Home / Opinion / We need products that help us make money, not lose it

Since this is the pre-budget lobbying season, here is a pitch for an investor-friendly product that also collects money for the government. At the moment, banks and insurance companies are the octopus arms of the government that suck money out of households, destroy purchasing power with negative returns and hand over the money to the government to finance its deficit. I looked deeper into the numbers and found that the investment of just life insurance companies in central government securities as on 31 March 2013 was a huge 5.1 trillion, or 5% of gross domestic product (GDP), for that year. Another 10 trillion is in “state government and approved investments" and “approved investments"; and another 2 trillion in “other investments". The total investment by life insurance companies as on 31 March 2013 stood at 17.44 trillion. Given that the total premium income of all life insurance companies was 2.8 trillion for the year, the investment number must be the cumulative figure held by life insurance companies as on 31 March 2013.

It would be an under-statement to say that data reporting in the Insurance Regulatory and Development Authority’s annual reports is opaque; one has to figure out the data as one ploughs through the reports.

But coming back to the way this data is reported. I tried to find out what is included under the head “approved investments" and “approved securities" and had to go all the way back to the Insurance Act of 1938 because the subsequent Acts—specifically the Insurance Act of 1999—and circulars, all circle back to the original Act drafted during the British rule. In fact, if you read the Insurance Act 1938 in the context of an alien power setting up rules for a captive country, some of the regulations begin to make sense. The 1938 Act was put in place to suck up liquidity from households and handed over to the British government. Para 27A. (1) that enumerates “approved investments", states: “No insurer shall invest or keep invested any part of his controlled fund otherwise than in any of the following approved investments, namely: (a) approved securities; (b) securities of, or guaranteed as to principal and interest by, the Government of the United Kingdom;…" the list goes on for a while, but the key destinations for the money are right up on top. Not unlike the police force that was put in place to control the natives, the Insurance Act puts in place a system to draw money from households and turn it over to an alien government. To help with this was a commission structure (also in the 1938 Act) that can only be called bizarre—40% of the first-year premium is to be handed over the seller for his efforts. With such a high incentive to sell, is it any surprise that the insurance industry premiums in 2012-13 were at 3% of GDP?

Though the Insurance Act was rewritten in 1999, read it closely and you can see the constant references back to the 1938 Act. A cosmetic change has taken away the subsection (b) mentioned above, but the spirit and the intent of the Act remains the same. How to move cheap money from households to the government. And that end has been achieved—life insurance companies own a total of at least 7 trillion of central and state government securities.

It is understandable that the government needs money to run itself, especially when direct taxes meet less than 30% of the government expenditure and indirect taxes another 20%, but there is a hole the size of almost 40% of the spending that is filled by market borrowing through selling government bonds. Who buys these bonds? The captive market is insurance companies and banks that give sub-optimal returns to the investors. The only way out of this is to cut away the wasteful expenditure of the government and expand tax revenues so that the systemic loot of the household stops.

And while we get there, here’s a suggestion for the finance minister. Yes, you need the money from households, but does it have to be in products that give us negative returns, post-inflation and -tax? Make the consumer price index-linked inflation indexed bonds work for the household. The bonds as they are today serve neither the purpose of a lump sum investor who is seeking a regular post-retirement income (the cap is 10 lakh and there is no regular income option, these being cumulative bonds), nor that of a corpus builder since the bonds are not available on tap. These bonds have the potential to give a fair deal to the risk-averse inflation-protection seeking investor. Please move the market from the toxic products sold now to products that work for the households.

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

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