 |
The UPA government’s decision to hike
FDI limit in insurance and allow foreign equity participation in the pension
sector is meant to placate the domestic and international finance capital. The
government feels this decision will fuel foreign investors’ interest in India and help revive our faltering
economy. But from the past experience, it
becomes clear that this move would neither benefit the Indian economy nor bring
any gains to the insuring public. Despite vehement protests by the AIIEA, a
number of political parties and the democratic opinion in the country, the
government appears determined to bring the necessary legislation in the coming
winter session of parliament and work for its approval. The finance minister
has been going round the country justifying the FDI hike, exuding confidence
that the Bill will pass the test with the support of BJP, the main opposition
party.
The decision to hike the limits of
foreign equity participation is not new. It was taken in 2004 itself when UPA-I assumed the reins of power in the
country. The UPA-I government could make no
headway in this direction as it was critically dependent on Left parties’
support for its survival and the Left had made known in no uncertain terms that
FDI hike is unacceptable to them. The arguments against
FDI hike put forth by AIIEA also pushed the government on the back foot. The
UPA-I introduced the Insurance Laws (Amendment) Bill 2008 after the withdrawal
of support by the Left parties. This Bill was brought to amend
the Insurance Act 1938, IRDA Act 1999 and General Insurance Business
Nationalisation Act 1972. The government justified the Bill saying that some of
the provisions in these three Acts had become archaic and need modification to
meet requirements of the modern insurance industry. But the real intent was to
further liberalise this sector and place it in the architecture of global
finance capital.
The opposition of the Left to this Bill
and the popular support AIIEA mobilised against this move forced the government
to refer the Bill to parliamentary standing committee on finance for closer
scrutiny. The AIIEA submitted a written submission to the standing committee
and also deposed before the committee to explain its opposition to the FDI hike. The AIIEA also argued against the proposal to allow
the GIC and four public sector general insurance companies to raise capital
through disinvestment. The standing committee came to the unanimous conclusion
that there is no need to increase the foreign capital in insurance industry.
The standing committee observed that “the government seems
to have decided upon this issue without any sound and objective analysis of the
insurance sector following liberalisation”. Cautioning the government of the global financial crisis, the committee
recommended to the government that the private companies may explore avenues to
tap the domestic capital instead of increasing the FDI limits. The standing committee, however, by majority opinion agreed with the
provision enabling privatisation of GIC and four public sector general
insurance companies with Moinul Hassan, CPI(M) MP, being the lone dissenting
voice. In order to allay our fears on
privatisation, the standing committee recommended that the government must
ensure that at no stage the government equity holding in these companies comes
below 51 per cent.
The union cabinet that met on October
4, 2012 rejected the unanimous recommendation of the standing committee and
decided to hike the FDI limit in insurance to 49 per cent from the present 26
per cent. It also decided to allow the GIC and
four public sector general insurance units to raise capital through public
offerings. In a separate move it also decided to
push ahead with the Pension Fund Regulatory and Development Authority (PFRDA) Bill permitting foreign equity into pension funds on the lines
of insurance. In deciding these issues, the government has been advancing the
same beaten arguments again.
The finance minister and the chairman
of Insurance Regulatory Development Authority (IRDA) have been making
statements that the insurance industry is starved of capital and is unable to
grow. Both of them have been projecting that
the industry needs another 5 to 6 billion US dollars to expand the businesses
and increase the penetration level. The statement of IRDA
chairman contradicts its own earlier stand that 26 per cent cap on foreign
equity limits has not hampered the expansion of the private sector. These were
the very same projections made before the parliamentary standing committee on
finance. The standing committee noted that the
projections as per the chairman of IRDA during his deposition are “just an
arithmetic’, ‘not very accurate’ and ‘just a general estimate of where the
industry stands’. The standing committee dismissed these
arguments as lacking sound basis and totally unconvincing. The total capital
deployed by the foreign partners in a period of over 10 years is just a little
over 1 billion US dollars (Rs 6813 crore). The experience of the past 10 years does not justify the expectation that
foreign capital would flood the industry once the FDI cap is raised.
The private companies did not suffer
for want of capital either. All the 41 private
companies in the sector have pan India presence. These companies have been promoted by big industrial and
financial houses. Being the giant industrial and financial conglomerates, they
have access to enormous resources. The experience of the past few years suggest
that the parent companies of the private insurers have been heavily investing
and purchasing businesses outside the country. The available statistics also
suggest that there has been more outflow of capital than inflow. These
companies can tap the domestic resources if infusion of capital is
needed. The rules also permit the companies
with more than 10 years in business to make public offerings. Therefore, the
argument that insurance industry can survive and expand only with the hike in
FDI is untenable.
