Importance of old-age pensions

Jean Dreze 

It was a new experience, last summer, to go from village to village with student volunteers and listen to elderly women and men. Our main purpose was to understand how pension schemes for widows and the elderly worked in different States (Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu and Uttar Pradesh to be precise). Testimony after testimony has opened our eyes to the critical importance of old-age pensions as a pillar of social security in rural India.

The first thing that struck me was the immense number of elderly people, and their miserable plight. They escape our notice most of the time, but if we have an eye out for them, they spring up everywhere. They live quiet and unobtrusive lives, some passing time on a broken charpoy, others collecting twigs, limping from one place to another, or simply lying ill in the darkness of a shabby backroom. They rarely complain — at least not in public — but if you enquire about their well-being, the tales of sorrow are endless.

It is not just in poor households that widows and the elderly have a hard time. Even in relatively well-off families, money is always in short supply, and the comfort of the elderly often takes the back seat. We met plenty of women and men who lived a life of deprivation even as their adult sons built good houses or rode motorcycles.

Whenever public meetings were called to talk about social security pensions, elderly women and men came out of their houses in large numbers to join the discussion. Those who were not receiving a pension pleaded for help to apply. Pensioners, for their part, complained that the pension amount was far too low. Even so, they clung to their bank or post-office passbooks as they might precious possessions. In their harsh lives, the pension was a chance to enjoy small comforts — relieving their pain with some medicine, getting their sandals repaired, winning the affection of their grand-children with the odd sweet, or simply avoiding hunger. 

Small leakages, but no big scams
The main insight from the survey was the basic soundness of pension schemes as a tool of social security and economic redistribution. Most of the recipients are, by any standard, deprived people who need social support — and indeed have a right to it. Aside from contributing to their economic security, pensions give them some dignity and bargaining power. The administrative costs are very low. Last but not least, the survey (which included verifying pension records in 160 sample villages) did not find any evidence of major fraud in pension schemes. There are leakages here and there, for instance when post-office employees take a cut to disburse pensions, but nothing like the scams that plague many other forms of government expenditure. And the leakages, such as they are, can be dealt with quite easily.

Having said this, pension schemes for widows and the elderly have five major flaws as things stand: narrow coverage, bureaucratic procedures, low pension amounts, irregular payments, and high collection costs.

To start with, the coverage of pension schemes is too narrow. According to Central guidelines, social security pensions are meant for “below poverty line” (BPL) families; financial support from the Central government is restricted to this category. Some States have launched their own schemes, with their own funds, to expand the coverage of pensions beyond BPL families. But the bulk of pensioners are selected from the BPL category. The unreliable and exclusionary nature of this eligibility criterion is now well understood in other contexts.

In the context of pensions, it is all the more inappropriate, because widows and the elderly are often extremely deprived even in relatively well-off households. BPL targeting should be abolished in favour of a universal or near-universal approach, whereby any widow or elderly person who does not meet well-defined exclusion criteria (such as having a government job) is eligible for a social security pension.

Second, application procedures tend to be very cumbersome. Numerous supporting documents have to be produced, and it often takes years for applications to wind their way up and down different layers of administration — Gram Panchayat, Block, District, State and back. In Latehar district (Jharkhand), we learnt from the Sub-Divisional Magistrate that pension applications were being forwarded to the State government at a snail’s pace simply because he had to sign each application six times. With about 13,000 applications pending, that meant 78,000 signatures, for this purpose alone. He was blindly signing application forms even as he was talking to us, without, for all that, making much of a dent in the backlog.

Third, the amounts of social security pensions are ridiculously low. The Central contribution to old-age pensions has remained at an abysmal Rs. 200 per month since 2006 —an insult to the dignity of the elderly. Some States top this up with their own resources, but even the topped-up amounts are measly, except in a few States like Tamil Nadu where the standard pension amount is now Rs. 1,000 per month. Pension amounts should be increased without delay and indexed to the price level.

Fourth, pension payments are highly irregular in most States. Often, pensioners have to wait for their pension for months, without having any idea as to when the next payment will materialise. This defeats the purpose of old-age pensions, which is to bring some security in people’s lives. More than ten years have passed since the Supreme Court ordered State governments to ensure that social security pensions are promptly paid by the 7th of each month, but few States have acted on this.

