Dr Ashwani Mahajan
In the recent past, Government of India has taken some decisions, on which there is lack of political consensus. Decision to open FDI in retail has created an atmosphere of political uncertainty. A major ally partner of the UPA government has not only withdrawn its support but has also started agitation against the government. Though other political parties, supporting the government from outside, are escaping to pull down the government, but are raising voice against the decision of the government.
Now on October 5, 2012, Union Cabinet decided to allow 49% FDI in pension funds and raise the limit of FDI in insurance from present 26 percent to 49 percent. Most of the political parties are annoyed with the government for taking this unilateral decision. Though managers in the present regime are trying to buy support from principal opposition party, Bhartiya Janata Party the same is not seemingly willing to bail out the government from the troubled waters. Within BJP, there is a lot of debate with regard to need for FDI in insurance and pension sectors, and there is a big opposition to the FDI in pension and insurance.
What is meant by FDI in Insurance and Pension
During NDA regime 26 percent FDI in insurance sector was allowed by an act of the parliament ending the monopoly of Life Insurance Corporation (LIC) of India. Since then by 2011-12, market share of private insurance companies has increased to 30 percent in aggregate life insurance premium. Foreign companies set up joint ventures within 26 percent FDI limit. These joint ventures have been expanding their business gradually. However, limit of 26 percent, restricted these companies to have any big say in the decision making of insurance companies. However, with raising the cap to 49 percent, dominance of foreign players in insurance business will increase.
As of today, Indian entities only can manage pension funds. If FDI is allowed, foreign companies could also collaborate with Indian entities and manage pension funds. Government’s argument is that allowing of FDI would not only help present insurance companies to raise more funds, this would not lead to launching of new types of insurance plans and the same would help widening of choice of the customers.
A Dangerous Decision
Entry of foreign companies in pension business, would pave way for routing of people’s savings into the share market. It is no secret that India is a saver nation, with around one third of GDP being saved. A major portion of these savings is deposited in banks, insurance companies, pension, post office saving schemes etc. So far, there has not been any major problem in terms of failure of these institutions or any problem in repaying to the depositors/investors. Even during the worst economic crisis in US and Europe, when their insurance companies, pension funds and other financial structures were demolishing, Indian banks and insurance companies were earning huge profits. Government at that point was proud to claim that since India’s financial system in insulated from the rest of the world, there is no danger to Indian financial institution from global upheavals. Whole world was talking of learning lesson from India, as how to save financial institution in the global turmoil. Now when pension funds and insurance is being opened for foreign players, Indian financial system would be exposed to the dangers from the global upheavals.
Mamata Benerjee, supremo of Trinmool Congress, who has been opposing FDI in pension funds, tooth and nail, has been trying to explain the issue with an example. Mamata Benerjee says that an Indian residing is US, invested in a pension fund from his hard earned money. But when during recession, stock markets crashed, his fund value was reduced to only 50 percent. She further says that this example is not a standalone example. This applies to all those who had invested in pension funds for securing their future. Mamata Benerjee says that government’s act is anti-people. Today returns of pension funds run by global finance companies have gone down to as low as 2 percent and therefore they are trying to look for new posture grounds. JP Morgan in its research paper released in April 2012, has advised these pension funds to invest in Indian real estate market and agricultural estate. Therefore, it in evident that USA’s and European financial system is at the verge of collapse. They are in search of new areas/markets. Government of India is in a way trying to bailout these financial institutions. With opening up of these markets for FDI, these global players will now enter into even those segments of Indian economy, where they are not allowed so far. Opening up of FDI for pension funds and raising FDI cap for insurance would cause irreparable loss for the people of Indian and their savings.
Now savings made in pension funds and insurance would go in a big way into stock market. So far, only those who are willing to play in upheavals of share markets, enter into these markets. However, with new policy, even those who are not willing to expose themselves to the upheavals of stock market, will also be subject to these risks. Therefore, investors who want to secure their future by pension funds would be more insecure now.
It may be interesting to note that in USA, share of pension funds in stock markets was hardly 20 percent in 1978, which has increased to 50 percent now. During this period share of banks in stock markets have declined from 57 percent to only 30 percent now. Slowdown and crashing of stock markets have caused depletion of asset cover of pension funds, which was 108 percent in 2007 has reduced to only 75 percent now. US model of Pension Funds’ investment in stock markets has proven to be disastrous and caused havocs for the people at large. S & P 1500 losses of pension funds have reached 520 billion dollars so far. In addition, the US government disability programme fund is projected to exhaust in 2016, the Medicare funds 2024 and the social security reserves in 2033.
Proposals to introduce FDI in pension and raising FDI cap in insurance would lead to more uncertainties and common people money, that was much more secure earlier, thanks to stability of our financial structure, would no longer remain secure.
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