Economic Highlights
New Delhi, 5 October 2012
FDI In Insurance, Pension
NO GAIN FOR AAM
AADMI
By Shivaji Sarkar
The slew of
reforms introduced by the Government has caused euphoria and at the same time
raised a basic question whether it is a decision to shore up political fortunes
or economics. The Opposition parties are slamming the decisions saying that
these have been taken under the influence of large corporate and some western
powers. At its end, the UPA-II maintains that these are only to give the
economy a push and invite the much-needed investment.
The decisions
to clear the 12th Plan target of 8.2 per cent growth, creation of
infrastructure debt funds, Companies Bill amendment, and increase in powers of
Competition Commission are being projected as the Government’s serious intent
to give the right direction to the economy. The Cabinet’s decision on Thursday
last, to raise stake of foreign direct investment (FDI) in insurance and
pension sectors to 49 per cent against the Standing Committee of Finance’s
advice of 26 per cent has raised a storm as it comes soon after increasing the limit
of FDI in retail.
The Left
Parties led by the CPM have rejected it. The principal opposition party, the
BJP, against the usual expectation has not announced any unequivocal support
and the Trinamool Congress is gearing up to table a no-confidence motion. Even
Congress ally, the DMK is circumspect.
Insofar as
the industry is concerned, it is not as euphoric as it should have been. FICCI
Vice President Naina Lal Kidwai, who is also country head of HSBC Bank,
responded with “It’s not euphoric yet. We have only turned to be hopeful”. Many
others too from the industry are sceptical. The reason being that except for
FDI in retail, each of these decisions needs Parliament’s nod.
The industry
apprehends it would lead to pandemonium and whatever the UPA-II is proposing
would remain on paper. In fact, it might create the base for acrimonious
political exchanges in the run up to the State and 2014 parliamentary
elections. In all, there are 200-odd insurance amendments and according to
Ashvin Parekh of Ernst and Young many of these may be deadlocked in Parliament.
All this,
raises a basic question whether the country is in need of investment or not.
Most industry experts answer in the affirmative and that FDI is more than
welcome. The money is required for infrastructure projects and is not easy to
come by. The Government’s creation of infrastructure debt tools are cited as
the basis of requirement for ports, airports, roads and other development
projects.
However, as
both the industry and Government feel happy about the developments, the country
has yet to take lessons from the failure of the western economies and the
unethical practices of the private insurance in the 1950s, which forced the
Government to take over the insurance business at a time when it was not even
prepared for it. Crores of people had lost their investments with the insurance
firms, which gobbled up the poor investors’ money those days.
However, it
is argued that with regulators this is no more possible. But only recently the
IRDA has come out with a study to virtually state that it has limitations. How
else can one explain the insurance companies in a short span of operation would
appropriate over Rs 1 lakh crore funds of the common insurers?
Obviously,
the Government has not taken note of the IRDA report. It has also not so far
stated whether the minimum guarantee of return, as suggested by the Standing
Committee, would be ensured or not. This is a basic necessary safeguard the
Committee has considered not only for ensuring a return but also to protect the
principal amount.
Any proposal
for FDI without these basic safeguards is fraught with risk. The insurance
companies all over the world have low credibility rating after the Lehman
Brother and AIG –one of the largest US insurers, scam of 2007-08. The US administration
itself has indicted AIG, though it helped it with a bail-out package. Let’s not
forget that millions of US insurers lost their deposits in several insurance
and pension funds and became paupers.
Now it
appears that it will be mostly these infamous companies which are expected to
come with FDI. Would it not throw the Indian investors to the wolves? The
opposition of some of the political parties is based on this fundamental issue.
This apart,
the Government’s new pension scheme funds are tipped to be invested in these
funds as well as the volatile stock market. Each Government employee is
contributing 10 per cent of his earnings to New Pension Scheme (NPS) since
2004. Indeed, this is bait for these companies. But the NPS has fine prints. It
always says that fund management is subject to risk. And, the Government does
not guarantee return. It is uncertain whether the principal amount would remain
protected after 20 years.
Clearly, this
calls for introspection. There is too much at stake. It virtually holds the
future of a generation at ransom. The previous US administrations were advised by
people such as Bernard Madoff, who led the New York Stock Exchange to collapse.
They had also encouraged the US
government to give a free hand to pension funds and insurance. And, the
regulators miserably failed there.
It appears
the similar logic is working in India
also. The country needs investment but it should not be at the cost of the
investors. The impact of schemes such as pension funds takes time to realise.
The opposition to such dicey schemes is but natural.
Further,
there is another flip side. These businesses rake in huge profits through
siphoning and book management. The repatriation of funds would be at a high
level. The money that is being sought for infrastructure through these funds
may possibly never come for the purpose except in some isolated cases. It is a
high risk investment for India.
This apart, the insurers are supposed to reinsure with public sector insurance
companies. This would result in their losses being virtually hedged by the
Indian insurance sector.
The supposed
benefits are more for mass consumption. Every single individual would have to
check the credentials of each of the companies and their schemes. The benefit
to the country would be minimal, if at all. The argument that the companies
need higher stakes is not based on firm realities. They are expected to raise
more funds here. But as they would have 49 per cent stake officially, they
would be able to repatriate funds at a higher level.
In such a
scenario, expecting a higher growth during 12th Plan would not be
easy. It is also necessary to understand that many private insurance companies
have reduced their exposure as their businesses are not growing as per their
expectations. The companies abroad are obviously watching these moves. Thus, in
reality the extent of investment may not be as high as is being projected. The
common man even otherwise has little to gain. The FDI is an expensive
proposition and may well add to the cost and inflationary tendencies. What use
then.--- INFA
(Copyright, India
News and Feature Alliance)
|