The new policy will be in line with that for mill workers, according to which, housing was provided to them at affordable rates on a no-profit-no-loss basis
Certainly, not the common man, unless it is accompanied by stringent regulations to protect the “aam aadmi” from exploitation
The central government has proposed to enhance foreign direct investment (FDI) in insurance to 49% in its second wave of reforms announced recently. At present foreign investment in private insurance companies is restricted to 26% of their capital, which is now proposed to be increased to 49% by passing an amendment to the Insurance Act in the ensuing session of Parliament.
Announcing this decision, finance minister P Chidambaram said “the benefits of this amendment to the insurance act will go to the private sector insurance companies, which require huge amounts of capital and that capital will be facilitated with the increase in foreign investment to 49%.” He also clarified that this will not apply to public sector insurers like Life Insurance Corporation of India (LIC) and the five general insurance companies.
At present there are 44 private insurance companies authorized by the Insurance Regulatory and Development Authority (IRDA) operating in the country. These comprise of 23 life insurance, 17 general insurance and four health insurance companies, since the insurance sector was opened for private sector in the year 2000. These are all joint ventures between the Indian promoters who hold up to 76% and foreign insurance companies who hold up to 26% as mandated by the law.
The insurance business requires additional capital as it grows and this has to come from the promoters. If the Indian promoters are unable to contribute their share of the capital, they will not be able to grow. Foreign companies with deep pockets will be able to fill this gap, if they are allowed to invest up to 49% of the capital. It is estimated that the private insurers need about Rs60,000 crore of additional capital during the next five years. Therefore, the raising of FDI cap to 49% will come handy for the foreign partner to increase their stake in the company, without the local partner having to put matching capital in to the company. The foreign partner will be more than happy to increase its stake, as it will help it get a bigger share of the pie, and will also give it a larger role in running the company according to its ways, by virtue of a higher shareholding in the company. This will, therefore, be a boon to the foreign insurers to come to India in a big way.
This change does not benefit the common man, as he is the target for all insurance companies, whether Indian or foreign, who try to extract maximum business from the gullible public, who are carried away by the sweet talk and tall promises made by the insurance salesmen. In fact they are concerned more about their own commission rather than the welfare of the insured. Insurance business is one where there is rampant mis-selling and the insurance companies go scot free because of a number of conditions included in the policy in small print, but never communicated in advance.
Our country has a low insurance density and every company selling the insurance feels that there is abundant scope to expand its operations and hence this proposal to increase FDI in insurance has been received with great applause by the industry. Only time alone will tell whether this irrational exuberance is justified considering the fact that there is political opposition to this move and this change requires approval of the Parliament.
If and when this proposal becomes a law there is bound to be a great demand from foreign companies to enter our country because of the abundant opportunity provided by the large population and the growing per capita income of our people. During the last twelve years, if over 40 foreign companies have entered our country as joint venture partners, with the increased FDI cap, we may expect another 100 companies to come within the next twelve years. Unfortunately, some of our people are carried away by the foreign names and brands, and that there is a perception among our people that foreign companies are better than the home-grown companies. But the fact is that foreign companies are as bad as or as good as local companies, and insurance business, whether run by Indians or by foreigners has the same objective, as in all business, of maximizing returns to the owners even at the cost of the insured.
It is abundantly clear that mere hiking the FDI cap to 49% does not in any way benefit the common man, unless it is accompanied by stringent regulations to protect the “aam aadmi” from exploitation.
(The author is a financial analyst and writes for Moneylife under the pen-name ‘Gurpur’)
FDI in retail will really benefit us, if it helps the farmers. Today, farmers are starved of infrastructure, logistics and investment. Even the investment schemes are hard to implement. A first-hand view of the reality on the ground
Foreign Direct Investment (FDI) in retail has become a hit topic of debate and discussion. It is interesting to note that all the noises are coming from people who have no stake in either side. People are more worried about which perceived lobby they can incite and whip up passions. And of course, our media is all for it. But what is the reality on the ground?
Over the last three years, I have been fortunate enough to be a part of a horticulture venture (vegetables and fruits) that has brought me in touch with the farmer as well as the consumer. Let me first give you my first-hand views on the issues. Farmers want a better share of the price that the customer can pay. Today, the price difference between what a farmer gets at the wholesale mandi and what the customer pays is approximately 100% or so, on a good day. The big issue we have seen is one of wastages in the output from the harvest to reaching the shelf due to time lapse, improper storage, primitive packing and total absence of post-harvest management. Moreover, the farmer also does not have any infrastructure and has to sell off his produce immediately. When there is oversupply in one locality, the price at the mandi drops disproportionately. The farmer has no flexibility to hold on or even to transport the produce back to his field. Apart from this, farmers suffer from tiny land holdings. This means higher costs of production, transportation and very low financial flexibility. The present format of retail supermarkets does nothing to make the farmer any better off.
To solve the plight of the farmer, infrastructure is required, which includes processing centres, refrigerated trucks, cold storage at the destination and proper storage at the retail outlets. As one of the first players in this field, we have been trying to address the issues, one by one. We buy from the farmer and sell to the supermarket—directly. We pay top mandi price without charging any commission. Since we pick up the produce, the farmer also saves on transport.
Ideally, we should form a farmer cooperative and do something like Amul. That is perhaps the best way. And if a cooperative is well funded, there could be a retail chain that will sell directly to the customer. This would be real reform.
Today, most department stores or supermarkets keep a mark up of around 30% in order to provide for ‘dump’ or unsold stock. Obviously, customers do not want to pick up ‘broken’ vegetables. Proper packaging would help to virtually eliminate store losses and they can reduce the mark ups. Proper handling and infrastructure will not add much to the final prices prevailing today. The farmer will get a higher price and the customer will get better quality, perhaps at the same price.
There is room to drop prices further, if we can succeed in investing in secondary processing. This means that we invest in making concentrates out of broken or mis-shapen vegetables or fruits that do not get sold—make jams, dehydrated produce, etc. Of course, all of this calls for high investment.
It is heartening to see that the government has announced so many schemes for subsidies in this sector. However, obtaining them is a nightmare. The funny thing is that, to get hold of these subsidies, one needs a bank loan sanction first. Forms and project reports are required to be given to the agency doling out the subsidy. In about three to six months a Letter of Intent is issued. Before this is obtained, one cannot start any work on the project.
Banks are shy to lend to the farmer and prefer ‘personal’ guarantees and/or ‘urban’ collateral. Farm land is not considered to be an ‘enforceable’ security. Banks have lost a lot of money lending to the farmer at the behest of the government and have been continually writing off loans. More importantly, the agricultural loans department in public sector banks have never seen a balance sheet. They have merely lent against land, gold or real estate.
Tomorrow: The impact of FDI in retail at the other end of the supply chain—the actual retailers—will be discussed.
(The author can be reached at [email protected].)