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After contracting in 2020-21, the Indian economy rebounded sharply in 2021-22, ending the year 1.5 per cent above its pre-pandemic level. This year the Reserve Bank of India expects it to grow at 7.2 per cent, making India one of the fastest growing economies in the world during this period. But the recovery from the pandemic lows has been anything but even. Beyond the headline numbers, there are indicators of the unabated pain stemming from the pandemic and the continuing distress in parts of the economy.
One possible indication of the scale of the distress comes from data on households/individuals who have worked under MGNREGA. In 2019-20, the year prior to the pandemic, 7.88 crore individuals worked under the scheme. In 2020-21, the first year of the pandemic, this number rose to 11.19 crore. While in the subsequent year it dipped to 10.62 crore, the number of individuals working under the scheme remained considerably higher than in the pre-pandemic period. In fact, so far this year, 6.29 crore individuals have already worked under the scheme as compared to 6.21 crore in the entire year of 2014-15. This growing reliance on MGNREGA likely indicates that other more remunerative employment opportunities remain limited. Another pointer to the economic distress at the lower end of the income distribution scale comes from the National Crime Records Bureau report — there has been a rise in suicides by daily wage earners and in 2021, daily wage earners accounted for a fourth of suicides in the country. As this paper has also reported, in 2021-22 over 2.3 crore life insurance policies were surrendered way ahead of their maturity by policy holders — this was more than thrice the number of policies surrendered the previous year. Other indicators point to subdued household purchasing power. As per data from SIAM, in 2021-22, sales of two-wheelers were lower than their 2019-20 levels by almost a quarter. Similarly, as per CRISIL, sales of cars priced below Rs 10 lakh grew by a mere 7 per cent in 2021-22, while those priced above Rs 10 lakh (the premium segment) grew by 38 per cent.
The bigger picture that emerges is one of pain at the lower and middle levels of income distribution. As policymakers navigate the tumultuous global macroeconomic environment, they must be mindful of the highly uneven nature of the recovery, and take measures to address the distress of the most vulnerable.
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A MAJORITY of the top 15 listed PSUs by market capitalisation continued to witness a shrinking of their headcount, an analysis of the annual reports, including for the latest financial year 2021-22 (FY 22), showed. This trend was seen across sectors from banking and manufacturing to energy and minerals.
Barring, SBI Life Insurance and IRCTC, which reported an expansion in headcount during FY 22, and LIC, which has not yet reported its numbers for the year-ended March 31, 2022, all companies in the list have been reporting a decline in the number of employees for the past several years.
India’s largest bank SBI last witnessed an increase in the number of its employees in 2017-18, when it added 71,000 employees following the merger of its five associate banks and Bharatiya Mahila Bank during the year. Even prior to that, the bank was witnessing a steady decline in staff strength. SBI’s subsidiary SBI Cards and Payments too saw a decline over the last three years to 3,774 people on its rolls as of March 31, 2022, compared to 3,967 as of March 31, 2020.
Bank of Baroda has been witnessing a reduction in its employee headcount for the last two years, after witnessing a bump on account of amalgamation of Dena Bank and Vijaya Bank with effect from April 1, 2019. The bank had 79,806 people on its rolls as of March 31, 2022, down from 84,283 employees as of March 31, 2020.
Coal India Ltd employee strength dropped from 2.48 lakh as on March 31, 2022, compared with 3.83 lakh eleven years ago in 2010-11. Power generation major NTPC had also last reported an increase in its number of employees a decade ago. At the end of 2011-12, NTPC had 25,511 employees and since then, its numbers have fallen consistently to 17,474 as of March 31 this year.
Upstream oil company ONGC, which had 27,165 employees as of March-end this year, last recruited in 2015-16. It had 33,927 people on its rolls at the end of March 2016. Privatisation-bound Bharat Petroleum Corporation Ltd (BPCL) has also reported a steady decline in the number of employees since 2013-14. At the end of 2013-14, BPCL reported 13,214 employees — one person more than it had as of March 31, 2012 — and has witnessed a fall to 8,594 as of March 31, 2022.
GAIL India saw a net addition to its headcount five years back in 2016-17, when it reported 22,604 employees. It has since witnessed a fall to 17,828 people as of March 31, 2022. India’s biggest state-owned oil marketing company Indian Oil has been witnessing a decline in employee numbers since 2018-19. It had 31,254 employees at the end of 2021-22, compared with 33,498 at the end of 2018-19.
Ticketing platform IRCTC, which had 1,971 people on its rolls as of March 31 this year, saw a decline in 2020-21 to 1,417 from 1,446 employees in 2019-20. SBI Life Insurance has also been seeing a consistent rise in headcount over the past several years to 18,515 people as of March 31, 2022 from 13,207 as of March 31, 2018.
