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For a few dollars more

The gains from FDI are some way off, but they could be considerable. The social benefit of universal insurance and pensions is its USP, writes Dipankar Bhattacharyya.

india Updated: Oct 07, 2012 22:33 IST
Dipankar Bhattacharyya
Dipankar Bhattacharyya
Hindustan Times

The industries opened up to foreign investment in the past 20 days produce less than a tenth of India's national income. On the face of it, this number is too small to justify the opposition to foreign direct investment (FDI) in supermarkets, airlines, insurance and pensions. Or the government's resolve to open these businesses to foreigners with or without majority control.

The picture changes when you see how fast these sectors have grown - in the range of 10-30% - after they received their initial dose of capital from Indian companies. Twice as many Indians flew in 2011 than in 2006 and they doubled their insurance premiums over the period. Indian supermarket chains have been clocking growth rates in excess of 20% a year. Pensions, even in their antiquated defined-benefit provident fund avatar, are also trotting along at 10%.

The fact that a chunk of industries desperately in need of financing can outrun the services sector overall and leave farming and factories far behind will naturally make any government sit up and take notice. Manmohan Singh's government, whose re-election strategy centres on redistributing the growth dividend among voters, can thus explain its preoccupation with opening up these sectors to money that is not available in the country.

Pan out a bit more and the FDI logic comes into sharper focus. One in 10 Indians flies in a year while every American rides a jet plane once every six months. For every five people who shop in a supermarket, there are 95 that stock up on groceries from the local kirana. Three-fourths of the population do not have their lives insured, and four in five workers have no pension. The scope to grow each industry is staggering.

But these are just numbers that somebody can profit from. There is a human side to it as well. It shows up in the fact that individuals pick up the tab for two-thirds of the country's Rs. 300,000 crore medical bill. An Indian today will very likely have to borrow money for hospital costs of his family members. Or take the farmer who must dump his crop on the highway because the refrigeration that would keep it fresh is not there. He's staring at ruin too. Then again, life is a little less kind to a widow without a pension than a poor working lad.

The social benefits this clutch of service industries provide go into the making of a modern welfare state. This has to be the main argument for removing their fetters. Opposition to foreign capital is based on the question of who gets to pocket the profits by providing these services. It is blind to the counter-view that these services won't be available unless someone finds it worth his while to provide them. A state incapable of footing the bill for universal insurance and pensions must reconcile itself to watching money leech away from the poor as they spend on their health and old age. So much for being Robin Hood.

Scaling up social security, organised retail or aviation to cover a sixth of mankind is daunting. It takes deeper pockets than those of our corporate czars. Indian capital is finding it difficult to deal with the current growth rates of aviation and insurance - most companies in these industries are losing money in a ruthlessly competitive market. If the tempo is stepped up, the horizon for return on capital needs to move outward. Foreign investors have the staying power that turns an airline or an insurance company profitable. But they are fighting fires at home and may not immediately rush into new markets like India despite its enormous potential.

Aviation has been open to FDI for some time now - the September relaxation allows global airlines to buy into local ones up to 49% - but the regulatory environment that governed fuel prices and bilateral flying rights kept investor interest low. With policy being turned to making Indian aviation more competitive globally, some of the concerns may ease.

Insurance is sorely undercapitalised a decade after foreign insurers were allowed to buy 26% in Indian start-ups. Mounting losses kept the joint ventures out of the stock markets while the foreign partners had to sweat it out till they could raise their stakes to 49%. This should change once the enhanced FDI limit kicks in and the insurance regulator estimates that the industry may get enough capital to keep it growing at 11-12% for the next five years.

Retailing has drawn the toughest opposition and foreign supermarkets face the prospects of geographically restricted rollouts and policy reversals at the state level. These are considerable hurdles. Yet, even a partial rollout can demonstrate to the consumer and the farmer the benefit of a modern retail industry. Some of it is already on display in the local ventures but the big difference will come about when food moves through refrigerated supply chains.

With the insurance and pensions bills having to clear Parliament, gains from the UPA's boldest reforms gambit are quite some way off.

First Published: Oct 07, 2012 22:15 IST