Importantly, most informal sector workers appreciate the importance of saving for their future. Therefore, the latent demand for both NPS and liquid savings should be even higher than ever before.
By Gautam Bhardwaj and Sanjay Jain
Every news channel today is overflowing with heart-wrenching stories. A staggering mass of people, crammed into trucks, or simply walking thousands of kilometres back to their villages. This raises some important questions. About the plight and future of our informal sector workforce and about the country we want to build.
Why did these workers start fleeing within a few days of the lockdown? Why, after toiling for so many years, painstakingly building a new life for themselves in the cities from scratch, have they just thrown it all away? What could have prevented this exodus, and prompted these migrants to hold on?
A sudden loss of livelihoods cannot be the primary cause for such desperate actions. After all, migrants are a very resilient lot and have undoubtedly faced and overcome frequent setbacks over the years. The real problem is simply that most of them had near-zero savings. With little or no money to fall back on, they just couldn’t afford food or rent, even for a few days, under lockdown.
Unfortunately, most of these migrants are also not eligible for a pension or any other social safety net. If their current savings behaviour remains unchanged, we will witness an exponentially larger and more sustained social and fiscal crisis—when they permanently drop out of the workforce in their old age. At that point, unless they have saved enough for at least 20 years, they will face a long and terribly harsh retirement. If we can’t afford the fiscal cost of supporting them for even a few weeks today, we certainly won’t be able to afford to pay them a tax-funded social pension for over two decades.
If on the other hand, a 25-year old migrant in Delhi had opened a National Pension Scheme (NPS) account in 2010, and begun saving just Rs 20 a day, she could have accumulated nearly Rs 120,000 by March 2020. When the lockdown was announced, she could have simply withdrawn Rs 30,000 from her NPS account (as per PFRDA rules). This would have allowed her to stay on in Delhi for another three to four months, wait for the lockdown to lift, and for her work to resume. Without experiencing any economic stress or depending on cash or food transfers. In the long run, she would have saved enough by age 60 for a secure and dignified old age, with a lifelong pension of around `10,000 a month.
This is equally true for the nearly 100 million urban migrants on the road today, as it is for the 300 million other informal workers across India. Fortunately, we have a large demographic advantage and most of these workers are still young. Since we cannot afford to fund a social safety net for them from taxes, we have to encourage and enable them to save for retirement and emergencies. This requires an enabling ecosystem, savings demand, and easy, frictionless access.
The government has already laid the foundation. We have universal Aadhaar coverage, nearly 400 million Jan-Dhan accounts, over 500 million smartphone users, around 100 million UPI users, and the NPS—one of the most efficient pension systems in the world.
Importantly, most informal sector workers appreciate the importance of saving for their future. Therefore, the latent demand for both NPS and liquid savings should be even higher than ever before. The stumbling block that remains is the friction around KYC and account activation. Focusing on this will set us up for voluntary thrift and self-help at scale.
Ideally, any Indian with an Aadhaar, bank account and a mobile, should be able to easily open a digital NPS or liquid mutual fund account. This should not require any additional KYC—especially if periodic savings are being transferred directly from a bank account using UPI. Thereafter, a person should be able to use her mobile to easily check her account balance, withdraw savings, or file a complaint—regardless of where she lives or works over time.Over 80% of our workforce does not get a regular income every month. Strategies used for salaried employees with regular monthly pay cheques cannot be applied to construction workers, street vendors, farmers, domestic help, rickshaw pullers, fishermen or contract workers—all of whom have very unpredictable incomes.
Non-salaried workers will need a flexible solution. One that allows them to save as per their own cash-flow. A street vendor or Uber driver should be free to save Rs 50 a day, a construction worker or domestic help could choose to set aside Rs 500 a month, and a farmer may prefer a lump sum Rs 5,000 after each crop. A simple, convenient and flexible digital saving solution is both feasible and essential. Subcontinent-scale adoption will however require a gigantic effort on digital literacy. This will be challenging given modest literacy levels, diverse languages and low financial literacy. This will be even more difficult with social distancing.
On the flip side, the pandemic response has been marked by a growth in digital communication platforms. Individuals, governments and corporations routinely conduct meetings over Zoom, Google, WebEx, etc. Social media is the default way to disseminate information and updates. Even rural India is seeing a sharp rise in digital communications and payments. For example, Mission Shakti in Odisha uses WhatsApp to communicate directly with its 75,000 Aanganwadi workers, who manage 7 million women SHG members in remote rural locations.
We are also seeing a growth of simpler user interface design with regional language technologies to tailor digital solutions for a diverse India. Interestingly, several banks, mutual funds and insurers, who already have their own proprietary apps, are instead using generic open platforms to reach, inform and service customers.
By combining the India Stack ecosystem with simple, intuitive and widely used platforms, we can achieve three important outcomes: First, we can speed-up mass-scale adoption of digital finance by allowing citizens to use apps they routinely use already. Second, finance firms can jumpstart a country-wide digital strategy, without large investments on either digital literacy or on promoting proprietary platforms. And third, we can achieve retail demand aggregation—which can dramatically reduce transaction costs and make micro-savings more commercially viable for mainstream fund managers and insurers.
This may be an especially powerful strategy for pension inclusion—given that over 80% of India’s WhatsApp users are not eligible for a pension, and need to start saving for their retirement as soon as they resume work.
We need strong political leadership and regulatory support to overcome the current friction and KYC barriers to comprehensive pension and savings inclusion. We don’t have a choice if we are to avert India’s looming retirement poverty crisis. This will also be a giant step towards a truly atmanirbhar Bharat.
Bhardwaj has contributed to the development of NPS, and Jain has contributed to the development of the India Stack. Views are personal.