The Government
has finally come out of a policy paralysis. The second phase of the reforms in financial
sector has been launched amid political fluidity. Insurance sector is opened up for 49 % foreign
direct investment while pension sector is also up for foreign participation. Financial
sector opening is a long pending reform and given the dearth of money in
financial sector, undoubtedly it is a major step. Despite the significance of these measures,
context of this opening is somewhat different now. Global financial conglomerates
ie banks, insurance and pension companies have lost their credibility during financial
sector crisis in Europe and America. Opaque functioning of financial companies
is under criticism and doubts have surfaced about safety of hard earned savings
of public. Therefore one must not go berserk over swanky news-headlines but to look
into the safeguards being taken by Govt under these reforms..
The second
phase of financial sector reforms consists of two pronged strategies. First the
further opening up of the foreign investment via increasing FDI limit to 49%
from 26% and second, creating an enabling regulatory environment for further
expansion of insurance services. Under
the first measure of reform, the Govt. has outreached the dictate of
Parliamentary Standing Committee on insurance reforms. This committee had
recommended that FDI limit must be capped at 26% but cabinet has decided to
increase it to 49%. The pension sector is also opened for foreign investment, although
private pension market is yet not developed in India. Savings of government employees are the
largest chunk of India’s pension business. Interim pension regulator is given
statutory powers to kick start private competition in the business of annuity
savings. Second set of measures taken by Govt. is in form of an overhaul of the
regulations pertaining to insurance sector. It includes expansion of group insurance
to non-employees and dose of tax breaks to the insurance savings.
India’s
private insurance industry is now ten years old and in the need of an investment of
Rs. 72000 cr. in order to expand its
business. This step, if approved by parliament, will pave the way for influx fresh
funds in India’s financial services industry.
If reforms
are powerful and long term the fears are not less substantive either. Financial companies have played a havoc in
global markets through their irresponsible business behavior. The disastrous
consequences of the banks and insurance companies investing in speculative
activities are not unknown. Numerous examples can be given where they have burned
the savings of common men due to their greed for making more money. These
money-minting approaches of banks and insurance companies have created the real
estate bubble in different parts of the world caused in a global financial meltdown.
This has resulted in an exceptional tightening of regulation related to financial
services. India’s fresh reforms must be analyzed in this context.
The opening
up of insurance and pension has been supported and disapproved by different sections
of the society. New measures are being criticized by the political standpoint
only. We need to ponder over the pros and
cons of insurance sector’s opening. The fine-prints of these reforms have to be scrutinized closely to understand the possible impact. India needs an open and vibrant
insurance market as majority of the population is deprived of financial security.
But reform must come with impeccable safeguards to preclude the possible greedy play of banks and insurance companies,
as has occurred in developed markets.
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