Shivaji Sarkar
The slew of measures taken by the Government on foreign direct investment (FDI) is caused euphoria and anxiety. Would it really benefit the common man if FDI ours in insurance and pension funds? This is a question that is rocking the minds of political pundits and a common investor.
The western economies have suffered the worst crisis particularly in the pension funds and insurance linked to share market equities. In the US, the exposure of various instruments to share market account for 55 per cent of the GDP. India so far is a safe bait with less than 3 per cent going into stock exchanges. Globally, as the latest conviction of Rajat Gupta of McKenzie and Goldman Sachs in the US, the share market has become a conduit for economic manipulations, siphoning of funds and insider trading is more a rule than exception.
Insurance and pension funds with the largest funds are accused of ruling the manipulations. If these funds have access to India would it not become more vulnerable, ask those who know about these operations.
Political parties are raising questions that the decisions have been taken under the influence of large corporate and some western powers. The Government has said 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 seriousness of the Government to give the right direction to the economy.
The decision to raise stake of foreign direct investment (FDI) in insurance and pension sectors to 49 per cent against the standing committee of finance advice of 26 per cent has raised a storm as it comes soon after raising the limit of FDI in retail.
However, as the industry and government feel happy about the developments, the country has yet to take lesson 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 even not prepared for it.
Crores of people had lost their investments with the insurance companies, which gobbled up poor investors’ money those days.
It is argued that with regulators it is no more possible. But only recently the IRDA has come out with study to virtually state that it has limitations.
Else how the insurance companies would in the short span of operation would appropriate over Rs 1 lakh crore funds of the common insurers.
It appears 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 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 Government itself has indicted AIG, though it helped it through a bail-out package.
Millions of US insurers lost their deposits in several insurance and pension funds. They have been pauperised.
It would be mostly those 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.
Apart the Government’s new pension scheme funds are tipped to be invested in these funds as well as the volatile stock market. Every government employee is contributing 10 per cent of his earnings to NPS since 2004.
It is bait for these companies. But the NPS has fine prints. It always says that fund management is subject to risk. The government does not guarantee return. It is not certain whether the principal amount would remain protected or not after 20 years.
It 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 like 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. 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 like pension funds takes time to realise.
The opposition to such dicey schemes are natural.
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.
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. Each 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 officially they would have 49 per cent stake, they would be able to repatriate funds at a higher level.
In this kind of 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 must be watching these moves. So in reality the extent of investment may not be as high as it is being projected.
The common man even otherwise has little to gain. The FDI is expensive. It may further add to the cost and inflationary tendencies.
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