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Rising inflation has emerged as a key concern all across as it eats into disposable incomes of individuals. Vibha Padalkar, MD and CEO, HDFC Life, told Sandeep Singh that if the inflation is prolonged then it will start hurting demand for savings products too. Stating that the premiums should stabilise now, she also called for the regulator to permit life insurance companies to sell health indemnity as that will allow them to offer innovative solutions to customers. Edited excerpts:
How is inflation hurting the industry and what is the impact of interest rates?
Inflation remains a big concern as it has a bigger impact since it eats into the savings and reduces the disposable income. As disposable incomes reduce, customers react by going for slightly smaller cover or by not covering everyone in the family, etc. If you see the industry numbers, the impact is not much as of now. While there has been some impact on term, it is not so much on savings. However, if inflation is prolonged then it will start impacting savings products too.
As for interest rates’ rise, it is reasonably positive for us. Our transmission is faster and we can pass higher annuity rates. However, the volatility in equity markets is a downside. I think that of the other options to save, insurance continues to do well. The saving quantum itself is, however, reducing.
The industry has witnessed a rise in premium. Do you see it stabilising now?
The premiums have risen mainly for term policies and the rise has been because of pandemic. Even as there is a lot of talk around rise in premiums, I would like to state that the increase in premium over the last 10 years is less than inflation. Reinsurers have suffered huge losses because of pandemic and if they raise the charge, it is difficult not to raise it. I think, it should stabilise now.
How have Covid death claims been for you?
We have settled claims amounting to over Rs 6,000 crore in FY22 but it has now eased off. We settled close to about 4 lakh claims with gross claims of around Rs 6,000 crore and net claims of Rs 4,300 crore. As a sector I would say that even as it was significantly higher, we paid so many claims without looking too much into the clause I believe that money is important if it is timely. For almost all our non-early claims (if the policy has completed 3 years) we paid within 24 hours or max 48 hours.
While this was for saving schemes, it took around 3 months for term policies as we need to check pre-existing etc and physical checks are required to be done by local field investigator.
Are life insurers getting permission to sell health indemnity?
We have been demanding the regulator to allow us to sell health indemnity but it hasn’t been permitted yet. Our point is that worldwide health sits closer with life than with motor. However, for some reason, general insurers in India are selling health whereas life insurers are not allowed to sell it. That is not logical. We used to be allowed to sell health, but it has been taken away.
My limited point is that life insurers have the largest touch points with their branches and network, but you are not alllowing us to sell. I think the focus should be on penetration of insurance and expansion.
As of now, nothing has moved. We even asked the regulator to allow us to distribute, if you don’t allow us to manufacture. Today, banks can distribute insurance but life insurers can’t distribute health. It doesn’t make sense.
We submitted it almost 18 months ago and the regulator has said that they will look at it. I stay hopeful.
When you say innovations are possible, if you are allowed, what could they be?
Innovation can’t happen if one key piece is missing. For example: When someone is young, he needs more life insurance. Suppose a person is paying Rs 60,000 as premium, I would say that until the age of 55 (nearer to retirement) we would give him maximum of life cover. After that, since he would have built savings too, we will reduce the life cover and increase the health cover. However, for the individual, Rs 60,000 premium will stay constant.
As of now we are not allowed to club various products and sell to the customer, unless we tie up with one insurer. But even that is not seamless.
What are the growth areas for the life insurance?
Growth will come with product innovation. Retirement products are another big growth area. As a nation, pension funds as a per cent of GDP is less than 5 per cent while it is more than 100 per cent in the developed world. While it is increasing, it is not at the desired pace. People need to understand that the risk of an individual running out of money is very real because of increasing longevity.
How will the merger of HDFC Bank and HDFC limited benefit you?
It can only get significantly better. The way I see it is that today HDFC Bank is my largest distributor, but it is not my parent, so once that happens, there will be full alignment. HDFC Bank will become a financial conglomerate and will not just be a bank. It will have everything to do with any financial service products and will be the parent company of all. They will be able to tell the customer that they know them— if they have a home loan but not insurance etc so the advisory will be better.
If customers give their consent that they would like to be serviced as a single customer, they will be treated as a single customer across all HDFC Group products.
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The Modi Govt completes 8 years today. Since returning to power in 2019, it has checked several key boxes on its agenda. India appears to have put the worst of the pandemic behind, but multiple challenges loom at home and abroad for the remainder of the Govt’s second term.
ECONOMY: Hope and challenge
India is seen to be the world’s fastest-growing big economy in FY23, with a realistic chance of holding on to that badge for a while as a botched zero-Covid policy threatens to derail the Chinese economy. But some of the structural issues that constrained the Indian growth story before the pandemic continue to weigh heavy amid a worsening inflationary spiral and an uncertain external environment.
