LIC

Yesterday, once more: Will LIC come to govt’s rescue again?

LIC

On January 13, 2015, the ministry of finance declared the indirect tax collection numbers for the period April to December 2014. And they aren’t looking very impressive.
The government managed to collect Rs 3,77,648 crore during the period, in comparison to Rs 3,54,049 crore it had managed to collect during the same period last year. This is a jump of 6.7%. Indirect taxes include excise duty, customs duty and service tax.
The trouble is that the indirect tax collection target for this financial year is Rs 6,24,902 crore. The total amount collected in the last financial year stood at Rs 5,19,520 crore. Hence, it was assumed that the indirect tax collection would grow by 20.3% from what was achieved last year.
What this tells us clearly is that the growth of the indirect tax collections is nowhere near what it was assumed to be. In the first nine months of the year, the government has managed to collect only 60.6% of the year’s target, meaning that 39.4% of the target still remains to be collected in the last three months of the financial year. Also, unlike direct tax, the collection of indirect taxes is not totally skewed towards the end of the year.
In a report titled Will the Government Meet the Fiscal Deficit Target for F2015? analysts Chetan Ahya and Upasana Chachra of Morgan Stanley point out that “tax collection picks up seasonally toward the end of the fiscal year, with direct tax collection between December and March at 51.4% of total (five-year average) and indirect tax collection at 42% of total.”
So, between December and March, in the last five financial years, the government managed to collect 42% of the indirect tax target set for the year. This time around it needs to collect 39.6% of the annual target between January and March, which will be a tough ask indeed.
It needs to be pointed out here that during the last five years, the economic growth for a significant part of the period was greater than 8%. Currently, the economic growth is around 5%. Hence, indirect tax collections will slowdown to that extent.
Take the case of excise duty. In the first nine months of the financial year the government managed to collect Rs 1,19,719 crore of excise duty, a jump of just 1.6% in comparison to the last financial year. When the budget was presented the government had assumed that excise duty collection will jump by 15.4% during the course of the year.
The government has increased the excise duty on petrol and diesel thrice since October 2014. The third increase came on January 1, 2015, and hence, the excise duty collected because of this increase are not a part of the just released indirect tax data.
The higher excise duty on petrol and diesel is expected to boost the indirect tax collections between January and March 2015 by Rs 14,600 crore, write Ahya and Chachra.
At the same time the “removal of excise SOPs for autos and consumer goods sectors from December 31 [is]expected to add ~Rs 2,400 crore between January and March,” feel the Morgan Stanley analysts.
But even this will not help the government meet its excise duty target of Rs 2,07,110 crore. Taking into account average collections over the last five years and this year’s indirect tax collections it is highly unlikely that the government will be able to meet its indirect tax target for this year. My guess is that it will fall short of the target by around 8-10%.
This gap will amount to Rs 50,000-60,000 crore (~ 8-10% of indirect tax target of Rs 6,24,902 crore). How will the government fill this gap? One way as I have often pointed out in the past will be to cut expenditure. A recent newsreport in the Business Standard points out that “on an average, key ministries, including those of agriculture, rural & urban development, and infrastructure, might see cuts of up to 20 per cent in Plan allocation compared to the FY15 Budget estimates.” This can’t be good news in an environment where corporate investment is slow due to excessive debt levels.
The government will also force public sector units to shell out higher dividends as it had done last year as well. The dividends from public sector units were supposed to contribute Rs 29,870.12 crore to last financial year’s budget. Ultimately the government ended up collecting Rs 43,074.58 crore. This year’s target is Rs 27,815.10 crore. The actual number this year will also be considerably higher.
What adds to the troubles of the government is the fact that it looks highly unlikely to meet the disinvestment target as well. Disinvestment of shares in public sector units was expected to bring in Rs 43,425 crore. Until now only Rs 1,700 crore has come in through this route. Now news coming in suggests that bankers are having a tough time lining up investors for the shares of companies that the government wants to disinvest.
The Economic Times reports that: “Bankers are finding it tough to convince foreign investors to commit money in the proposed share sale as the government is yet to implement reforms that it had promised while marketing the issues previously.”
Whenever such a situation has arisen in the past, where the market is not ready to buy shares of public sector companies, the government has forced the Life Insurance Corporation (LIC) of India to come to its rescue by buying these shares.
The money invested by LIC is essentially the hard earned savings of millions of people and it is not fair to use it to help bail out the government all the time. From the looks of it something similar seems to set to happen this year as well, which is clearly not good news.
What does not help the government is the fact that it has very little time left to carry out the disinvestment. For reasons, which only the government can best explain, there has been barely any activity on the disinvestment front over the last six months and only now things are looking to pick up. But it may be a case of too little too late.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning on Jan 15, 2015

