Union Budget 2023: Middle-class thrust that largely sidelines the poor

Vision of A Pension Plan for Unorganised Workers

The Finance Minister has decided to shrug off political hesitation by offering windfall gains via changes in the income tax regime and interest earnings on middle-term investments. In the process she had given the market a sudden buoyancy, the long-term implications of which need to be worked out in detail. The concessions granted would result in a revision in projected budgetary deficits, impacting on the rate of inflation and long-term infrastructure investment, while there are apprehensions that measures to promote corporate investment may not be able to halt the kind of premature deindustrialisation seen in several other developing countries.

With policymakers, academics and the market having gotten busy computing the impact of the increase in disposable income, the macro concerns of inflation and unemployment seem to have been put on the backburner. The decline in the inflation rate during the past few months has led to the complacent belief that increased production can take care of the problem of price rise. Similarly, the Economic Survey has underplayed unemployment by quoting an ILO report of 2013 to suggest that India is in a comfortable position in terms of total employment, including unpaid family-based employment for men and women, without bothering about its quality or productivity.

For people outside the net of direct taxes, and who don’t enjoy pensions and interest earnings, the present government had envisaged the Atal Pension Yojana (APY). This savings scheme was largely aimed at the country’s unorganised workers through long-term interest support. APY was criticised for the government’s contribution, equal to that of the member of the scheme for five years, being withdrawn within a year of its launch. Furthermore, the monthly installment of Rs 126 for those who join at the age of 18 years for a pension amount of Rs 3,000 a month was considered unaffordable for the poor. The Finance Minister had stumped critics by proposing the Pradhan Mantri Shram Yogi Mandhan Scheme (PMSYM) in the budget for 2019-20, by maintaining the government’s contribution during the total period of accumulation (till age 60), and by reducing the individual’s monthly contribution to Rs 55 only.

It must be pointed out that APY, as a long-term saving scheme, has the advantage of guaranteed interest and a lump sum amount at age 60. Alternatively, one can choose to get only the interest as a monthly pension during one’s lifetime and authorise the spouse or nominee to get the principal amount on death. It espouses that the corpus, a member builds through fixed monthly contribution and guaranteed interest, is his/her entitlement. This is not clear in case of PMSYM, which has been designed with a welfarist perspective, for the member only during his or her lifetime, implying that the corpus amount, if remaining, is to be credited to the national fund after the death of the subscriber and spouse. Furthermore, persons who leave the pension scheme in less than ten years would get only their contribution with interest accruing at the savings bank rate.

Monthly pension of Rs 3,000 at 60 years for persons entering the scheme at 18 years

Period (months) of accumulation	Monthly installment (Rs)	Annual rate of interest	Accumulated amount at 60 (Rs)	Survival age in years	Monthly installment (Rs)
504 (=42*12)	55	8.65	2,73,915	72.3	3,016

Workers earning less than Rs 15,000 a month in the informal sector, and joining the mission at the age of 18 years, would pay 504 monthly instalments of Rs 55 each, spread over 42 years of their working lives. The life expectancy of such persons is likely to be lower than those in the formal sector. One can use the life expectancy of 72.3 years for rural persons aged 18, as estimated by Registrar General’s office, as a proxy, for the computation of the interest rate, implicitly being paid under PMSYM.

Now, if the monthly contribution is Rs 55 only, an interest guarantee of 8.65 per cent, similar to what is being provided to those in the organised sector, is needed so that the accumulated amount at 60 years becomes Rs 2.74 lakh. This corpus fund is required to give Rs 3,016 to the worker (and half to the spouse, in case the subscriber dies) for the rest of the life, according to the EMI calculation formula. These rates are higher than that of APY, wherein the rate of interest for all age groups is 8.0 per cent during accumulation period and 7.0 per cent during the pension period.

Given the above stipulations, one would note that an informal sector worker joining the PMSYM under this much-hyped programme gets an interest rate support which is about the same as available to the organised sector. The former, however, runs the risk of losing the entire deposit (corpus) in case of her and her spouse’s death, since there is no life insurance cover in the scheme. Importantly, the inflation factor has not been brought in the computation as the state is expected to protect the member against high inflation.

Need for equity in interest support

As far as the workers in the organised sector are concerned, there exists reasonable pension coverage. Additionally, pension-like schemes have been introduced through the post office and banking system, ensuring quarterly payment of interest on an amount up to Rs 15 lakh. The rate of interest was raised from 7.5 per cent to 8 per cent a year recently. A person who has attained the age of 60 years or who has turned 55, but is less than 60 years and retired under superannuation, VRS or Special VRS, can open an account. The budget 2023 has further strengthened this by increasing the ceiling to Rs 30 lakh, ten times the amount entitled to interest support under PMSMS at the age of 60 years. The account can be opened individually or jointly with one’s spouse. In addition, there was the Post Office Monthly Income Scheme (POMIS) with a limit of Rs 4 lakh for single-account holders and Rs 9 lakh for joint holdings. These limits, too, have been enhanced to Rs 9 lakh and Rs 15 lakh, respectively. The budget has also launched the Mahila Samman Saving Certificate’ with a fixed interest rate of 7.5 per cent for two years. This can be opened in the name of a woman or a girl child. with the maximum amount set at Rs 2 lakh.

It is possible to make a case for these welfare-cum-resource mobilisation schemes, considering the poor state of social security in the country. It must, however, be pointed out that all these schemes are designed and are being availed by only those who have reasonably accumulated savings. Unfortunately, a large majority of the people in the informal sector simply do not have these. The only scheme that allows them to accumulate up to Rs 3 lakh during their working lives, after making a monthly contribution of Rs 55, backed up by interest support of about 8.5 per cent a year is PMSMS, as discussed above. Given that workers in the unorganised sector have scanty resources and humongous institutional constraints, they may not be able to join the programme or may drop off in between due to exigencies. Under the existing arrangements, a worker in the unorganised sector would, at best, get a fifth of the financial support received by an organised worker. The expectation from the budget was of a substantial increase in interest support for the poor so that the monthly instalment can be reduced or their inability to pay during periods of unemployment can be addressed. It is a matter of disappointment that no thought has been spared for improving the scope and coverage of old-age security for the poor at the launching of the Amrit Kal.

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The Author is Senior Fellow at World Resources Institute. Views are personal