A welfare state for the rich?

A welfare state for the rich?

Rajindar Sachar

The proposed hike in the FDI limit in insurance is an anti-national step

The argument that the increase in FDI in insurance will lead to more
competition and result in better services to consumers is a hoax

The Lok Sabha has passed the Bill to allow an increase in the FDI limit in insurance from 26 per cent to 49 per cent. The Congress and other constituents of the erstwhile UPA government initially opposed it. Ironically, it was opposed even by the BJP when the Congress-led UPA government had proposed it. The enormity of hypocrisy of both major political groups hits you in the eye.

In 1956, to strengthen its position in the 1957 general election, the then Congress government nationalised about 250 private life insurance companies and set up the Life Insurance Corporation, the justification being the interest of small persons. C.D. Deshmukh, the then Finance Minister, said insurance in the developing country must be seen as an essential service which a welfare state should provide to its people and not as a business proposition or additional source of investment to those who put their money in the stock market. The capital contribution of the government in the LIC was a mere Rs 5 crore.

When general insurance was nationalised in 1973, Y.B. Chavan, the then Congress Finance Minister, declared: “This step has been taken to serve better the needs of the economy by securing development of general insurance business in the best interests of the community and to ensure that concentration of wealth does not result in to the common detriment”.

However, in 2002 the BJP government permitted private companies with 26% FDI. In 2011 the UPA government wanted to increase the FDI cap to 49% but the parliamentary standing committee headed by Yashwant Sinha of the BJP had opposed it and the proposal remained on paper.

It is, therefore, intriguing why the present BJP government wants to increase the FDI limit. It cannot be justified by saying that the 49% proposed increase in FDI would bring in more foreign money to be used by India in the road and house building sector. The income raised by insurance companies is all local, the premium which an average insurer pays. The result would be that profits of foreign investors would increase to 49% instead of 26% without the creation of any asset in India.

It is not as if the L.I.C. has not delivered the expected results. Those favouring an increase in FDI falsely claim that it would lead to greater penetration of insurance in the rural backward areas. The government has not announced an inherent conditionality in the Bill that these companies would operate in rural areas so as to get 75% of the total premium from rural areas and a failure to do so would invite a penalty. In fact, the private sector in insurance is not interested in life insurance business because of lower profits. This is shown by high lapses of life insurance in the case of private companies ranging from as much as 36% in some cases to 51%, while the L.I.C. has only 5% lapsed policies.

The penetration of life insurance in India under the L.I.C. (3.4 per cent) compared favourably with the USA (3.6 per cent) and Germany (3.2 per cent) in 2011. The same situation prevailed in 2012 - India (3.2 per cent), Germany (3.1 per cent) and the USA (3.7 per cent), which have private life insurance companies.

The argument that the public sector is a drag on the economy is a calumny. In the USA, one private life insurance company goes into liquidation every month. Over 370 general companies became insolvent during 1982-2000. Even Lloyds of London, supposed to be the last word on stability and solvency, suffered a loss of over $38 billion in 1991.

The lesson to be drawn from the economic crisis in the USA and Europe is clear, namely, that it were the oligarchic financial institutions that were chiefly responsible for it. The latest financial disaster in the USA relates to the case of J.P. Morgan Chase Bank, the largest in the US by assets, which faces multiple investigations and a $5.8 billion loss on wrong bets on credit derivatives. Ironically, both the UPA and NDA governments still feel that the talisman for growth is in permitting these very foreign insurance firms and banks into the Indian market.

The loss that government funds are going to suffer will be immense. Before 2002, when private insurance was again permitted, vast sums were paid to the government. The LIC made an investment of Rs. 7,000 crore in the Sixth Plan and Rs 56,097 crore in the Eighth Plan. A sum of Rs. 30,000 crore of insurance funds was earmarked for infrastructure development as part of the Ninth Plan. It distributed to policy-holders a bonus of Rs 2,250 crore in 1992-93, which rose to over Rs. 3,700 crore in 1996-97.

In a developing country like India, the public sector is the only instrument through which the social sector can be strengthened. The gross direct premium even in general insurance projected for the year 2030 is Rs. 13,000 crore. No amount of this fund will be available for public use if privatisation took place, but the money would go to private investors.

The increase in FDI is falsely projected as bringing in new techniques to increase the funds available. The argument that the increase in insurance FDI will lead to more competition and result in better services to consumers is a hoax. The reality is that in 2000 there were 3,500 general insurance companies in the USA but only 15 (0.4 per cent) of them controlled 50 per cent of the market. Six per cent together control 95 per cent of the business. So cynical is the slogan of competition in a private economy.

In the USA in the nineties a Senate sub-committee report on rising insolvencies of insurers, submitted to the House of Representatives, detailed the “scandalous mismanagement and rascality of private operating insurance companies and ill-effects of frauds and incompetence leading to bankruptcies among 50 large-sized companies in the course of the last five years”.

Insurance is not a sophisticated industry which may require the involvement of multinationals in order to obtain technology. We should heed the warning given by the U.N. Under Secretary General for Economic and Social Affairs, “the world’s economic system was alert enough to protect the rich but too tardy to protect the poor and that the goal was not to have a global economy that ended up as a welfare state of the rich. Rethinking was needed on how to make the system more equitable and mindful of long-term concern”.