Evil foreigners, upright Indians and FDI in insurance

Do we see representatives of trade unions and other such organized labour unions come out on the street in “national interest”? Do they threaten to strike work if rapists are not brought to book? Do they burn effigies of airline owners who owe banks millions of rupees and don’t pay their employees for months, while they vacation in their yachts and buy super-expensive stuff for aspiring offspring? Nope. But try doing something that will enhance efficiency, reduce corruption and increase consumer protection in any industry controlled by these unions and see them pour out on the streets to protest. The red rag of higher foreign direct investment (FDI) in insurance was waved in the budget and as the Bill struggles to get passed, the political parties against the legislation have cranked up the organized protests. Trade unions, insurance staff and the Communist Party of India (CPI) have all been active in the past week threatening strikes and worse if the Bill that allows foreigners a 49% stake in insurance companies, up from 26% now, goes through.

There are three strains of argument against FDI in general and FDI in insurance, in particular. The first, in the words of CPI leader Gurudas Dasgupta, as reported in the media, is that private insurance companies have been found to be “delinquent” all across the world except India. His words find resonance in Bharatiya Mazdoor Sangh (BMS) general secretary Brijesh Upadhyay, who said, “BMS has always been opposing FDI, whether it is in defence or insurance sector. More so in the insurance sector, because across the globe it is only in India where insurance companies are standing strong. Look at what happened in the US to AIG during the financial crisis.”

If we examine the statement without frothing at the mouth, and with the unlimited patience of a yogi, we can at a stretch say that these gentlemen and organizations are worried that an AIG-like disaster will happen in India if we hand over control of our insurance companies to these nasty foreigners. AIG, we all remember, went under and had to be doled out by the US government. But what we selectively forget is that AIG went under not due to its ownership by “foreigners” but because insurance regulation in the US is a mess with no single central regulator. AIG went under due to weak regulations and regulator.

The second argument is that India will hand over an industry of “national interest” and the savings of Indian households to foreigners. It is the vintage “foreigners are evil and Indians are awesome” argument (we did invent the zero, after all).

The third argument is that Indian investors will not be well-served by these foreigners, who are all, of course, evil and the Indian insurance industry, agents and staff are the epitome of goodness, efficiency and investor protection. Again, without frothing at the mouth, if we were to examine the argument neutrally, it would be fair to ask this: if it were “foreigners” who were evil, why have Indian mutual funds—some of which are owned 100% by these evil “foreigners”—not crashed the savings of Indians? In fact, if we look at the returns of a such a mutual fund with a 20-year track record, we see that the average annual return on its equity schemes is in excess of 20% a year, for 20 years. And then, it would be fair to ask how the true blue Indian insurance companies, covered in high morals and goodness, including the Life Insurance Corp. of India, defrauded Indian investors of 1.5 trillion by selling them toxic life insurance plans in the past few years? It would also be fair to ask those opposing FDI to demonstrate what return investment plans coming from insurance companies have given over the past 10, 20 or 50 years. The truth is that these are high-cost products that allow the build-up of flab inside the companies, encourage investor-unfriendly business practices and a very clunky claims procedure.

Moving to 49% (why stop there? Go all the way to 100%, I say) with adequate regulatory control is all the protection that policyholders and masses of the country need. “National interest” will be served if the insurance sector gains in efficiency and consumer protection.

The final threat of the lobbyists is a nationwide strike in insurance if the government pushes through the higher FDI in the sector. I wish the government had the courage to say: go right ahead. It isn’t as if you are the water or power or transport or even hospital staff whose absence for a few days will bring normal life to a halt. Anyway, insurance public sector undertakings take over a month to process claims. Now, it will take a while longer. Go ahead and strike work. Burn a few effigies, add to your carbon footprint and then go back to work—or whatever it is that you call passing the six-seven hours you spend in office.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com