FE Editorial : Not so fast, Mr Sinha
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Whatever its impact on the economy, as a political party, the BJP is well within its rights to say it will not support legislation on raising FDI limits in the pension and insurance sector. The BJP feels aggrieved that the government did not, as promised by Pranab Mukherjee in Parliament, evolve a consensus on retail FDI, so it may feel a tit-for-tat response is an appropriate one. Our view is that the BJP has got it wrong on FDI in retail—organised retail doesn't really pose much of a threat to kiranas; there is enough scope for kiranas to grow their business even if organised retail's share doubles in a decade. And, in a dynamic economy like India, people who lose their jobs get employed elsewhere—between 1993 and 2004, for instance, the number of clerical workers fell from 8.5 million to 5.3 million but construction workers rose from 5.4 million to 13.1 million and the number of hotel/dhaba employees from 1 million to 1.5 million (http://goo.gl/UwIMm) … Given India's dramatically under-penetrated insurance and pension markets—4% of the population has insurance and pensions—similarly, any right-thinking party would want to do something about it; and since service providers need a lot of capital to do this, hiking FDI limits seems pretty much a no-brainer.
Where the BJP's positioning gets even more curious is in the packaging. In an interview to Rajya Sabha TV, BJP leader Yashwant Sinha who also chairs the Standing Committee on Finance said that, after the global financial crisis, the financial sector—which caused the crisis—needed to be seen through a different prism. Put that way, no one can doubt hiking pension and insurance FDI is a bad idea—after all, what's the point of putting your economy at risk, indeed the global economy, just to allow a few more Indians to get insured? But what does the financial crisis have to do with pension and insurance FDI where the companies are tightly regulated and subject to prudential norms—to the extent these norms are loosely enforced, even purely Indian pension/insurance firms present a systemic risk. While India doesn't allow the kinds of CDOs and CDO-squared that were part of the problem in the US, it allows securitisation and after the global financial crisis a lot more futures and options in areas like currency, interest rates and even commodities have been allowed. These are required to mitigate risk and, unlike in the US, making them exchange-traded reduces a lot of the counter-party risk. If the BJP wants to look at the financial sector through a different prism now, this is what it needs to look at, to see if there are enough safeguards. Merely using the global financial crisis to give a veneer of respectability to its tit-for-tat moves won't do.
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