Liberalising Insurance And Multi-brand Retail: A Gamble?

Posted on July 19, 2011 in Business and Economy

By Ankita Rastogi:

India is in the wake of another crisis, as it was in 1991, when it had availed of its first lease of liberalisation. Today, India is in the throes of galloping inflation that has struggled its reigns free, beyond the reach of the common man. In view of this situation, the Government has tried out various permutations and combinations of the fiscal and monetary policy and now wants to resort to liberalisation of multi-brand retail and the insurance sector to curb inflation that has a major contribution from food inflation.

Presently Foreign Direct Investment (FDI) is allowed in single-brand products upto 51%. Cash and carry is also fairly conducive to foreign investments. As regards the insurance sector there is a statutory limit of 26% which is allowed on obtaining a valid license from IRDA. However, the government is considering a surge in Foreign Institutional Investment (FII) to 49%, inclusive of FDI (according to recommendations of the Lahiri committee report). The government has already announced liberalisation of multi-brand retail chains initially in the six metropolises Delhi, Mumbai, Kolkata, Chennai, Hyderabad and Bangalore.

This was a much awaited step in the world economy as the US economic, energy and business affairs additional secretary-Jose W Fernandez was heard saying “US companies to invest in India would be helped by allowing US firms to operate in some sectors that have so far been difficult for them to operate in, like insurance. There are a number of sectors where the US investment would get facilitated…multi-brand retail could be one.” at an Indo-American chamber of commerce conference in March this year.

It is also noteworthy that the Inter-Ministerial Committee headed by Chief Economic Advisor, Kaushik Basu recommended that opening the multi-brand retail sector to FDI in a “calibrated manner” would increase the FDI and tame inflation. According to the committee report there is a considerable difference between farm-gate prices and the prices consumers have to pay in the market. With the entry of foreign players into the market there shall be a step up in competition and the market prices shall plummet. The report says that in contrast to the retail markets of Japan, China, Malaysia and Indonesia that have 66%, 20%,55%,30% organised retail markets, India’s organised retail consists of only 4% of the entire market. Which is why the authorities are assured that monopolistic tendencies in the market shall phase out with the entry of foreign players into the market; yet the report cautions that the presence of a large number of players is a must in the market at all times.

Other factors to be monitored are the leasing of land for projects which should be done keeping in mind the access of land, population size of the settlement and the city’s zoning plans. The allocation needs to be done in a way that the native retail players and the new entrants co-exist in the market, or else there would not be incidence of competition amongst the two.

Also it would be a matter of ministration that farmers are receiving remunerative prices and are not being exploited at the hands of the retail players. The incidence of competition would eliminate middlemen, thus making price determination more transparent. Transnational companies like Wal-Mart, Carrefour and industry chambers have long been interested in such investment in India. Liberalisation shall ensure that farmers receive export prices and also that the grading and sorting facilities are upgraded since no player would like to reduce its profit margins by wasteful storage.

The insurance sector was liberalised in 1999 with the institution of IRDA, which, as the regulatory body, was responsible for granting licenses to the participants in the market. Now the Government wants to step up foreign investment in this sector leading to expansion of the sector towards reinsurance. That is, the existing market players might opt for insurance cover of larger foreign insurers against bankruptcy. Also the relatively unexplored terrains of investment in commercial cropping may lead to better development of the country since the agriculturalists of the nation who account for 52% of the population and their income that accounts for 16% of the GDP shall be ensured against the uncertainty of the monsoons.

Advantages apart, there are some prospective drawbacks in the proposed liberalisation, the most important amongst them being the difficulty in decoupling the economy from the world in times of distress in the world economy. That is to say that the ease with which the Indian economy was able to withstand the global recession in comparison with other nations may not be an occurrence in the future. Also the government must stand firm to witness structural unemployment in the short run and would need to monitor that unemployment does not spill over in the long run and impede economic growth. Competition shall particularly affect the insurance sector, since, till now the foreign players who wished to invest in the Indian insurance sector had to tie-up with Indian insurance companies and invest 26% of the total company capital which shall no longer be the case. With 49% FII stake the foreign say in the operation of the insurance firm would be much more substantial.

Also liberalisation will make the domestic economy more vulnerable to global market precariousness. Diplomatic relations between nations would have much more bearing on trade relations and vice-versa as is the case with the trade ties between China and America. Greater extent of foreign investment shall also require a cleaner float of currency and shall lead to fluctuations in the external value of the rupee. Foreign investments may crowd out Indian private investment causing distress; therefore there is a need to keenly study the after-effects of further liberalisation of the various sectors of the economy. Moreover, excessive import or export may bring in deflationary or inflationary tendencies in the economy respectively providing some respite to domestic investors but the relative size of these effects and counter effects is important, to know how exactly the liberalisation would affect the economy. Though, liberalisation will usher in advantages for the economy it will be possible to reap the benefits only if the liberalisation is carefully monitored. That though looks quite unlikely given the frequency of misgovernance and the spate of nepotistic corruption tales.

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