Fifth, even when payments are relatively regular, collecting them is often costly and tedious for old people with little mobility, education and power. Going to the nearest bank and queuing up there for hours can be an absolute ordeal for them.

Post offices are closer, but the convenience comes at a price — corrupt post-office employees often expect an inducement. Alternative options such as postal orders, business correspondents and cash payments pose their own problems. The Central government’s odd insistence on fast-tracking the transition to “UID-enabled” payments of social security pensions (one of the least appropriate applications of this problematic technology) is likely to be very disruptive — “UID-disabled” may well turn out to be a more accurate term in this case. 

Signs of change
All these problems are easy to fix. The main reason why it is not happening is that the people concerned count for so little. But this is changing: widows and the elderly have started agitating for their rights, with a little help from associations such as Ekal Nari Shakti Sangathan and Pension Parishad. Under public pressure or for other reasons, many States have started improving and expanding their pension schemes — Odisha, Tamil Nadu, Rajasthan, among others. Even Bihar and Jharkhand, the incorrigible laggards in such matters, are developing a serious interest in pension schemes.

Odisha, no paragon of good governance in general, presents an interesting case of a State which has put in sustained effort to strengthen pension schemes. Eligibility conditions have been relaxed and the coverage of pensions has been extended well beyond the ambit of Central guidelines. The lists of pension recipients are updated regularly and posted on the internet. Pensioners have well-designed and well-maintained passbooks with details of pension payments. Last but not least, pensions are promptly paid in cash at the Gram Panchayat office on the 15th of each month — even on August 15. This arrangement, very convenient for pensioners, is strictly enforced and appears to work very well.

The Central government, for its part, seems unable to get its act together on this issue. The need to put social security pensions on a sounder footing is well accepted in principle, and useful recommendations for this purpose have been made by an expert committee. However, little has been done to implement these recommendations — not even raising the Central contribution to old-age pensions above the paltry Rs. 200 per month. The “savage cuts” (as Union Minister Jairam Ramesh called them) in social expenditure sought to be imposed by the Finance Ministry are not going to help matters. The axe of fiscal austerity weighs most heavily on the poor and powerless, including destitute women and men who are expected to get by with Rs. 200 per month even as prices go through the roof.

(Visiting Professor at the Dept. of Economics, Allahabad University)

Healthcare needs a critical push

RANA KAPOOR

Changing disease patterns, low public spend on healthcare, and high out of pocket expenses have been the primary concerns leading to the formulation of the government’s new health policy. Economic advancement in India over the last two decades has enabled the government to take the cue and clearly articulate its intent to increase the public financing of health to 2.5 per cent of GDP in the Twelfth Five-Year Plan to move toward affordable, accessible and quality healthcare for all.

However, the share of government funding in total healthcare spend remains at approximately 1 per cent of GDP (less than 30 per cent of the total spend) which ranks India 171 out of 175 countries in the world on these parameters.

In spite of the best commitments by successive governments and Plan documents, healthcare spend has not kept pace with the GDP growth rate due to a variety of reasons, including high fiscal deficit.

Between paper and reality

A welfare state like India needs immediate addressal of this situation; Budget 2015 presents an excellent opportunity. It should lay out a roadmap for increased funding for healthcare and a definitive approach to take India to universal healthcare coverage, a matter that has been debated in policy circles since 2010. On paper, a comprehensive package is available to the entire population through the public delivery system, but in reality the government is far from delivering on this promise, especially for the poor.

While the network of Primary Health Centres (PHCs) and Community Health Centres (CHCs) has grown over the years, the public healthcare infrastructure remains woefully inadequate both in terms of accessibility and quality.

There have been two meaningful interventions in the interim towards the quest for universal healthcare — the National Rural Health Mission (NRHM) and the Government Sponsored Health Insurance Schemes (GSHIS).

While access has increased substantially after the launch of the NRHM, quality and equity remain nebulous. This has larger ramifications in the form of lack of preventive healthcare and a poor referral system leading to excessive pressure on urban tertiary centres.

Another aspect is the role of the private sector in delivery. Currently, 80 per cent of outpatient and 60 per cent of inpatient care is contributed by the private sector.

Further, studies have indicated that incremental expenditure of approximately $86 billion is required to reach a bed density of 2 per 1000 population by 2025.

