THE recent stake of Life Insurance Corporation of India (LIC) rising to 51 per cent in the Industrial Development Bank of India (IDBI) carries further the story of many adventures of financial mismanagement by the current NDA government. These adventures are cases of financial mismanagement from a macroeconomic perspective of the Indian economy. But there is a method behind this madness of management, namely the defence of hidden and sometimes not-so-hidden economic interests of the propertied classes aligned to the current government.
Two central planks on which the BJP came to power in 2014 were: Hindutva mobilisation and all-round development (’sab ka vikas’). After coming to power, the Hindutva agenda has been pursued vigorously and even violently, but the development agenda has turned out to be empowerment of the rich and wealthy instead of the promised ’sab ka vikas’.
Any critical observer of political economy would have known during the electioneering for the 2014 Lok Sabha polls that given the class interests aligned with the BJP, the slogan of ’sab ka vikas’ was a clever exercise in media spin and hoodwinking the electorate from poor and middle classes.
One would have also thought that the gimmickry of ’sab ka vikas’ would be maintained in some form at least for some time to retain the pretence of implementing the election manifesto pledge. No one could have anticipated that the BJP would so brazenly abandon, as it did, the veneer of ’sab ka vikas’ and launch into a programme of naked defence of the rich and powerful. Demonetisation, GST and recapitalisation of banks were all policy initiatives aimed at defending the moneyed backers of the BJP and which had disastrous consequences for citizens involved in vulnerable, informal and small-scale economic activities.
The recent LIC stake in the IDBI adds to those financial mismanagement initiatives that defend the powerful financial defaulters but increase the exposure and vulnerability of middle class holders of LIC’s life insurance policies.
The LIC was established in 1956 by nationalising nearly 250 private insurance companies, some of which had indulged in fraud and other financial malpractices. This nationalisation was also a part of the project then of India’s state capitalist model of development to concentrate finance in the hands of the central state to finance planned economic activities. The neo-liberal turn in economic policies initiated by the UPA government in July, 1991 allowed entry from August, 2000 of private and foreign insurance companies, but the LIC still commands 71 per cent market share of the ’total first-year premium’, ie the premium paid by policyholders in the first year of the policy. The LIC issues nearly 2 crore policies every year and nearly 25 crore persons in India have policies with it. Since it is mainly adults who have life insurance policies, it indicates the scale of households’ involvement in the LIC. Further, since a vast proportion of the very poor and marginalised sections of society are unlikely to be holders of life insurance policies due to not being able to pay the premium, the numbers holding the policies suggest that the scale of involvement of various layers of the middle class in the LIC is likely to be almost universal. The LIC is one of the most trusted brands in India mainly because it is a publicly owned entity and, therefore, safe.
Being an insurance group, risk-oriented investment of its resources is not the remit of the LIC. This government and, to a lesser extent, even previous governments have been pushing the LIC into the risky venture of involving the LIC into banking and other investments. It may be reasonable to support, even if cautiously, LIC finance being used to support infrastructural projects such as railways and power generation partly because such projects, in theory, are supposed to generate long-term returns. However, to get the LIC to start supporting the banking sector involved in risky commercial undertakings is to not only undermine the essential function of the LIC, but it is also, in fact, exposing it to the instability of the banking sector. The history of financial instability in capitalism tells us that if such instability does not lead to loss of political legitimacy of the regime, it is the working and middle classes that end up bearing its burden. Big financial sharks of capitalism look upon financial instability as an opportunity to eat up vulnerable smaller entities through mergers and takeovers.
The NDA government used the LIC in 2015 and 2016 to shore up several banks that were falling short of capital when the LIC bought into preferential share issues of such banks. The LIC already had an 11 per cent stake in the IDBI because of this questionable policy. Now that the LIC share in the IDBI has been raised to a massive 51 per cent, it virtually amounts to making IDBI troubles as the troubles of the LIC. Amongst all public sector banks, the IDBI has the highest share of gross non-performing assets (NPAs) of nearly 28 per cent. In simple terms, it means that out of Rs 100 loaned by this bank, Rs 28 are not likely to be returned. The rise in gross NPAs, ie bad loans, is primarily due to mafia-style combine of top banking officials, capitalists, politicians and bureaucrats facilitating huge bank loans that are never returned. Instead of making the defaulters accountable, it is LIC finance, ie the general public’s insurance premium money, which is being used to cover up a hole in the capital stock of IDBI. It is, therefore, also a case of moral hazard where the assurance of a risk protection encourages risky and bad behaviour. Why would other banks saddled with NPAs not turn to government twisting LIC hands to help them out too with capital induction?
Another aspect of the deteriorating financial governance in India that has come to light in the LIC-IDBI saga is the role of regulatory authorities. The Insurance Regulatory and Development Authority (IRDA) is part of the regulatory governance of the LIC and given the LIC remit, the involvement of the LIC in equity investment in other firms is limited to a maximum of 15 per cent, and if this limit is to be exceeded, it requires the intervention of the IRDA for approval. The way the IRDA approved the LIC share in the IDBI, not to a small increase over the 15 per cent limit, but to a whopping 51 per cent raises questions about the autonomy of regulatory structures. It is for the first time in India’s financial history that such a step has been taken. The rise of authoritarianism manifests itself not only in political, educational and cultural spheres but also in financial governance.
Pritam Singh is Professor of Economics, Oxford Brookes University, Oxford, UK