Why the disinvestment process is getting messier

market fall
Vivek Kaul

This song from the 1968 Hindi movie Teen Bahuraniyan best explains the state of the Congress party led United Progressive Alliance government. As the lines from the song go “aamdani atthani kharcha rupaiya, bhaiya, na poocho na poocho haal, nateeja than than gopal”. Loosely translated this means that when you keep spending more than what you earn, you are bound to end up in a mess sooner rather than later.
One area where the mess is getting more obvious by the day is the area of disinvestment of shares held by the government in public sector companies. The idea was that by selling these shares the government would be able to reduce a part of its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
During the course of this financial year (i.e. the period between April 1, 2012 and March 31, 2013) the government had expected to earn Rs 30,000 crore by selling shares of public sector companies to the public. This number has since been revised to Rs 24,000 crore.
This has been a tad better than the last financial year (i.e. the period between April 1, 2011 and March 31, 2012) when the government had targeted to raise Rs 40,000 crore through the disinvestment of shares but finally managed to raise only Rs 13,894 crore.
What is interesting is that even the amount that will be raised by selling shares of the PSUs during the course of this financial year, wouldn’t have been raised if the government hadn’t forced the Life Insurance Corporation (LIC)of India to come to its rescue.
The insurance major is supposed to have bought 46% of the 69 million shares of RCF that were disinvested last week. LIC as expected denied that it had rescued the government. “We have not bailed out anyone. We have examined this (RCF) issue by its own strength and then taken a decision to participate. We will examine the future issues in a similar manner and then take a call,” D K Mehrotra, chairman of LIC, told Business Standard on March 13, 2013. In November 2012, LIC had come to the rescue of the government by picking up 43.6% of the nearly 52 million shares of Hindustan Copper that were being sold.
In March 2012, LIC had picked up 88.3% of the 427 million shares of ONGC that were being sold. When a government owned insurance company has to pick up 88% of the shares being sold, what it clearly tells you is that there was no real demand for the share in the stock market. The government thus raised around Rs 11,275 crore from LIC. The government was also expected to sell shares in Metals and Minerals Trading Corporation(MMTC) of India, but that has been postponed. The government and the merchant bankers of the issue could not agree on the price at which the shares of MMTC would be sold. The merchant bankers seem to have told the government that Rs 75 per share was a fair price of an MMTC share. The trouble though is that currently one MMTC share is worth around Rs 302 (as I write this) in the stock market.
But there is a simple explanation for this huge difference. As an editorial in Business Standard points out “However, rather than getting carried away with the wide gap between the market price and the fair value assigned to the company’s shares by merchant bankers, the government should note that the current stock price of MMTC Ltd is produced by market dynamics – but with constrained supply. Only 0.6 per cent of the stock is freely floating.”
The point is that the government is being greedy here. But that ‘greed’ of course comes with the confidence that LIC can always be made to buy these shares. The MMTC situation is similar to that of ONGC, where the shares were priced so high that the investors were simply not interested in buying it. As the Business Standard points out “ The government may have deferred the proposed stake sale in the state-owned mineral trading company MMTC Ltd over valuation differences with merchant bankers, but it would do well to recall the debacle associated with the share sale of the state-controlled oil company ONGC last March. On that occasion, the government priced ONGC’s shares at Rs 290 each; institutional investors saw little value in bidding for them at that price – higher than the market price that was prevailing then. The government had to ask the Life Insurance Corporation of India to bail out the issue.”
