Follow us on

|

Little risk, higher return

Print edition : Nov 02, 2012 T+T-
C. Rangarajan addressing the 30th Skoch Summit in New Delhi on September 18.-RAMESH SHARMA

C. Rangarajan addressing the 30th Skoch Summit in New Delhi on September 18.-RAMESH SHARMA

Interview with Dr C. Rangarajan, Chairman of the Prime Ministers Economic Advisory Council.

Dr C. Rangarajan, Chairman of the Prime Ministers Economic Advisory Council and former Governor of the Reserve Bank of India, speaks about the proposed reforms in the insurance and pensions sectors in a measured, cautious tone. He said that the main opposition Bharatiya Janata Party (BJP) had earlier supported the move to raise the cap on foreign direct investment (FDI) in the insurance sector. As things stand today, legislative action is required, he said, adding that the United Progressive Alliance government would talk to the BJP to ensure that the Insurance Laws (Amendment) Bill, 2008, and the Pension Fund Regulatory and Development Authority Bill, 2011, got parliamentary approval. Excerpts from an interview he gave Frontline:

In what way will enhancing the cap on FDI in insurance to 49 per cent against the present 26 per cent help Indians, particularly when the insurance product is bought by a tiny minority across the country?

We have permitted FDI to a significant extent in the banking industry. There is no reason why the other segments of the financial sector should also not get the same treatment. The induction of larger FDI in the domestic insurance industry will help it to grow faster. Everyone recognises that in terms of both life insurance and general insurance, there is need for much greater penetration in the country today. To the extent to which FDI will help expand the insurance industry, it is also good from the point of view of financial deepening in our country. There is really no adverse consequence of foreign investment coming into the insurance industry.

The foreign insurance companies are well established and have deep roots in their countries. They have helped to widen the insurance industry in their countries. Therefore, the country will benefit from the technical inputs that foreign insurance companies can provide. On the whole, FDI in insurance and increase in their [foreign insurance companies] stakes in India will help strengthen the Indian insurance industry. Both the insurance and pension industries in the country are well regulated. We have strong regulators in relation to both. They will ensure that the products that are made available, and the efficiency with which the products are sold, will be monitored by the regulators. Therefore, the possibility of foreign insurers exploiting Indian situation does not arise. On the other hand, the strengths of the foreign insurers can be mobilised to further the financial inclusion objective of the country.

Apprehensions exist that the sweat and hard labour of the workers, which helped in building their nest egg for the evening of their lives in pension funds, would be lost in the bubbles of equity markets if the pension portfolio managers invest in bourses. What is your view on this justifiably vexatious fear?

Well, as far as the portfolio policy of pension funds goes, I think a choice is given to the subscribers under the New Pension Scheme, wherein if the subscriber does not want the funds to be invested in equities, this can also be taken care of. On the other hand, if the subscriber wants investments to be made in equities, it can also be made. There are limits that can be set by the Pension Authority. Therefore, the interests of pensioners can be easily taken care of. It is not true that over the long term, investment in equities has not been beneficial. It is well known that over a short period of time stock prices fluctuate where there could be gains as well as losses. Over a long period, it has been beneficial. With the proviso that the choice still rests with the pensioners, the Act should permit the possibility of funds being invested in equities. Once the choice is there, the pensioner can decide what he wants to do. Some pensioners might want to take a slight risk, even though I would argue that the risk is very little and the return is higher than from other investments. It is important to take in the interests of the pensioners, as this is their hard-earned money. The Pension Authority should have appropriate regulations regarding the investment policy for pension funds, but allowing a small portion of the funds to be invested in equities should not be ruled out.

G. Srinivasan