Over the past 24 months, India has pivoted away from its otherwise insular trade stance, with pacts signed with UAE and Australia, and negotiations initiated with EU and UK. A reboot in efforts to leverage the digital infrastructure founded on the innovative UPI platform is underway, as well as further fostering of a start-up scene that has thrown up over 100 unicorns.
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The big work in progress is the Centre’s attempt at replacing 29 sets of labour laws by four broad labour codes, but implementation is behind schedule. The insolvency resolution process under IBC is seeing delays. The GST structure remains an issue; much of the buoyancy in collections is on account of compliance efforts. A manufacturing-led push relies primarily on production linked incentives, but beyond telecom hardware, the output is underwhelming. The 5G telecom push likely later this year could be key to the next wave of digitisation. Commercial mining in coal has been cleared, but output is constrained.
The absence of a data protection framework is a hurdle in leveraging the numerous digital projects underway. Private investment continues to underperform, and attempts at forced formalisation have hit MSMEs. Land and agri reforms remain pending. The consumption story, despite the post-Covid recovery, continues to totter. Cleavages in spending by the rich and poor could be worsened by prolonged high inflation. Air India and LIC have given disinvestment a boost, but the big-ticket privatisation of BPCL has fallen through.
EDUCATION: National Policy, new entrance
After a sluggish first two years in the government’s second term, much been happening on the education front in recent months.
After the announcement of the new National Education Policy in July 2020, its implementation got off to a sluggish start, mainly due to the pandemic. Now, there’s a common entrance test for admission to central universities. Students can study a four-year multidisciplinary undergraduate programme with multiple exit options, or even two degree programmes simultaneously. The UGC now permits students to pursue up to 40% of a programme online. But some announcements have been more cosmetic: for example, the midday meal scheme has been repackaged and renamed PM POSHAN without any additional allocation.
A committee has been set up for drafting the National Curriculum Framework with guidelines for changes in the school curriculum. The NCF is expected to be ready by next year. For a single regulator for higher education, a Bill to set up the Higher Education Commission of India is almost ready.
Appointment of teachers remains tardy; the National Research Foundation announced in 2019 hasn’t been set up yet; and public spending on education is nowhere near the 6% of GDP promised in 2014 and has in fact been decreasing. Apart from IIMs, none of the other centrally-run institutions have been granted total autonomy; and not even 20 of the 50 Institutions of Eminence promised by the BJP have been set up.
SOCIAL SECTOR: Rise of the Labharthi
Leveraging the Jan Dhan-Aadhaar-Mobile (JAM) platform to expand coverage of the flagship PM-Kisan scheme from 1 crore beneficiaries in February 2019 to over 10 crore in January 2022, new initiatives like PM-GKAY to provide free foodgrain to nearly 80 crore people, and retreating with a bloody nose from the battle to reform the agriculture sector — these have been the social sector headlines of Modi 2.0 so far.
10 instalments of PM-Kisan have been released so far — Rs 1.80 lakh crore has been transferred directly into farmers’ accounts. The 11th installment is due for release on May 31. PM-Ujjwala beneficiaries have gone from 8 crore in September 2019 to 9 crore in April 2022. Pradhan Mantri Garib Kalyan Anna Yojana, launched in response to the pandemic in February 2020 to provide 5 kg free foodgrains to 81.35 crore people every month, has been extended till September 2022. The Centre has also been able to roll out the One Nation, One Ration Card (ONORC) project to enable NFSA beneficiaries to avail of their entitlement anywhere in India.
The flagship Jal Jeevan Mission, launched in the government’s second term, aims to provide tap water connections to all rural households by 2024. The Jal Shakti Ministry said on Saturday that 50% rural households had already been covered. If implemented fully and successfully, Jal Jeevan will be a scheme of gamechanging impact.
The withdrawal, in November 2021, and eventual repeal by Parliament of the three farm laws announced in June 2020 are both a setback and an unfinished agenda point for the government. Experts have argued that reform is critical to the advancement of Indian agriculture.
DIPLOMACY & STRATEGY: Tightrope and partnerships
New Delhi’s diplomatic outreach succeeded in blunting international criticism of the constitutional changes in Jammu and Kashmir early on, and significant strategic achievements have followed. But the neighbourhood remains in turmoil, and China presents a huge challenge.
With an experienced diplomat at the helm, Modi 2.0 began by explaining to the world its decision to abrogate Art 370 that revoked the special status for Jammu and Kashmir. The transition from the Trump administration to the one led by President Joe Biden was smooth, and the strengthening of the Quad was a significant achievement. The framing of an Indo-Pacific strategy by European partners including France, Germany, UK, and EU is a positive for India’s interests, as China is seen as a violator of the global rules-based order. India’s Covid diplomacy largely worked, albeit with some challenges of supply.