The disinvestment of other companies like Steel Authority of India Ltd (SAIL) and National Aluminium Company Ltd (NALCO) also seems to be in trouble. The share price of both these companies is currently at more or less their one year low levels. The same stands true for MMTC as well.
What the ONGC experience hopefully must have taught the government is that while selling shares of a company which is already listed on the stock exchange it cannot demand a price that is higher than the price the share is selling at, in the stock market. So if a share is selling at a price of Rs 100, the government cannot demand Rs 120, simply because the investor has the option of buying the share from the stock market.
Given this, it means that if the government wants to sell the shares of SAIL, MMTC and NALCO, it will have to sell them at a price which is lower than their market price to make it an attractive proposition for investors. And since the market price is at around the one year low level, the government will be unable to raise as much money from these stake sales as it had expected to. Of course the government can always dump these shares on LIC , which would be more than happy to buy it. The disinvestment of NALCO which is located primarily in Orissa is being opposed by the ruling party in the state, the Biju Janta Dal.
There are several points that stand out here. If the government is having so much trouble achieving a scaled down disinvestment target of Rs 24,000 crore for this year, how will it achieve the target of Rs 54,000 crore which it has set for itself in the next financial year? It also raises the question that was a high figure of Rs 54,000 crore just assumed to project a lower fiscal deficit for the next year?
The second point is that at Rs 54,000 crore, disinvestment receipts are expected to bring in 6% of the total revenues of the government during the next financial year. This a rather huge number to be left to the vagaries of something as moody as the stock market. The government is only doing this because it is confident that it can get LIC to pick up the tab if the stock market is not interested.
In fact that is why it has passed a special regulation allowing LIC to own upto 30% of shares in a company against the earlier 10%. This in a scenario where the other insurance companies can own only upto 10% of a listed company. How can there be two separate rules for companies in the same line of business?
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall, impacting returns of investors who have bought insurance plans from LIC. As the old saying goes, “putting all eggs in one basket” is a pretty risky proposition and goes against the basic principles of investing. What makes the situation even more dangerous is the fact that it is public money that is at stake.
Also when LIC has to anyway pick up these shares why go through this entire charade of disinvestment in the first place? The government can simply sell these shares directly to LIC and get done with it.
There is another basic issue here. Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point this out in a report titled Connecting the Dots: “As trained Accountants, we have learnt that sale of Assets from the Balance Sheet are one-off or non-recurring items.”
In simple English what this means is that shares once sold cannot be resold. By selling shares the government is raising a one time revenue. On the other hand, using this revenue it is committing to expenditure which is more or less permanent. And that really can’t be a good thing in the long run.
But politicians really don’t live for the long run. They survive election by election. And there is one due next year.
The article originally appeared on www.firstpost.com on March 14, 2013. 
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why LIC chief is more worried about the agents than policyholders

