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RBI Allows NRIs to Subscribe to NPS – Plays the Cards in its Hand to Stabilise Economy

RBI Allows NRIs to Subscribe to NPS – The NPS can lead to smaller trickles coming into India from such people in a steady flow, thereby stabilising the local currency.

To enable Indians living abroad to access old age income security, the Reserve Bank (RBI) on Thursday allowed non-resident Indians (NRIs) to subscribe to the National Pension System (NPS). “It has now been decided, in consultation with the Government, to enable National Pension System (NPS) as an investment option for NRIs under FEMA, 1999,” Reserve Bank said in a notification here on Wednesday.

NRIs may subscribe to the NPS governed and administered by the Pension Fund Regulatory and Development Authority (PFRDA), provided such subscriptions are made through normal banking channels and the person is eligible to invest as per the provisions of the PFRDA Act, it said.

Under the Foreign Exchange Management Act (FEMA), 1999, the National Pension Scheme will work as an investment option for the senior NRIs. They may subscribe to the scheme via online channels. There would also be no restriction in repatriating the savings for the aged citizens.

On the face of it, this move is of course a benefit for NRIs, but the other side is that it is also a potential source of economic stability in India. Here’s how.

Time and again, India has faced some kind of a problem on the external front, though the reasons have varied. In 1991, India went into a deep balance of payments crisis amid a political turmoil, even mortgaging its gold. In 1998, the nation staged nuclear tests that resulted in US sanctions that made the rupee weaker.

Again, between 2008 and 2013, India went through ups and downs as the global economic crisis hurt export demand, and domestic inflation caused its own weakenesses amid high oil prices, resulting in the rupee facing a big attack in 2013. Dependent on foreign exchange for oil and key food items like pulses, India always has to keep an eye on the rupee.

India had come out with its India Development Bonds after the 1991 crisis that raised $1.6 billion. Resurgent India Bonds after the 1998 woes raised $4.2 billion and India Millennium Deposit Scheme in 2000 fetched $5.5 billion.

In 2013, the RBI came up with some sophisticated currency swap arrangements to tide over the problems triggered by a weaker rupee, even as ideas popped up that India should be issuing bonds.

The simple fact is that NRIs have time and again helped India with their resources, but there is a catch to this. In 1990, it was the flight of short-term NRI deposits that precipitated the balance of payments crisis. While various special schemes bolstered foreign exchange reserves that stabilised the rupee, they were put together quickly when market pressures were high.

India is the world’s largest recipient of remittances from its citizens working abroad. The World Bank estimated in a report released last week that in 2015, the amount is expected to touch $72 billion (R 470,000 crore) – a new record! This is even higher than China’s $64 billion remittances.

The remittances are a great source of strength for India’s economy and so are schemes like the ones India came out with in the aftermath of the nuclear crisis. But a steady flow of remittances can insulate India relatively from the kind of ups and downs and high-interest-bearing schemes in times of crises.

The NPS is a quiet vehicle for inflow of foreign exchange that can boost India’s reserves. The notable factor is that the minimum annual subscription in NPS is as low as R 6,000. NPS investments mature when a participant turns 60.

Consider the fact that overseas Indians are estimated to number more than 20 million but a huge number of them are rich citizens of Western nations. They may not be interested in Indian pension schemes – but those eligible may be tempted to join as investors as India becomes an economy promising sustained high growth with prospects for a boom in equities. As much of 50% of NPS funds can be invested in equities.

At the same time, NPS also enables modest variants of NRIs to remit more into India. The Arabian Gulf area accounts for as much as 5 million Indian nationals, many of them not in the affluent category.

The NPS can lead to smaller trickles coming into India from such people in a steady flow, thereby stabilising the local currency.

The RBI may well have quietly opened an alternative to expensive bonds and deposits by allowing NRIs to invest in the National Pension Scheme.

Here are some facts about the National Pension Scheme you need to know :

  1. The National Pension Scheme was primarily introduced as defined-benefit scheme where the pensioner would not have to invest. However, in 2004, the Government of India changed the scheme into a defined-contribution pension system with multiple investment options.
  2. The pension scheme allows an account holder to choose where the money would be invested and to withdraw a portion of the pension amount prior to retirement.
  3. There are two kinds of pension accounts – Tier 1 and Tier 2. A Tier-1 account is set up for every citizen of India from May 1, 2009, from where one cannot make any withdrawal prior to retirement. A Tier-2 account has the provision of a prospective payment system (PPS), which lets the pensioner withdraw the amount under exceptional circumstances including health issues.
  4. The National Pension Scheme is authorised by the Indian government and managed by the Pension Fund Regulatory and Development Authority (PFRDA).
  5. The regulation launched in 2009 that included all the citizens of the country also extended to the unorganised sector workers such as farmers, migrant workers, scavengers, toddy toppers, porters, loaders, domestic workers, fishermen, barbers, vendors, bonded labourers and casual labourers.
  6. The National Pension Scheme is applicable to all citizens of India between the ages of 18 and 60 on a voluntary basis.
  7. The amount of pension is equally divided into two parts. One is paid by the employee and the other is offered by the employer. The minimum annual contribution of pension should be more than Rs 6,000 for one account and the maximum contribution should be less than Rs 12,000. The monthly minimum pension limit of is Rs 500 per account.
  8. There are three asset classes under the pension scheme, in which each pensioner can invest. The asset classes include equity, government securities and a range of fixed income instruments.
  9. One can only withdraw 20 percent of his or her pension amount as a lump sum and the rest is invested in a life annuity scheme of a life insurance company approved by the Insurance Regulatory and Development Authority (IRDA).
  10. On retirement at the age of 60, the pensioner is required to invest a minimum of 40 percent of his or her total pension amount and the rest can be withdrawn as a lump sum. A pensioner can also opt to keep the pension account active even after 60. However, at the age of 70, the pensioner would receive the benefits as a lump sum.
  11. Source: Hindustan Times
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