The amendment to the citizenship law set the cat among the pigeons, and New Delhi had to reach out to Dhaka to assuage concerns. The strategic establishment has been occupied with diplomacy with Beijing, as the two-year border stand-off poses the most serious threat of recent times. The war in Ukraine has made it difficult for New Delhi to continue deep engagement with defence partner Russia. The balancing act has been successful so far, but remains a delicate work in progress, as do engagements with China and the neighbourhood.
Taliban-ruled Afghanistan presents a huge strategic challenge. New governments are in power in Myanmar, Nepal, Pakistan, and Sri Lanka, and the latter two nations are in economic and political crises. New Delhi has to navigate its ties with its neighbours and help maintain a peaceful and stable South Asia. Its leadership in the subcontinent will be tested in the near future.
POLITICS: BJP growing, concerns remain
In its second term, the BJP has made strides towards achieving its ideological agenda and consolidated its position as the major pole of national politics. But it remains challenged by regional parties, a struggling economy, and a communally charged atmosphere.
In the last years, the BJP has made itself and its ideology the major pole of Indian politics. With the key missions in its ideological agenda – the construction of Ram Temple in Ayodhya and abrogation of Article 370 — already achieved, the ban on triple talaq is being seen as progress halfway towards a Uniform Civil Code. The party is slowly and cautiously embarking on a new mission on Kashi and Mathura temples, but it is a legislative agenda.
Although the BJP has become a dominant political force at the national level, regional parties still call the shots in a number of southern and eastern states. The party is working on a blueprint to alter the “political and ideological character” of these states.
There has been very little progress in restoring the electoral process in Jammu and Kashmir, and the reopening of the Kashi and Mathura disputes has put paid to hopes of impending closure in these cases following the resolution of the Ram Janmabhoomi matter in favour of the Hindu side. The ‘bulldozer politics’ in several states has enhanced insecurities among the minorities and opened the government up to allegations of partisan behaviour. Satisfactorily addressing all of these dissonances remains a task before the government and party in line with the Prime Minister’s promise of “sabka vishwas”. Unemployment too remains a concern.
HEALTH: Vaccines for all, but work to do
Most of government’s time and resources in the last two years have been consumed in responding to the pandemic, which has in turn exposed India’s fragile healthcare infrastructure.
Just before the pandemic, the government had unveiled its plan to create an elaborate network of health and wellness centres (HWCs) for delivery of primary healthcare. About 1.5 lakh HWCs are proposed to be set up. An initiative to provide a unique health ID to every citizen and create a registry of healthcare professionals and health facilities has also been launched. In providing Covid-19 vaccines to everyone, India has done better than most other countries.
Most of the health initiatives, including the creation of HWCs and digital mission are works in progress. So are programmes like the Jan Arogya Yojana for insurance to the poor. Barely 5% of India’s population has health insurance right now, which makes the Jan Arogya Yojana a very important initiative.
The government still has a long way to go in providing universal and affordable access to healthcare facilities. The partnership of state governments is vital. Upgrading of infrastructure, reforms in medical education, expansion of nursing and para-medical education, and regulation of costs of healthcare are some of the big projects the government has to attend to.
SECURITY & DEFENCE: LWE in decline, reforms pending
On the security front, the performance of the government has been a mixed bag in the last eight years..
According to Ministry of Home Affairs, Left Wing Extremism-related violence has declined by 77% between 2009 and 2021, and resultant deaths by 85% between 2010 and 2021. The geographical influence of Maoists has been reduced to just 41 districts from 96 in 2010. Gains have also been made in the Northeast
The creation of the post of the Chief of Defence Staff was a key reform, but work appears to have stalled. After CDS General Bipin Rawat was killed in a helicopter crash in December, the position is still vacant. Also, theaterisation in the armed forces isn’t working at the desired pace.
Terror emanating from Pakistan remains a cause for concern. Despite the government’s claims of normalcy in Jammu and Kashmir following abrogation of its special status on August 5, 2019, a rise in civilian killings has posed questions. Also, as many as 25 modules of Khalistan militancy were identified and neutralised by security forces in 2021, compared to 15 in 2020 and just seven in 2019.
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The Union Cabinet on Wednesday approved the setting up of the National Land Monetization Corporation (NLMC) to monetise surplus land and building assets of Central Public Sector Enterprises (CPSEs) and other agencies linked to the Government.
To be fully owned by the Centre, under the administrative jurisdiction of the Finance Ministry, NLMC will have an initial authorised share capital of Rs 5,000 crore and paid-up share capital of Rs 150 crore.
“With monetisation of non-core assets, the Government would be able to generate substantial revenues by monetising unused and under-used assets. At present, CPSEs hold considerable surplus, unused and under-used non-core assets in the nature of land and buildings,” the Government said in a statement after a Cabinet meeting chaired by Prime Minister Narendra Modi.
Sources said Railways, Telecommunications and Defence are among key ministries holding the maximum surplus land, while parcels of several CPSEs are in prime areas with good potential.
