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| April 10, 2006 | Monday | Rabi-ul-Awwal 11, 1427 |
Employee pensions to be brought under contribution system
INDIA has so far not had to face up to the problem of a pensions crisis, unlike many other economies, especially in the developed world. But last week, a strike by about 200,000 employees of the country’s largest commercial bank, State Bank of India (SBI), over a pension dispute, was an ominous sign, indicating the kind of formidable challenges the government could face over the coming months over the contentious issue.
Realizing that the sensitive dispute over pensions could snowball into a major financial crisis, the United Progressive Alliance (UPA) government decided to adopt a tough stance and take on the unions that had called for the strike.
The Indian government has finally come round to the view that all government and public sector employees – including those on the rolls of state-owned firms such as SBI – should be brought under a defined contribution system, where an employee’s pension is dependant on the monthly contribution and the returns are linked to investments in the capital market.
As in many other countries, most public employees enjoy a defined benefit pension scheme, where irrespective of the performance of the pension fund, or the employee’s contribution, they are guaranteed a fixed pension.
The employees are seeking a comprehensive review of the pensions policy, but the government is loath to intervene. Though SBI is a public sector company – set up under an act of Parliament – the government has told the employees to negotiate with the management.
The unions are demanding 50 per cent of the last drawn pay as pension, and complain that the existing cap on pensions – fixed at Rs4,250 a month for most employees, and about Rs1,500 more for top executives – is unfair. They point out that other public sector bank employees get 50 per cent of their last drawn basic pay as pension, and there is no cap on the amount.
SBI employee unions are also protesting over the cap on gratuity, currently fixed at Rs350,000, much less than what other public sector bank employees get.
The most worrying aspect for the government is the fact that nearly 70 per cent of SBI’s 200,000 employees would be retiring in about 10 years. Removing the pensions cap at this stage would result in a massive financial blow for the bank, besides leading to similar demands from other state-owned enterprises, especially in the insurance sector.
SBI would be able to bear this additional burden only if the federal government pitches in with its share, but Finance Minister P. Chidambaram is in no mood to fund such fiscal misadventures.
Chidambaram appealed to the unions to call off the stir, as it was hurting banking transactions, clearing operations, and even inconveniencing millions of customers. SBI, with a network of over 9,000 branches, has a dominant position in the banking sector accounting for nearly a fifth of total bank deposits, and a third of customers. Most public sector pensions and salaries are drawn on it.
The worst affected by the strike are the small account-holders, who do not have access to ATMs, and were starved off funds. The SBI management decided not to levy the usual fee on cash withdrawals from other banks, for its ATM card-holders, but that would benefit just a small part of its huge client base.
THE federal cabinet recently approved a draft bill that would enable SBI to reduce its holdings in its seven subsidiaries, allowing it to ‘unlock its huge value.’ The government now plans to introduce a bill in parliament, amending the act governing SBI and its seven subsidiaries.
The bank has a controlling stake in all the subsidiaries – State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Patiala and State Bank of Saurashtra.
According to A.K. Purwar, chairman, SBI, the seven subsidiaries are ‘jewels in the group.’ “We believe there is a huge value in the associate banks,” he explains. “We are looking at unlocking these values.” Some of the subsidiaries are unlisted, including State Bank of Patiala, which has been adjudged one of the soundest banks in Asia.
It is estimated that the sale of part of the stake in the seven subsidiaries would fetch SBI around Rs35 billion. SBI plans to go in for an initial public offering (IPO) for the unlisted banks, followed by sale of additional stake in the remaining listed firms.
The seven sisters of SBI are among the most efficient public sector banks in India. Their combined net non-performing asset (NPA) is less than one per cent. Unfortunately, because they were tied to SBI through the act of Parliament, they could not approach the market for raising funds, starving them of cash.
This had also adversely affected their business plans, as under the new international banking norms (Bank of International Settlements, Basel, requires much higher capital adequacy ratios), additional capital is needed.
The new act would allow SBI to reduce its stake to 51 per cent, and allow individuals to own more than 200 shares – the current limit. The bank at present has a 75 per cent to 100 per cent stake in the subsidiaries.
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INDIA’S retail sector is undergoing remarkable transformation, as shopping malls, hypermalls, supermarkets, exclusive retail stores, and convenience stores are cropping up in the major cities.
The government is keen to open up the retail sector to 100 per cent foreign direct investment (FDI), but there is stiff opposition from the traditional grocers, who are major supporters of the Bharatiya Janata Party (BJP), which is naturally a vocal opponent of FDI in retailing. The communist parties are strangely opposed to foreign retailers.
Despite stiff opposition, the government is determined to push ahead with FDI in retail. Recently, it allowed FDI in single branded stores, and international majors are expected to enter the sector.
One foreign player that has had a successful stint in the pharmaceutical retail sector is US-based Medicine Shoppe International, which established a foothold in India way back in 1999, through the franchise route. Bruce Burnett, international business head of the firm, was in Mumbai last week to open the 100th pharmaceutical store in the country.
“India is a very unique market,” says Burnett. “It has the largest middle income consuming population, many of whom suffer from chronic ailments. Over the next five years as baby boomers start ageing, consumption of chronic as well as preventive medications is going to increase.”
India’s $5 billion pharmaceutical retail market is dominated by over 800,000 chemists, but a handful of organised chains have set up shop in recent years. “We foresee that the next five years there will be a strong boom in organised pharmacy retailing, where the models will start following the western world,” says Burnett, whose firm is part of the $75 billion Cardinal Health Inc, ranked 16th on the Fortune 55 listing.
According to Viraj Gandhi, CEO, Medicine Shoppe India, the role of organised retailing would grow in the pharmaceutical sector over the coming years. “With nine out of 10 blockbuster drugs being bio-tech based, there is growing need for special storage facilities and transportation, which only organised retailers can provide,” he explains.
Medicine Shoppe, for instance, has ‘super specialty stores’ in Mumbai, where drugs are stored in controlled-temperature environment, transported from the pharma firm’s factories in refrigerated vehicles, and even delivered to a patient’s home in similar conditions.
The master franchisee for the American retailer plans to have a network of 700 stores across the country in four years. Other organised retailers, including Apollo Pharmacy (of the Apollo Hospitals group), Himalaya Drugs, Guardian Lifecare and Global Healthline, also plan to set up hundreds of pharma retail stores, both in urban and rural India, over the coming years.
Many of these firms are tying up with shopping malls and retail giants, and even with rural marketing chains. Dispensing drugs and pharmaceuticals is undergoing a major transformation in India, and the new players are wooing customers, by offering special schemes – including loyalty programmes, smart cards containing the medical history of the patient, and free medical insurance policies.
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