LIC
Vivek Kaul
Seth Godin, one of the leading marketing gurus of the world, talks about the rock n roll band The Rolling Stones in one of his blogs.
“Keith Richards (guitarist and vocalist of The Rolling Stones) tells a great story about Charlie Watts, legendary drummer for the Stones. After a night of drinking, Mick (Jagger, the lead vocalist of The Rolling Stones) saw Charlie asleep and yelled, “Is that my drummer? Why don’t you get your arse down here?” Richards continues, “Charlie got dressed in a Savile Row suit, tie, shoes, shaved, came down, grabbed him and went boom! Don’t ever call me “your drummer” again. You’re my … singer. No drums, no Stones,” writes Godin.
As The Rolling Stones wouldn’t have survived without Charlie Watts and his drums, no insurance company can survive without the policyholders who go out there and buy there products. Then they pay premiums which keep these insurance companies going.
But the Life Insurance Corporation(LIC) of India clearly doesn’t seem to believe in this. In an interview to the Daily News and Analysis (DNA), D K Mehrotra, the Chairman of LIC, said that the Insurance Regulatory and Development Authority (Irda), the insurance regulator, should rethink its plan to reform the traditional products offered by insurance companies.
For the uninitiated insurance companies in India largely sell two kinds of insurance plans. These are the unit linked insurance plans(Ulips) and the other are the endowment plans. The endowment plans sold by insurance companies are typically referred to as traditional plans.
In an endowment policy the policy holder is insured for a certain amount. This amount is referred to as the sum assured. A portion of the premium paid by the policy holder goes towards this insurance cover. Another portion helps meet the administrative expenses of the insurer. And a third portion is invested by the insurance company on behalf of the policy holder. The investment is largely made in debt securities which are deemed to be safe. (For a more detailed discussion on endowment plans click here).
The interesting thing is that The Insurance Act 1938 allows insurance companies allows insurance companies to pay as high as 35% of the first year’s premium as commission to insurance agents. This means for every Rs 100 that is paid as premium in the first year as high as Rs 35 could go to the agent as a commission.
The insurance regulator, Irda, over the last few years has cracked the whip on the commissions that insurance companies can pay to their agents for selling Ulips. Ulips are essentially investment plans masquerading as insurance.
The fall in commission on Ulips has led to insurance companies and agents suddenly discovering ‘good’ attributes in endowment plans given that they continue to pay high commissions. In the days when commissions on Ulips were high LIC and its agents had taken to pushing Ulips in a big way.
As Mehrotra told The Economic Times in September 2011 “Earlier, we had Ulips and traditional products at a 60:40 ratio, which has now reversed.” This ratio has further fallen and the ratio of sales for LIC between traditional plans and Ulips is now 80:20.
Irda in its proposed reforms for traditional products plans to cut down on commissions on offer to insurance agents, as it had done in case of Ulips earlier. And if that happens sales of traditional plans which now get in the bulk of the premium for LIC will be impacted. “.If the existing ones(the products i.e.) have to be withdrawn, we will be at loss,” Mehrotra told DNA. As has been clearly seen in the case of Ulips, lower commissions have impacted sales big time. And that will happen with traditional plans as well once the monstrous commissions are cut.
This is something that Rajeev Kumar, chief and appointed actuary at Bharti Axa Life Insurance told www.moneycontrol.com sometime back. “if you cap charges and you apply the same logic as unit linked then these plans will have same fate as unit linked plans which means commissions will go down, if commissions will go down, distributors will not be interested and distributors are not interested, the market share of these products will go down,” he said.
The Committee for Investor Awareness and Protection had envisaged an era of totally commission free financial products in its reports a few years back. As the report of the committee had pointed out “All retail financial products should go no-load by April 2011. The pension product in the NPS is already no-load. Mutual funds have become no-load with effect from 1 August 2009. Insurance policies need to remove the bias towards selling the policy with the highest commission. Because there are almost three million small agents who will have to adjust to a new way of earning money, it is suggested that immediately the upfront commissions embedded in the premium paid be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011.”
While the commissions on almost every other financial product have fallen to 0%, the insurance companies continue to offer high commissions to their agents, at the cost of the policyholder who in the process gets lower returns.
But low commissions are not in the interest of the insurance companies neither is it in the interest of the government which needs LIC to buy the shares of public sector companies that it is trying to sell to bring down the burgeoning fiscal deficit. Other investors are not interested in buying shares being sold by the government.
When Mehrotra was asked by DNA in another interview if there was pressure from the government to buy shares “No, at least I have not experienced it. There is no pressure on me to buy any particular share,” he said. Being a government employee we couldn’t have expected him to say anything but this. A recent report in The Economic Timessays that the LIC lost over Rs 5,000 croreby buying public sector shares of ONGC, NMDC and NTPC.
Given this the last thing on the minds of Mehrotra and LIC is the policyholder who has bought the LIC policy. As Godin wrote in his blog “Who’s playing the drums in your shop?” In case of The Rolling Stones it was Charlie Watts. For LIC its clearly not the policyholder. 
The article originally appeared on www.firstpost.com on December 13, 2012 

