India's workers will soon have a part of their nest eggs in stocks. A similar portfolio shift by Japan's retirement funds has played a big role in pushing that country's Nikkei stock market index to a 15-year high. The Indian version, however, is too modest to boost investor sentiment. A bolder embrace of equity culture will require overcoming trade unions' deep mistrust of markets.
The state-run Employees' Provident Fund Organisation (EPFO) recently decided to invest 5 per cent of its estimated Rs 8 lakh-crore ($125 billion) of assets in exchange-traded funds. That target, which will be reached by March 2016, would see $6.25 billion flow into Indian equities over the next year.
Though the decision to invest in stocks is significant, the shift is not bold enough to make much impact on the overall market. The EPFO's planned purchases are equivalent to 0.4 per cent of the Indian stock market's total capitalisation. Contrast that with Japan, where social security funds led by the Government Pension Investment Fund (GPIF), boosted their equity holdings by 14.5 trillion yen ($122 billion) between end of 2012 and 2014. That's about 2.5 per cent of the value of shares listed on the Tokyo stock exchange.
The Indian finance ministry wants the labour ministry to be more adventurous, but the trade union representatives on the EPFO's board of trustees want assured, high returns on government securities. Risk is anathema to them.
That creates a lopsided market. Foreign institutional investors have poured more than $18 billion into Indian stocks over the last 12 months - about three times the EPFO's planned outlay. The result is that managers of California public employees' retirement savings have greater access to the booming Indian stock market than India has allowed its own workers.
It's time to correct the imbalance. Japan's ageing population desires the safety of low-yielding bonds in an environment of perpetually low inflation. But living standards in India are rising rapidly. The country's relatively young workforce could be in trouble if it doesn't accumulate enough wealth to afford a decent retirement. India's pension system has a strong case for embracing the equity culture. A little more ardour for the stock market would be quite healthy.