Apart from the strategic sale and privatisation of state-owned companies, monetisation of idle land is part of the Centre’s strategy to reduce its business presence to a bare minimum and generate resources for future asset creation.
Last September, the Government had put out a four-year National Monetisation Pipeline (NMP) worth an estimated Rs 6 lakh crore. Roads, Railways and power sector assets will comprise over 66 per cent of the total estimated value of assets to be monetised.
However, progress on these fronts has been less than encouraging so far, with the Government scaling down its disinvestment targets substantially. Among the key challenges that NLMC might face include lack of identifiable revenue streams in particular land assets, dispute resolution mechanism, various litigations and lack of clear titles, and low interest among investors in remote land parcels.
“For CPSEs undergoing strategic disinvestment or closure, monetization of these surplus land and non-core assets is important to unlock their value. NLMC will support and undertake monetization of these assets. This will also enable productive utilisation of these under-utilized assets to trigger private sector investments, new economic activities, boost local economy and generate financial resources for economic and social infrastructure,” the Government said.
The NLMC will own, hold, manage and monetise surplus land and building assets of CPSEs under closure and surplus non-core land assets of Government-owned CPSEs under strategic disinvestment. This will speed up the closure process of CPSEs and smoothen the strategic disinvestment process of Government-owned CPSEs, the statement said.
NLMC will undertake surplus land asset monetisation as an agency function, and assist and provide technical advice to the Centre in this regard. The NLMC board will comprise senior Government officers and eminent experts, while its chairman and non-Government directors will be appointed through a merit-based selection process, the statement said.
While the Government had set a target of Rs 1.75 lakh crore through disinvestment in its Budget estimates in 2021-22, the target has been revised to Rs 78,000 crore — for the year 2022-23, the target is Rs 65,000 crore. Any move to raise the target amount of Rs 78,000 crore will depend on the completion of the proposed public issue of Life Insurance Corporation by March-end.
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While privatisation of PSBs and PSUs has faced challenges, monetisation of idle government land requires specialised skills and expertise. This will be the job of the new agency.
In 2021-22, the Government has raised Rs 12,423.67 crore through various modes of disinvestment. While the Government has been able to sell Air India and Neelachal Ispat Nigam Limited to the Tata Group, privatisation of state-owned banks and a PSU general insurer is yet to gain momentum. The BPCL privatisation is also being pushed forward due to lack of investors’ interest.
NLMC will hire professionals from the private sector as in the case of similar entities like the National Investment and Infrastructure Fund (NIIF) and Invest India. This is needed since real estate monetisation requires specialised skills and expertise in areas such as market research, legal due diligence, valuation, master planning, investment banking and land management, the Government said.
The Corporation will have minimal full-time staff, hired directly from the market on a contract basis. “Flexibility will be provided to the Board of NLMC to hire, pay and retain experienced professionals from the private sector,” it said.
So far, CPSEs have referred around 3,400 acres of land and other non-core assets to the Department of Investment and Public Asset Management (DIPAM) for monetisation. Monetisation of non-core assets of MTNL, BSNL, BPCL, BEML, HMT, is currently at various stages of the transaction, as per latest data in the Economic Survey 2021-22.
BEML, for instance, has identified surplus land in Karnataka — around 123.39 acres in Bangalore and 401.23 acre in Mysore — which will be demerged and subsequently monetised during the strategic disinvestment process. HMT Limited which is under closure, has also earmarked land of around 89.506 acre in Bangalore for monetisation.
The Rail and Defence ministries are the biggest government land-owners in the country.
According to available Government data, the total land available with the Railways is 4.78 lakh hectares (11.80 lakh acres) of which 4.27 lakh hectares is under operational and allied usage while around 0.51 lakh hectare (1.25 lakh acres) is vacant.
The Defence Ministry, the biggest land-owner, has about 17.95 lakh acres of which around 1.6 lakh acres is within the 62 cantonments, and about 16.35 lakh acres outside their boundaries, according to data from the Directorate General, Defence Estates.
According to the Government statement issued Wednesday, monetisation of land can be through direct sale or concession, or by similar means. Under the process, the Government is essentially transferring revenue rights to private parties for a specified transaction period in return for upfront money, a revenue share, and commitment of investments in the assets.
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India’s economic growth could be impacted by the Ukraine crisis, say experts
India is likely to rank among the emerging economies worst affected by the Russia-Ukraine crisis as a surge in global prices of commodities is set to upend spending plans and derail its pandemic recovery, analysts say.
If the conflict lasts, India, which imports close to 85 per cent of its oil needs, is likely to see its fiscal, trade and account deficits swelled by a surge in crude oil prices to their highest in more than a decade, which will also fuel inflation.