The life insurance industry in India had been performing exceedingly well
since its nationalisation in 1956. The coverage by LIC even at the time of
opening up of the industry was surprisingly high considering the low per capita
income and lack of disposable income in the hands of overwhelming sections of
the population. It is a fact that the reach and
coverage of life insurance at the time of opening up of the sector was greater
than that in many countries with 5 times or more high per capita income. It was a mere coincidence that the country registered a growth of 8 to 9
per cent in the post opening up period till the economy felt the impact of
global financial meltdown of 2008. The IRDA Annual Report for 2010-11 notes
that premium mobilisation of the life insurance industry is around 4.4 per cent
of the GDP. The life insurance penetration in India compares favourably with the United States 3.5 per cent and Germany’s 3.3 per cent. It also compares
favourably with the global average of 4 per cent. The argument that insurance
penetration is low and therefore the industry needs additional infusion of
foreign capital is just not correct.
The growth of the life insurance
industry critically depends on the levels of incomes, particularly levels of
disposable incomes. The last two years have been very difficult for the Indian
economy. The insurance industry cannot be an exception. The domestic savings
for the year 2011 were at an 11-year low and the financial savings were at a
21-year low. This resulted in the lower collection of premium and also
forced the private companies to close down branches and prune down the work
force. Some foreign insurers like Sun life
have exited India and others like ING are looking to sell their stake. Most of these
foreign insurers are in difficulty in their own countries and their first
priority is to consolidate their businesses there. Even in such difficult
period the public sector performed well. The LIC regained the market share. Its share in premium income in August 2012 is 76 per cent and it has 81
per cent share in the number of policies. The private sector finds it difficult to beat the LIC and the FDI hike
is another attempt to weaken the public sector.
The experience of the past one decade
confirms that the insuring public has not benefitted by the opening up of the
industry. The claim settlement is the final test
for an insurance company. The IRDA statistics reveal that nearly
11 per cent of the death claims are repudiated by the private companies on
average. The LIC holds the best claim settlement
record. It settles 99.86 per cent of the claims
intimated. The IRDA itself has expressed concern
that the lapsation of policies in the private sector is very high. There are
companies with lapsation ratio of over 40 per cent. The LIC has the lowest lapsation ratio of 5 per cent. The IRDA has gone on record to say that insuring public has suffered due
to high lapsation and private companies have been able to earn profits due to
this. This scenario clearly makes a case that FDI hike cannot bring any gains
to the policyholders.
There is no dispute that India needs huge funds for infrastructure
building. But the argument that increasing
foreign equity in insurance will help in generation of funds for infrastructure
is flawed. The experience of the past one decade and more of opening up of the
industry clearly suggests that the private sector has made minimal contribution
to the infrastructure funds. The hype created at the time of opening the sector
that foreign partners will bring substantial portion of their global premiums
into Indian infrastructure has turned out to be totally untrue. It is a pity that this UPA-II government has made development hostage to
foreign capital with the understanding that Indian economy cannot grow without
it. Finance capital is always in search of quick profits. It does not come to any country to express gratitude or help the growth
and economic development of that country. It basically comes for profits. Therefore, to expect that foreign
capital will come into infrastructure projects that have long gestation period
is a totally flawed understanding. Hiking the FDI limits and allowing the
foreign capital gain greater access and control over the domestic savings will
harm the national economy instead.
The insurance industry is facing
serious stagnation in the United States and the West. India has a young population. More than 65 per cent
of the population is below 35 years of age. The country lacks any social security. All this makes India a very attractive market for both
insurance and pensions in the long term. That precisely is the reason why foreign capital wants a greater space
in the financial sector.
The move to privatise the GIC and four public
sector companies is imprudent. These companies are
profit making and have contributed enormously to the nation-building
activities. They are adequately capitalised and have huge assets and reserves.
They are capable of raising resources internally in case they need additional
capital. Privatising them is to hand over the most precious public assets to
the private interests. The public sector needs consolidation instead of
privatisation. The four companies should be merged into a single corporation on
the lines of LIC to help in leveraging the collective strengths to meet the
competition and to carry out the social obligation.
The FDI hike in insurance, foreign
equity participation in pension funds and privatisation of public sector
general insurance companies would harm the national interests and place the
savings of the people in the hands of the speculative forces. These measures
have to be fought resolutely. The public and
political opinion has to be mobilised along with the industrial actions by the
insurance employees to defeat the nefarious games of the UPA-II government.
0 Comments