It is, therefore, imperative that the private sector continues to contribute towards plugging the infrastructure gaps; its role in overall healthcare provision would be even greater in the future.

Public-private partnership and the private sector’s role in healthcare provision, therefore, need to be an important consideration in any policy formulation for the sector.

Between 2003-04 and 2009-10, population coverage through the GSHIS increased more than fivefold. Insurance coverage is expected to reach more than 630 million persons, 50 per cent of the population by end of 2015, according to a World Bank study.

Impact of GSHIS

Empirical evidence shows that the GSHIS has had a deep impact on the ground. For instance, third party studies conducted on the Vajpayee Aarogyasri Scheme (Karnataka) has revealed that the risk of mortality for conditions covered under the scheme dropped by 64 per cent, out-of-pocket expenses reduced by 60 per cent, and also led to increased use of available healthcare facilities by the population.

The providers are empanelled (both public and private) on the basis of set criteria and risk disqualification if quality parameters are not adhered to. The scheme provides the participating bottom-of-the pyramid (BPL) households the freedom of choice between public and private hospitals and makes them potential clients worth attracting on account of the revenues that hospitals stand to earn through the scheme.

The purchaser-provider split, therefore, shifts provider payment from inputs to outputs and creates an enabling environment for increased accountability for results. Providers are held accountable for service provision.

Need for guidelines

Overall, experts are vying to use health insurance (both GSHIS and private voluntary) as a lever to improve quality in healthcare. This could address critical aspects of linking funding with health outcomes, and enhance accountability.

The challenges posed by moral hazards should be tackled by regulations prescribing the adherence to standard treatment guidelines, accreditation of facilities and implementation of national electronic health record standards. Moreover, public hospitals could get access to a lot of funds to improve infrastructure and quality, which might otherwise be very difficult to attain in the current grants mechanism.

This provides significant learning to the government which has to decide between being a payer or provider of services.

World over, governments have clearly articulated their role and related imperatives before embarking on a journey towards universal care. The existing focus on free drugs and diagnostics needs to be backed up by a framework of enhanced focus on primary and preventive healthcare and enabling a PPP-based social health security net for the entire population.

New models

Finally, there is a need to consider new models where the Centre and the State governments collaboratively design a performance-based resource allocation to link a district’s funding to its health needs.

The current mechanism for rewarding better performing states under NRHM is marginal and has not changed the healthcare skew between the relatively better performing States (such as Kerala) and the laggards (Such as Uttar Pradesh). This also goes well with the spirit of cooperative federalism championed by the current dispensation.

(The writer is the president of Assocham, and MD and CEO of YES Bank)

The risk of Foreign Investment in Insurance sector in India

Vijay Kumar Shunglu

Permitting a 49 per cent foreign investment limit in the insurance sector, without specifying if that should be FDI or FII, can be a win-win way out for stakeholders

The opening up of India’s public monopoly insurance sector to competition from private companies in 2000 was billed as a major financial system reform. It was clearly understood that ownership rules for insurance would be liberalised progressively apace with liberalisation in other parts of the financial services industry. Since then, a large number of insurance joint ventures between domestic and foreign partners have been formed. They have transformed the Indian insurance scene and provided a much better deal to consumers.

There is now a wider choice of products providing protection against many more types of risk. Most importantly, the insurance industry has become a key player in underpinning the long-term foundations of India’s capital markets and financial system. It is a growing source of finance for infrastructure. Insurance has also been a significant source of foreign capital inflows — directly and indirectly.

The market since 2000

Moreover, the entry of private competition has forced the former public monopoly insurers to improve their performance and efficiency. Yet, despite these benefits, the government has not yet — after 13 years — lived up to its promise of fostering the growth of the industry by increasing the Foreign direct investment (FDI) limit in insurance from 26 per cent to 49 per cent. That unjustifiable delay now compromises the financial standing of many insurance joint ventures (JV) and puts a question mark over the future of an industry that is vital to the health of the financial system.

Let’s look closely at what has happened since 2000. The insurance industry requires significant inputs of capital sustained over a long period to build a viable business and meet growing policyholder commitments. It takes eight to 10 years to reach break-even. The private industry in India has lost a combined $4 billion in the last decade. In the non-life segment, 13 private sector insurers have reported losses in 2011. Many of the smaller insurance companies have looked at options to introduce new domestic partners, but there are no buyers. Most existing foreign promoters have a long-term view. They are unfazed by medium-term losses which they regard as necessary investments to generate future returns. They are looking to increase their ownership stake while their domestic partners have neither the capital resources nor the inclination to do so. A few foreign firms have grown impatient with the slow pace of progress and exited.