“The contagion from currently rising geopolitical tension is unlikely to remain limited to financial assets and warrants a change in our key macro forecasts for 2022-23,” said Abheek Barua, chief economist at HDFC Bank.
February’s budget was based on an average oil price of $75 to $80 a barrel for the fiscal year starting from April 1, but Brent briefly soared on Monday to nearly $140, its highest in over a decade.
A senior government official said if oil prices averaged $100 a barrel in the fiscal year to March 2023, that could shave 90 basis points off growth, taking it below 8 per cent, from a forecast range of 8 per cent to 8.5 per cent.
In such a scenario, inflation is seen rising by 100 basis points and the current account deficit could widen by 120 basis points to 2.3 per cent to 2.4 per cent of GDP.
DBS Bank says every increase of $10 a barrel in the price of oil lifts India’s consumer price index-based inflation by 20 to 25 basis points, widens the current account gap by 0.3 per cent of GDP, and poses a downside risk of 15 basis points to growth.
The oil price spike is also expected to pressure the government to lower fuel levies and reduce the burden on consumers. That in turn would dent revenues, narrowing the room for capital spending needed to boost growth.
Retail fuel prices could rise 10 per cent or more, starting from this week, as results flow in from elections in key states. To avoid voter backlash at the polls, state-run oil companies have not raised prices since November 4.
“Given the bunched-up increase in the offing, excise duty cuts might be undertaken, to ease pressure on purchasing power and incomes,” said Radhika Rao, an economist with DBS Bank.
But every rupee cut from fuel levies shrinks revenue for the government’s coffers by 130 billion rupees ($1.7 billion) a year. Economists say India could lose as much as 900 billion rupees in trying to lower pump prices.
And a recent battering of markets, which forced a rethink of plans for an $8-billion initial public offer (IPO) of state-run Life Insurance Corporation (LIC) by the end of March, is likely to further dent the government’s financial position.
RATINGS RISK
On the plus side, the government could turn a profit by selling some of its vast grain stockpiles following a rise in global wheat prices that could boost exports of the grain from India.
That could defray expenses on its vast annual purchases of grain at prices above global levels in the effort to support farm incomes.
But India’s fiscal deficit had widened to a record 9.3 per cent in the year that ended in March 2021, thanks to efforts to cushion the shock of the coronavirus pandemic and revive growth.
That meant the ratio of debt to GDP shot up to more than 90 per cent, for the worst among similarly-rated emerging markets.
Although India’s ratings have held steady, agencies have warned of long-term challenges and the need to cut the debt-to-GDP ratio to more sustainable levels.
Government officials said the fiscal deficit could slip by 20 to 30 basis points from a target of 6.9 per cent of GDP in the current fiscal year ending in March if LIC was not listed by then.
“The ratings agencies were not very happy with the fiscal consolidation path undertaken by us in the budget. Further deterioration could concern them,” said a second government official, who also spoke on condition of anonymity.
The government is reworking some key budget figures and the outcome of next year’s spending plans could look very different from the budget outlined last month, he added.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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The macroeconomic environment has changed considerably from the time Finance Minister Nirmala Sitharaman presented the Union budget, and the RBI released its inflation forecast for the upcoming fiscal year. On Thursday, crude oil prices hovered around $120 a barrel for the first time in years. While prices have moderated mildly thereafter, for the Indian economy which imports around 80 per cent of its requirements, higher crude oil prices will have adverse consequences. Higher prices will impact growth, will be inflationary, and will exert upward pressure on the current account and fiscal deficit. Considering that crude oil prices are currently significantly higher than those factored in the Union budget and the RBI’s calculations, navigating this uncertain economic environment will require deft management by monetary and fiscal authorities.
Since November last year, when the price of the Indian crude oil basket stood at $80.64, oil marketing companies have refrained from revising pump prices, even though global prices have been on the rise. But, once the assembly elections are concluded, fuel prices at the pump are likely to be hiked. However, steep hikes will be needed — as per a report by ICICI securities, a Rs 12 per litre hike will be needed just to break even. This will be inflationary. Needless to say, fuel price hikes will upend the central bank’s optimistic assessment of the inflation trajectory. As per RBI’s recent assessment, inflation was expected to trend down from 5.7 per cent in the fourth quarter of 2021-22 to just under 5 per cent in the first half of 2022-23. This will complicate the choices before the monetary policy committee. Higher prices will also reduce discretionary spending by households. Governments may respond by lowering fuel taxes to absorb part of the burden. However, this will weigh down their revenues and spending. Thus, growth will thus take a hit. Higher oil prices will also push up imports, increasing the current account deficit at a time when global financial conditions are tightening. Recent data shows that the merchandise trade deficit has already widened to $21.2 billion in February, up from $17.9 billion, with much of the surge driven by oil. The rupee is already coming under pressure. This will only add to the inflationary pressures.
