The Government of India, in an attempt to showcase its allegiance to neo liberal reforms, has announced a slew of proposals to allow for increased Foreign Direct Investment in Retail, Insurance and Pension sectors. While this has attracted accolades from the India Inc., it has also come for significant criticism from large sections of the people. Why do these sections oppose FDI, especially when there is a growing need to increase Foreign investment in a climate of economic slowdown?
Here is an interview with Mr Swaminathan, Gen. Sec, South zone Insurance Employees Federation (affiliated to the AIIEA), who helps us understand the economics and politics behind these policy decisions.
Why oppose FDI in Insurance and Pension?
Pension and Insurance sectors are very important to national economy. These are two areas of long term savings. While insurance covers the risk arising out of early death or other untoward incidents, pension covers the cost of long life. Together they provide the minimum social security net in a country that does not have a state funded social security cover for its citizens.
These savings, given their long term nature, are very useful for investment into infrastructure projects which have a longer time for return on capital. For example, Life Insurance Corporation (LIC) of India has contributed Rs 7.4 lakh crores for government investment in the last Five Year Plan period alone. 28% of the railway finance investment has come from LIC. Such investments are very important for the overall national growth and this is why we oppose the privatization and the further intrusion of foreign capital into this vital sector.
Is FDI in this sector necessary?
Since the Insurance Regulation and Development Act of 1999 came into force, there has been a 26% FDI in insurance sector. This foreign investment has moved towards joint ventures with Indian promoters to set up private insurance companies in India. The total capital invested by the private sector amounts to Rs 29000 crores with the FDI component around Rs 6300 cr. This forms an insignificant fraction of the total revenue generated or the investment made by the nation every year. Further the investments made by Indian capitalists overseas (for example the TATA Corus acquisition was valued at Rs 55000 cr) are far higher and they are not in need of additional capital.
In the 12 years since opening up the insurance sector to private investment (including 26% FDI), Indian capital has gained enough experience in running the sector and there is no significant transfer of knowledge and technology that the foreign companies bring into this sector. They only reason why the Indian corporates are pushing for this is because they want to gain access into the European and north American markets and the further opening up of Indian financial sector is a quid pro quo.
The three reasons for privatization that were made in 1999 at the time of IRDA act was that a) it will improve penetration b)it will increase product innovation and c) it will enhance claim settlement. These were to enhance customer satisfaction and help mobilize resources better. But the experience of the past decade of private operations has proved beyond doubt that the public sector insurance companies and especially LIC ranks far better in all three dimensions. The average policy value at LIC is by far the lowest. We have 40 crores policies. This proves that LIC ranks far better in penetration. LIC is the foremost in providing a social cover to families in India. Secondly all new insurance products that have emerged in the past decade have been pioneered by LIC and GIC except Unit Linked Insurance Policy (ULIP) scheme. When it comes to claim settlement LIC ranks first with a 99% claim settlement ratio on maturity and 97% claim settlement ratio overall. But the private companies together have a claim settlement ratio of about 86%.The claim repudiation rate for private companies together is around 10% while LIC has a mere 1%. In Insurance trust is the most important brand value and we have gained it.
Thus I don’t see any public good coming out of increasing FDI in this sector, the gains are private.
What is the danger of FDI in financial sectors?
Insurance as we discussed earlier is a foremost instrument to mobilise long term savings from individuals. This has to be utilised in improving the economic and developmental fundamentals of the nation. Insurance should be a national monopoly especially in developing nations. But the privatization and further opening up to international capital has led to increased investment of savings in non-core sectors with high rates of return and also in secondary markets through ULIP. While the returns are high in the secondary market, the risks are higher and the investment is not productive.
Inspite of its other commitments, LIC remains the largest institutional investor in India. Quite often the government seeks the help of LIC to stem the fall in the stock market and to avoid a crash. But LIC diverts only a part of its revenue into stocks.
The other important issue is about cross subsidizing insurance products for the lower income groups. Public sector insurance companies have ventured into and are mandated to provide products for high risk sections as well. The loss due to covering high risk categories is made up from the rest of the sector. But the private companies have no such mandate allowing them to garner the market share in the low risk – high gain segments This has a significant impact on cross subsidization for example earlier GIC group companies used to the pay Rs 5000/- as compensation (to the state to deliver immediate relief) for every hut (even if not insured) destroyed in fire but today this scheme had to be rolled back.
The third danger from the present bill is that it would pave the way for further opening up of the sector. IRDA act of 1999 stipulates that the government has to gain parliamentary approval for amending the FDI ceiling for the first time and subsequent enhancement s can be made through executive notifications. Secondly this bill also allows for disinvestment of GIC through market route to the extent of 49%. Lastly even while the present regime does not allow for the corporates to invest outside India, we feel that the direction of state policy is towards this end and in that condition it would be a grave situation to have foreign capital dominating a significant portion of Indian savings.
The parliamentary standing committee which included even members from congress and other UPA allies had unanimously rejected the bill in its current form citing that there was no reasons for its opening up, and in the present condition of crisis might not bring in much foreign exchange but will leave the future of the financial sector far more vulnerable to international fluctuations.
It is in this context that we feel called upon to oppose this move by the government.
How do insurance employees perceive this issue?
LIC employees are sensitive to this issue and they fully understand why this move should be opposed. Government of India, in 1999 presented so many reasons why the limit should be held at 26% but now they are upping the scales. It is clear that the drift of state policy is towards full capital account convertibility and deregulation of financial markets which is a grave danger. Further our outreach and public contact programmes on this issue, which helped us gather 1.5 crores signatures across India against privatization and FDI, has given our employees are even better view about how the public perceive LIC and GIC.
We have not been able to make any inroads into organising the private sector employees and this has been a serious drawback. So we cannot comment on how they are looking at this issue.
What are the plans for future action?
Presently we are concentrating on grass root level campaign against FDI in general. In this regard we are running a joint campaign with the Vannigar Sangam led by Tha. Vellaiyan in Tamilnadu against FDI policies. We have realised through our political experience that workers actions that happen without a larger campaign tends to fall apart or not achieve the necessary public support. Even a indefinite strike without a good outreach will be in vain, while a one day strike after a significant level of campaign will win us good reward. Thus our present focus is on the grass root level campaign. But we have decided that as and when the bill comes for discussion in the parliament we will go on an indefinite strike.