FDI is good cholesterol, don’t oppose it

Foreign investment once meant loss of sovereignty. But we must put that mindset firmly behind us ANUROOP ‘TONY’ SINGH The Indian Express Thursday, July 22, 2004

To use a healthcare analogy, not all cholesterol is bad. FDI in sectors of the economy that need capital infusion is like good cholesterol, needed to clear the arteries. Why would you want to oppose it? At the policy level, we need to encourage FDI. The restrictive era in foreign investment policy was consistent with a high level of trade protection and a wave of economic nationalism that perceived foreign investment as loss of sovereignty and foreign acquisition. We have put that era firmly behind us. The mindset now must change.

• FDI brings to the recipient country not only capital and foreign exchange, but also managerial ability, technical knowledge, administrative organisation, and innovations in products and production techniques, all of which are scarce commodities. These benefits are not immediately apparent in the economy because they take time to develop. However, there is enough empirical evidence to prove that with FDI, the economy is better able to provide higher productivity and bigger job pools.

If India is open to foreign investment, a 49 per cent stake represents a reasonable level of engagement for the foreign partner. It is a minority stake and yet it is sufficient enough for the foreign shareholder to see the investment as meaningful. Foreign investors have a variety of locations to choose from and the attractiveness of a country as an investment destination needs to be firmly established. I believe at least a 49 per cent holding lends greater strength to the local entity’s operations. It allows the financial statistics of the foreign company to be consolidated in a meaningful manner and for the size and scale of the business to be reflected properly in its global balance sheet.

Given the imperative of attracting FDI for increasing India’s GDP growth rate, we need to lower barriers and, in cases where we believe the barriers must stay, have watertight arguments in favour of retaining those barriers. In my view any such barrier cannot be justified in the case of insurance. Consider this: the opening up of the sector has galvanised the sector, raised insurance awareness, introduced more modern products and brought about a significant improvement in the quality of face-to-face selling. Moreover, Life Insurance Corporation of India too has benefited from the competition.

Life insurance is a long gestation business and requires significant amounts of capital. A significant portion of the capital deployed is put aside for maintaining the required solvency margin. Some recent estimates reveal that to build a company the size and reach of the Life Insurance Corporation of India would require anything between Rs 15,000 crore-Rs 20,000 crore. The total capital deployed by the dozen life insurance companies is around Rs 3,300 crore. The potential for growth is enormous and Indian capital markets are not deep enough to support this exponential growth. FDI can effectively bridge that gap.

India is a country that lacks social security systems and people are grossly under-insured. They have traditionally bought life insurance for tax-saving and investment purposes. The awareness that at its heart, life insurance is about securing the future of your family is just about beginning to seep in. Given that life insurance can save families from economic strife, there should be rapid development of this noble business. Capital infused into life insurance businesses can be invested in long-term infrastructure projects in the country and the need for investment into those projects can scarcely be over-emphasised. Generation of employment — both direct and indirect — is remarkable enough. Insurance is best sold face-to-face the world over and privatisation estimates are that more than 125,000 people have become agents and another 20,000 are directly employed in insurance companies.

So, foreign capital will allow the people of this country to enjoy higher rates of economic growth, employment and a higher standard of living. Insurance, telecommunications and civil aviation will benefit. Don’t stymie that growth. Say yes to good cholesterol. The writer is CEO and managing director of Max New York Life Insurance Company.