Following a long period of inaction and delay, the Union Finance Minister has taken the bull by the horns. He is committed to continuing with liberalising and reviving the industry. He realises that urgently needed infrastructure will require a far greater volume of investment by insurance companies and pension funds. Yet, unanticipated complications have arisen.

Getting sidetracked

The core issue of lifting the FDI cap to permit inflows of capital from foreign partners, thus allowing the insurance industry to strengthen its capital base and grow, has been sidetracked by a proposal to permit new investment to come in only through Foreign Institutional Investors (FII) rather than the FDI route. That is odd for an industry that requires a longer term investment horizon than FIIs have. India’s insurance industry needs around $12 billion in capital up to 2020. Life insurance penetration is only 4.4 per cent of the country’s Gross domestic product (GDP) in terms of total premium underwritten in a year. The sector needs huge and sustained infusion of funding to build viable businesses for the long term.

The idea of increasing the capital base of the industry through FII (instead of FDI) emanated from an understanding between the government and the Opposition, which avoided lifting the FDI cap. That opposition was bolstered by the strong position taken by the Joint Parliamentary Standing Committee on Finance on grounds that remain arguable and contentious. For a variety of reasons, the notion of allowing a capital increase only through FII would be a non-starter. FIIs have a very limited role to play in insurance companies, e.g. those listed in secondary markets, or a few profitable early entrants about to launch initial public offerings (IPO). It has no useful role to play in JVs requiring significant direct injection of capital.

The Insurance Regulatory and Development Authority (IRDA) has warned publicly against the entry of FIIs in insurance. Interestingly, the government has always been more in favour of FDI rather than FII, regarding FII as being “hot” and volatile.

Factor of destabilisation

For insurance JVs that are yet some distance away from IPOs, neither foreign nor domestic investors have any incentive to allow FII inflows that will dilute extant ownership rights and oblige operating JVs to sell shares to disinterested third parties at below par. Therefore, little new investment is likely to come in. Existing JV agreements often have clauses that do not allow other foreign investors to take up equity and dilute the rights of extant shareholders who have sustained losses for a long period of time. If the idea is to increase capital inflows, this is therefore unlikely to have much impact, except for a few insurance JVs that are at the IPO stage.

If the FII-only route becomes enshrined in the amended law, it would allow new foreign entrants to establish JVs and own 49 per cent of shares immediately using a combination of 26 per cent FDI and 23 per cent FII. In contrast, existing foreign promoters would be prevented from investing more in their own JVs if the amended Bill permitted an increase in the foreign shareholding percentage through FII only. So extant foreign promoters would be incentivised, again perversely, to abandon current ventures and start new ones. That would destabilise the entire insurance industry.

A compromise

From a practical perspective, the issue of new capital needed to strengthen the industry can be resolved by allowing the market to work and permitting an increase in the total foreign investment limit to 49 per cent, regardless of whether that increase is through FDI or FII. Such a compromise would not change the government’s original stance, but would accommodate the desire to permit FII as well.

The amended Insurance Bill should keep matters simple by lifting the total foreign investment limit to 49 per cent. Shareholders should be left to determine the best way to address a company’s needs — whether through FDI or FII. It should, therefore, also allow company boards to decide whether the investment should be in the form of entirely new capital or through a change in the ownership structure of existing capital. The amended Bill should leave it to the IRDA to approve such changes.

If a domestic shareholder in a JV wants to stand diluted or sell his/her shares, why should the government wish to prevent his foreign partner from buying that stake and increase its shareholding up to a limit of 49 per cent? That is for the company rather than the government to decide.

In the end, what the amended Insurance Bill needs to ensure is that India wins — i.e. policyholders, employees, shareholders, companies, and even the government — through an approach to increasing FDI in insurance that is transparent and flexible. It is time for the argument to end and for an amended Bill that is sufficiently foresighted and flexible to stand the test of time to be passed without delay.

(Vijay Kumar Shunglu is former Comptroller and Auditor General of India)