The indirect consequences of the deterioration in the economic environment are also beginning to show. There are reports that LIC’s initial public offering may be postponed to the next financial year due to prevailing market uncertainty. While the full effects of the oil price shock will be visible with a lag, when taken together with the third wave of the pandemic, it suggests further downside risks to economic growth in the fourth quarter, which as per the National Statistical Office’s latest estimate was already expected to slow down to 4.8 per cent from 5.4 per cent in the previous quarter.
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The government on Saturday cleared an amendment to allow up to 20 foreign direct investment (FDI) under the “automatic route” in Life Insurance Corporation. This comes ahead of the proposed initial public offer of LIC, which is expected to be the largest in the Indian capital markets so far.
The government expects to mobilise Rs 63,000-66,000 crore from the proposed share sale to meet its disinvestment target of Rs 78,000 crore for FY22, as per industry estimates. While LIC is yet to announce the IPO price, market estimates are that the IPO is likely to be Rs 2,000-2,100 per share.
The existing FDI Policy did not prescribe any specific provision for foreign investment in LIC, which is established under the LIC Act, 1956. The FDI ceiling for LIC has now been made at par with that of the public sector banks. While the government had last year raised the FDI limit in the insurance sector to 74 per cent from 49 per cent, it did not cover LIC that is covered by a specific legislation.
“Since as per the present FDI Policy, the FDI ceiling for public sector banks is 20% on government approval route, it has been decided to allow foreign investment up to 20% for LIC and such other bodies corporate. Further, in order to expedite the capital raising process, such FDI has been kept on the automatic route, as is in the case of rest of the insurance sector,” a government source said.
Foreign investors may be desirous of participating in the IPO of LIC, and this change would facilitate FDI in LIC and such other bodies corporate, for which government may have a requirement for disinvestment purposes, sources said.
On Friday, the National Stock Exchange decided to relax the eligibility criteria of Nifty equity indices and for replacement of stocks in various indices, reducing the minimum listing history of constituents from three months to one calendar month, effective from March 31. This relaxation is expected to pave the way for the inclusion of LIC, which plans to list its shares in March, in the benchmark Nifty 50 Index. Since many passive funds allocate investments to indices and index stocks, the move, along with FDI permission, would enable large inflows in the LIC IPO.
Once the Sebi approves the issue, the IPO is likely to open for subscription in the second week of March and trading will commence by the third week, industry sources said. The government is going ahead with the listing of the latter’s shares, despite increased volatility in the markets amid increasing global concerns.
Sources said the government expects this move, along with other simplifications in FDI policy, to “make India an attractive investment destination”. FDI inflows into India rose to $81.97 billion in 2020-21, from $ 74.39 billion in 2019-20. “The FDI policy reform will further enhance Ease of Doing Business in the country, leading to larger FDI inflows and thereby contributing to growth of investment, income and employment,” they said.
FDI in currently permitted sectors is allowed up to the limit indicated against each sector/activity subject to applicable laws/regulations. “Insurance” is a permitted sector under FDI policy rules, however, it currently lists only Insurance Company and “intermediaries or insurance intermediaries” under the “Insurance” sector. LIC being a statutory corporation, is not covered under either of these.
Further, no limit is prescribed presently for foreign investment in LIC under the LIC Act, 1956; the Insurance Act, 1938; the Insurance Regulatory and Development Authority Act, 1999 or regulations made under the respective Acts. Therefore, this amendment has been made to specifically allow 20% FDI in LIC.
In an interview with The Indian Express earlier this month, the Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey said that 20 per cent FDI should be sufficient considering that existing regulations and the requirements.
“…because LIC is not an insurance company, so insurance laws strictly does not apply to it, except for some of the provisions of insurance, which are indicated in the LIC act itself. We have to retain 51 per cent by law. We cannot go below that. And even if we go for an IPO, we will be able to dilute only up to 25 per cent within the first five years. We can not go more than this as per the law. And then we have the law that no single person can own than 5 per cent. So 20% (FDI) is more than enough for us, if we go for that route,” he had said.
As of September 2021, LIC policyholders had total investments of Rs 39,49,516.37 crore on a standalone basis. This is more than 3.3 times higher than total assets under management (AUM) of all private life insurers in India and approximately 16.2 times more than the AUM of the second-largest player in the Indian life insurance industry in terms of AUM.
LIC held stocks worth a “carrying value” of Rs 9,79,843 crore (close to $130 billion), or 24.77 per cent of its total investments, as on September 30, 2021. The market valuation is LIC is expected to be more than Rs 10 lakh crore, putting it at par with top notch companies such as Reliance Industries and TCS.
The initial public offer of up to 31.62 crore equity shares comprises the net offer, employee reservation portion, and policyholder reservation portion. The IPO works out to 5 per cent of the total capital of 632.49 crore shares, with the government retaining the remaining 95 per cent.
