will the government adequately consider how to use the money to lock in low rather than high carbon futures? And deploy it to build a climate resilient society?

Energy transition receives rhetorical attention but allocations and incentives don’t completely line up. In power, renewables receive production support, but long-term coal phase-down is ignored and discoms get short shrift, with states receiving limited support.

The lack of attention to and even steps backward on air pollution is among the budget’s biggest environmental shortfalls. The paltry allocations to the CAQM and NCAP, coupled with the rapid phase-out of LPG subsidies risks back-sliding in the fight against air pollution. Indications on public transport are welcome but need fleshing out.

Read a more detailed piece on budget allocations for energy, environment and climate change here.

Despite claims of greater fiscal space, net tax revenues are higher than budgeted, this budget has moved toward fiscal consolidation rather than broad based support to a struggling economy. Revised estimates for the current financial year (FY 22) highlight that total expenditure reduced by approximately 1.5% GDP from FY 21 to FY 22 and will continue this path to reduce by a further 0.95% GDP from 16.24% in FY 22 to 15.2% in FY 23. The fiscal deficit on the other hand has reduced by 2.5% GDP. The extra fiscal space this FY has been used to reduce the fiscal deficit and not to support public expenditure, a trend that will continue into FY 23.

It is certainly true that capital expenditure allocations have increased from 1.65% of GDP in FY20 to 2.16% in FY21 to 2.6% in FY22 and projected to 2.9% in FY23. This rise is consistent and means that less than 60% of the fiscal deficit will be used to finance revenue expenditure in FY23 compared with 71.4% in FY20. This is a structural change in fiscal stance. But, contrary to the braggadocio in the economic survey, this has come about through revenue expenditure compression, and not through an increase in resource mobilization, which is why the capital expenditure/GDP ratio has increased even though the total expenditure/GDP ratio has shrunk.