Domestic pension funds hold the key for India to become Atmanirbhar in long term infrastructure financing

Domestic pension funds hold the key for India to become Atmanirbhar in long term infrastructure financing

By Arindam Guha

While the country braces for the third wave of the pandemic, policymakers continue to evaluate various alternate levers to achieve continued economic growth in the run-up to Budget 2022-23. The Rs 111 Lakh crore National Infrastructure Pipeline (NIP), expected to have a 2-2.5 multiplier effect on GDP over the near to medium term, features prominently among the list of key enablers. 

A number of steps have already been taken for the timely implementation of the NIP. The Government has announced Gati Shakti, a technology-enabled platform spanning various Ministries in the Central Government as well as State Governments, for planning, prioritizing and monitoring implementation of key projects. Coming to the important issue of financing, a Rs 6 Lakh crore National Monetisation Pipeline of operating infrastructure assets has been identified. The National Bank for Financing Infrastructure and Development has been set up as a Development Finance Institution, with a target financing portfolio of Rs 5 Lakh crores over 4-5 years. State Governments are being incentivized for infrastructure development and asset monetization through low interest long tenure loans. 

However, the most important issue which still remains to be addressed is mobilization of adequate long term financing for India’s infrastructure projects. It is here that pension and insurance funds can play a key role, given their long term liability profile and the need to ensure a reasonable return for their investors. Over the last 3-4 years, the country has seen investments from a number of international pension and sovereign wealth funds particularly in operating infrastructure assets. However, investments from domestic pension funds continue to be skewed towards Government securities, with around 50 % of investments being in this category. When it comes to alternate assets like infrastructure InvITs, the investment is well below the mandated limit of 5% of the corpus, unlike countries like US, UK, Canada, Australia where it is as high as 26%.

To address this, the Government can consider relaxing the existing limit of 5% investment in alternate assets for specific pension schemes which are targeted at investors with higher risk return appetite and disposable income. The composition of the portfolio can be left to the trustees, with appropriate strengthening of governance, fund management, disclosure (to enable investors to take informed decisions based on portfolio information) and risk-based supervision mechanisms. Countries like Canada have gone a step further and allowed pension funds to make direct investment in individual infrastructure projects (beyond listed bonds / equity and alternate investments) on the back of specialist project appraisal & portfolio management capabilities, strong governance and disclosure requirements. With the domestic pension fund corpus under NPS being around Rs. 7 Lakh Crores as on March 31, 2021, and another Rs. 15 Lakh crores under the Provident Fund scheme, this could translate to a significant additional kitty for infrastructure investments. Return expectations of investors with higher risk appetite can also be met in the process, since returns from infrastructure investments will be higher than Government securities. 

Over the medium to long term, the issue of inadequate pension coverage in the country also needs to be addressed. India’s current pension corpus (including provident fund), at around 10% of GDP, is way behind other countries like United States, United Kingdom, Canada and Australia where it almost equals or is greater than GDP.  With an increase in life expectancy and more nuclear families, there is an emerging need for a sustainable social security system. It is therefore critical that specific measures be initiated to expand the overall pension kitty to support adequate social security coverage.

Some of the measures which may help achieve this goal include (a) extending coverage of occupational pension to contractual workers, micro-enterprises, ASHA & Anganwadi workers, construction sector workers, enterprises with less than 20 employees etc. through an auto-enrolment facility, incentivized through matching contribution from Government, flexible contribution mechanisms; provisions for premature withdrawal for major life events like construction of dwelling units, marriage etc.; (b) incentivizing people to invest in pension funds through added tax benefits on annual contributions as well as on maturity payments.  

Focused attention from policy makers on the domestic pension fund sector will not only help India become Atmanirbhar when it comes to long term financing of infrastructure projects but build the foundation for a robust and sustainable social security system.

(Arindam Guha is a Partner and Leader — Government & Public Services at Deloitte India. Views expressed are the author’s own.)
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