India delivers risky
half-promise to overseas insurers By
Swati Lodh Kundu
India's ruling United
Progressive Alliance (UPA) government, led by
Prime Minister Manmohan Singh, has gone through
months of inertia and being bogged down by
political constraints and hounded by its now
former ally, the Trinamool Congress (TMC). Now it
is trying to make use of the last possible window
available for policymaking before the likely
disruptive winter session of the parliament
starts. And how?
Last Thursday, the
government announced another round of reform
measures. While the decisions by the central union
cabinet to clear the new Companies Bill and
approve legislation that aims at deepening the
commodity markets are non-controversial, the
eye-popping decision to approve an increase in
limits of foreign direct investment (FDI) in
private insurance and pension funds to 49% shows
that the government has suddenly
developed a stomach to
fight it out with the opposition with their aim of
re-donning the garb of a reformist government.
However, appreciating the reality that
their policy measures might not pass muster in the
parliament, the government also seems to have kept
its options open, notably in the case of foreign
investment in pension funds, by averring that the
limit would be the same as whatever parliament may
decide for insurance companies. That means it
could be 26% if parliament does not approve an
increase in the cap on foreign investment in
private insurance companies.
These
decisions are not new. Discussion to increase the
FDI limit in private insurance companies started
as early as 2004, when it was decided that the
proposal would be put forward for legislative
approval after the general election was over and
the new parliamentary session started. It’s nearly
been a decade since then and the third election is
now round the corner.
For nearly a year
now, the government made renewed efforts to
kick-start the process, but every time this item
was put up as an agenda for discussion by the
cabinet, their erstwhile ally, the feisty TMC
chief Mamata Banerjee put her foot down and it was
unceremoniously removed from the list as a
discussion item. Now that the TMC has become
history to this coalition following the decision
last month on allowing FDI in the retail and
aviation sectors, the government has enough leeway
to do the needful this time round.
Cabinet
approval to raise FDI limits in pension and
insurance, closely following the previous
decisions to raise the administered price of
diesel and increase the FDI limit on multi-brand
retail, seems aimed at killing three birds with
one stone - (i) allay the fears of credit rating
agencies that India has not given up on reforms
and that economic problems may be exaggerated;
(ii) convince the Reserve Bank of India (RBI) that
the government is committed to the reform measures
and hence the central bank should have a rethink
on its policy of not cutting policy rates, and
(iii) bring back the confidence of the business
investors by showcasing that the investment
climate of the country has improved.
This,
however, is a decision fraught with political
connotations. It is important to note that unlike
allowing FDI in multi-brand retail (which was an
executive decision), raising the FDI limit is a
legislative decision that requires parliamentary
approval.
The difference is that, while an
executive decision can be taken by the government
(without going to parliament for approval) a
legislative decision necessarily means requirement
of parliamentary approval and hence a different
ball game altogether, as it needs the support of
opposition parties to be finally enacted - unless
the government has an absolute majority in both
houses of the parliament.
In this case,
the bill would have to be placed for parliamentary
approval during the forthcoming session - the
winter session - which normally starts in
November/ December.
Will this pass muster?
This seems to be most unlikely. The current ruling
coalition government, ie the UPA, lacks a majority
in the lower house, and the opposition parties are
generally fiercely against raising the FDI limit.
TMC chief Banerjee, who has taken to using
Facebook nowadays, said she will move a
no-confidence motion against the government, which
she believes is in the minority, and that she will
soon meet the president.
She was quoted as
saying in her Facebook page, "Is it the intention
of the UPA government to sell out the country?"
She feels that move on FDI in insurance will make
the lifelong savings of individuals totally
insecure.
Also, it is important to note
that the parliamentary standing committee on
finance rejected the same bill in December 2011.
The committee was chaired by a leading member of
the main national opposition party, the BJP
(Bharatiya Janata Party), and also comprised some
members of the Congress party, which leads the
UPA.
The bill was unanimously rejected,
which indicates a divide within the ruling party.
More importantly, the committee that took part in
the cabinet meeting was comprised almost
exclusively of Congress ministers and that
ministers of other UPA allies were conspicuous by
their absence.
Thus, not only is the bill
likely to meet stiff opposition from the
opposition parties, but even support from existing
allies may not be taken for granted. Also, one
needs to contend with the fact that FDI in
multibrand retail is still a political hot potato,
and the BJP has threatened to prevent the winter
session of the parliament from functioning
altogether, as they did during the previously held
monsoon parliamentary session.
For its
part, the BJP seems to be a somewhat ambivalent
with regard to the increase in the FDI limit for
insurance companies and pension funds. On the
issue of FDI in insurance, BJP spokesperson
Prakash Javadekar was quoted as saying that, "We
are not opposed to FDI in insurance and pensions,
as we created it. Our concern is that many foreign
companies have already invested more than 26%
through debenture-type investments. Now, that will
be converted into equity, so no new FDI will come
in."
Even on the issue of investment in
pension funds, he was reported as saying that the
government has to ensure a sovereign guarantee of
the pension fund so that they can assure a minimum
return of 8.5%. This is important for the
protection of labor interests and also for the
security of the pension fund itself.
Cabinet's approval on Thursday of the increase of the
FDI limit for insurers will be a positive
for the government - but it still may not mean
eventual success for the measure because
parliament will not possibly allow it. More so, if
the Congress fails to do well in the forthcoming
election in the state of Gujarat, which is a BJP
bastion and where the party is led by the Chief
Minister Narendra Damodardas Modi, who is also the
bete noir of UPA chairperson Sonia Gandhi.
In the event that the bill fails to pass
this time, there's no possibility of it getting
passed before the 2014 general election, as next
year onward all the parties will be in election
mode and there will be many more issues to contend
with. This will result in confidence in the Indian
economy taking a big knock.
Swati
Lodh Kundu is a New Delhi-based
commentator.
(Copyright 2012 Asia
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