Equity Markets to drive India's Retirement Income

Mon, 29 May Pre-Open

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The Employees Provident Fund Organisation (EPFO) is planning to invest up to 15 percent of its total investment into the equity market from the next financial year. So far, EPFO have pumped in Rs. 186 billion in the equity markets through equity-traded funds (ETF's). An additional increment of such proportions is likely to fire the market to heady proportions. The Sensex 40,000 story seems more and more plausible by each passing day.

Apart from investors, there's one more critical area which will benefit from such capital infusion. India's retirement savings. According to the World Economic Forum study, the size of retirement savings gap for India is likely to reach USD 85 trillion by 2050 from its current levels of USD 3 trillion. India's savings gap is expected to rise by 10 percent year on year. This is mainly due to a rapidly ageing population and high proportion of informal working class population.

The informal sector accounts for 40% of India's GDP and employs about to 75% of the labor force. The point is that the informal sector is a significant part of India's economy. There are other estimates which say that the informal sector employs more than 75% of India's workforce.

Informal companies evade fiscal and regulatory obligations, including value-added taxes, income taxes, labor market obligations such as social-security taxes and minimum-wage requirements as well as product market regulations. Most importantly, they deprive the working population of their retirement income since most of these firms do not contribute towards their employees PF account.

Avoidance of regulation and taxes gives these firms an advantage over firms in the formal economy, who are unable to increase their market share despite being far more productive and efficient.

But a rapid shift away from cash as well as the need of an audit trail to claim tax credits under the new goods and services tax (GST) regime could push a lot of firms into the tax net. Once this happens, employer contributions towards EPF are bound to increase.

Formalization of the economy followed by increased allocation in equity markets are bound to reduce the huge gap in retirement savings gap.

Apart from the government's efforts at bridging the retirement gap, individuals themselves need to be shrewd about their savings and investments. A collective effort from both stakeholders is needed to bridge the huge gap of an ever increasing population.

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