A portion of shares, not exceeding 5 per cent of the offer, will be reserved for employees. Another portion not exceeding 10 per cent, will be reserved for eligible policyholders. Policyholders and employees are likely to get shares at a discount.
A minimum 35 per cent of the issue will be reserved for retail investors. The corporation may allocate up to 60 per cent of the QIB (qualified institutional buyers) portion to anchor investors on a discretionary basis. One-third of the anchor investor portion will be reserved for domestic mutual funds.
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There was a time when Mr Narendra Modi — and on cue his Finance Minister — swore by the private sector. Like Agriculture and most of the Services, in industry too, Mr Modi’s preferred model was private sector-led growth. The State will step back and be content to be the regulator where regulation was necessary.
At some point of time, after demonetisation, Mr Modi appears to have changed his philosophy. As his faith in the private sector waned, he became a votary of the government-led model. With Budget 2022-23, the change is complete. This is a Budget driven by one engine: government capital expenditure. The rub, however, lies in the numbers.
Shifting Gears
The Finance Minister claimed that in 2021-22 the government had exceeded budgeted capital expenditure. As against a BE of Rs 5,54,236 crore, the RE number was Rs 6,02,711 crore. The surprise turned out to be unpleasant after one read the fine print. The latter amount included a sum of Rs 51,971 crore that was infused into Air India to repay past loans and liabilities before privatization! I did not know that repaying a loan would qualify as capital expenditure! Deducting this amount, the capital expenditure in 2021-22 was only Rs 5,50,840 crore — lower than the BE!
That is not surprising. The government’s capacity to spend money on the capital account is constrained by many factors: multiple levels of decision-making, huge paperwork, diffused accountability, and so on. These constraints will not go away because Mr Modi shifted gears.
There are more unpleasant surprises in the numbers. The Finance Minister generously announced that she will allow the states to borrow an additional sum of Rs 1,00,000 crore, interest free, if it was tied to capital expenditure. Soon it became clear that the states would borrow directly from the market and the Central government would bear only the interest. The nasty surprise was that the Finance Minister quietly tucked this sum into the 2022-23 BE of the Central government’s capital expenditure that printed at Rs 7,50,246 crore, and claimed that the Central government had enhanced its capital expenditure by 35 per cent over the previous year! By no stretch of argument would the additional borrowing by the state governments for their capital expenditure qualify to be Central government capital expenditure. This was deception of the worst kind. Deducting this amount, the Central government’s capital expenditure in 2022-23 BE would be only Rs 6,50,246 crore — a modest increase of Rs 1,00,000 crore over the true number of 2021-22 RE.
Losing Faith
The Modi government’s rhetoric of government capital expenditure-led growth is hyperbole. Further, the government does not have faith in the appetite of the private sector to invest more. The latter was exposed when the ambitious scheme to privatize public sector assets collapsed. Two years ago, the government decided to privatize BPCL, CCL and SCI. Last year, the government decided to privatize two public sector banks and one public sector insurance company. Also, last year, the Finance Minister announced a Grand Bargain Sale of monetizing public sector assets valued at Rs 6,00,000 crore. Not one of the proposals has seen the light of the day! The Railways invited bids to privatize 151 passenger trains on 109 routes — and got no bids! It was no surprise that against a disinvestment revenue target of Rs 1,75,000 crore in 2021-22 BE, the government hopes to achieve Rs 78,000 crore — that is if the LIC IPO goes through before March 2022!
There are good reasons why the private sector is shying away from investment. The foremost reason is lack of demand. The capacity utilisation in many industries is around 50 per cent. Why would any one invest more when there is idle capacity? Besides, the business environment has become more difficult, not easier, and is filled with cronyism, suspicion and fear.
Ignoring Advice
Many economists have advised the following approach to pull the economy out of the current state of jobless and sluggish growth:
– Stimulate demand by putting more money in the hands of the poor and the middle class — transfer cash, cut indirect taxes:
– Revive the MSMEs that have shut down or have scaled down their business. Such revival will also bring back millions of jobs that were lost;
– Spend more on welfare. The excuse that “we don’t have enough money” will not wash because the top 10 per cent of the population has garnered 57 per cent of the national income and holds 77 per cent of the nation’s wealth. They must come forward and say, like the American billionaires, “tax us more”;
– Review the licence raj that has found its way back through multiple regulations and directions by the RBI, SEBI, the Income-Tax department, etc;
– Rein in the CBI, ED, SFIO and IT so far as businesses and banks are concerned.
I have no expectations that the government will listen to well-meaning advice. Leaving that aside, will the Finance Minister solve a puzzle that is troubling many economists. In 2022-23, will the nominal GDP grow by 11.1 per cent (as projected in the Budget papers) and the real GDP grow by 8 per cent (as predicted by the new CEO)? That would be heaven with inflation at only about 3 per cent!
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