Long-awaited, necessary

Politics should not torpedo insurance and pension reform

The Union Cabinet has finally mustered the courage to allow 49 per cent overseas investment in insurance and repeat the clause for pensions. It’s unclear how the government will rustle up the numbers to push the legislation through Parliament. But, cheap politics apart, there can’t be any economic logic for opposing the long-delayed proposals. Increased foreign direct investment (FDI) in the insurance sector will lead to neither loss of jobs nor loss of ownership control by Indian entities. On the contrary, it will help bring in more products and hopefully better services for India’s underinsured citizens. In India, total premiums underwritten each year are just about 4.5 per cent of GDP, compared with eight per cent in Japan and 9.5 per cent in Britain. The fact that the insurance sector needs capital is stating the obvious. According to estimates made by the insurance regulator, the increase in FDI limit will attract Rs 30,000 crore in five years, and the inflows are necessary for the sector to grow at 11 to 12 per cent.

On pensions, the amendments will provide legal sanction to the New Pension System (NPS), which has managed the pension contributions of new government employees and voluntary private contributors since 2004. This is good news for its 3.74 million subscribers; the NPS may gain greater traction, with more options, more fund managers and some serious marketing effort. The NPS is supposed to be the answer to the problem of severely underfunded pensions in India — only a tiny 12 per cent of India’s working population is covered by some form of retirement benefit scheme. India’s pension funds constitute less than seven per cent of GDP compared to 100 per cent in the US. In any case, the government has offered a minimum assured return of 8.5 per cent, which should dispel the fears of a vast number of potential subscribers at the bottom of the pyramid. No doubt FDI will bring in foreign players and long-term money that can be deployed in the infrastructure sector, which, according to an approach paper of the Planning Commission, requires an investment of $1 trillion (or about Rs 52 lakh crore).

Some concerns still need to be addressed. For example, several insurance companies in India have not fulfilled existing rural market penetration conditions. Will greater foreign presence solve this problem? And the three-year deadline for questioning mis-statements in policy has led to fears of consumers and companies misusing the provision.