(Vivek Kaul is a writer. He can be reached at [email protected]) 

Why you should not believe LIC’s bulls**t on Ulips

LIC
Vivek Kaul
 
 
Patrick Jake O’Rourke an American political satirist and journalist recounts a very interesting story in his book Age and Guile – Beat Youth, Innocence and a Bad Haircut.
It was 1969 and O’Rourke had applied for a fellowship. To get the fellowship he had to clear an interview at the Ohio State University English Department.
On reaching there he was asked “Which literary critic has had the most profound influence on your thinking?”
“I could not think of the name of a single literary critic,” recalls O’Rourke in the book. But of course he had to say something, which he did.
“Henry David Thoreau,” was his answer to the question. Thoreau was an American poet, author and philosopher.
“Henry David Thoreau wasn’t a literary critic,” the board interviewing him rightly pointed out.
“His whole life was an act of literary criticism,” retorted O’Rourke.
He got the scholarship. “Well, it was 1969. Bullshit was an intellectual mainstay of the era,” he writes.
Bullshitting or BS as it is more euphemistically referred to as is a very important part of life in general and corporate life in particular. If one needs to survive and get out of tricky situations, learning how to give bullshit as well as decipher it is, very important.
Take the case of the decision made by the Life Insurance Corporation of India to relaunch Unit Linked Insurance Plans (Ulips) after a gap of nearly two years. Ulips are essentially high cost mutual funds masquerading as insurance. A major part of the premium collected through selling Ulips is invested in the stock market.
As the Business Standard reports today “The intention is to take advantage of the bullishness in the stock market. Sources familiar with the developments said this would also help the insurer attain its target of Rs 45,000 crore of new premium income collection in 2012-13 and increase its market share.”
Now this is what one would call bullshitting. Giving out every reason for a decision except the real one. And what is the real reason for LIC suddenly deciding to launch Ulips?
The real reason for LIC suddenly deciding to launch Ulips is the disinvestment programme of the government. At the beginning of the year the government had targeted to raise Rs 30,000 crore by selling shares of public sector enterprises to investors.
But now that number will have to go up due to several reasons. The government has been spending money at a faster rate than it had envisaged. The fiscal deficit during the first six months of the year had already reached 65% of the targeted amount of Rs 5,13,590 crore.
The tax collections have slowed down and only 40% of the projected amount has been collected during the first six months of the year.
Also, the auction of telecom spectrum through which the government had plans of raising Rs 40,000 crore has turned out to be a damp squib. The government could collect only Rs 1,707 crore or around 4.3% of the targeted amount.
This means a short fall of nearly Rs 38,300 crore which will now have to be most probably made up through the disinvestment route. Hence, a total of around at least Rs 68,000 crore (Rs 38,300 crore + the earlier target of Rs 30,000 crore) will now have to be raised through disinvestment.
This means the government will have to sell shares of a lot of public sector companies to investors. But the question is whether investors have an appetite for it?
And the answer is no given the current mess that the government is in. This is where LIC comes in. India’s biggest insurer bought a major part of the recent sale of shares of Hindustan Copper Ltd by the government and thus rescued its disinvestment.
And this is something that LIC is expected to do over and over again till March 31, 2012 and help the government meet its disinvestment target. Recently the government allowed LIC to own up to 30% of a company against the earlier stipulated limit of 10%.
Hence, LIC will end up buying shares which the government wants it to buy rather than the shares it should be buying from the point of view of generating good returns for its investors. Given this, LIC needs money which has the mandate to be invested in equity. The premium that it collects through its traditional endowment plans needs to be invested in safer avenues like government securities and loans raised by the best companies.
This money cannot be invested in the stock market. The money raised through selling Ulips can be invested in stocks. And that is the kind of money that LIC needs right now. Thus the decision to launch Ulips after a two year hiatus.
Also the last three months of the financial year are the best time to sell Ulips or any other kind of insurance plan, given that this is the time most people get around to doing their tax planning and investing money in tax saving avenues, insurance is one of which.
Ulips were the wonder drug for the insurance industry for a very long period of time until investors started figuring out that the only person gaining from the Ulip was the insurance agent. Also, the clamp down by Insurance Regulatory and Development Authority (IRDA) of India, the insurance regulator, on Ulip commissions, pushed insurance agents towards traditional insurance plans which continue to pay a high commission.
Now Ulips are all set to act as the wonder drug for the government. The money raised by LIC by selling its new Ulips is likely to be invested in the shares of the public sector units the government plans to sell to meet its disinvestment target.
It’s a win a win proposition for everyone. The government gets its easy money. LIC gets new premium on which it charges a management fee to manage that money. The insurance agent makes the commission. The only person losing out, as always, is the person buying the Ulip, who ends up indirectly owning shares that no one else in the market wants to buy. But then who was bothered about him anyway? He could always be bullshitted and told it was all for his own good.
Today’sEconomic Times says that the LIC lost over Rs 5,000 crore by buying public sector shares of ONGC, NMDC and NTPC.
But DK Mehrotra, chairman, LIC had told Business Standard on an earlier occasion “Ulip has its own advantages, it gives you fast returns.” But the question Mehrotra does not answer is faster returns for whom? It clearly isn’t the Ulip investor.
Hence, dear reader it is important that you decipher this bullshit and allocate your hard earned money somewhere else. 
The article originally appeared on www.firstpost.com on December 4, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
 
 

Govt will use your LIC money to offload PSU shares – again


Vivek Kaul
When the going gets tough, the government gets desperate.
The recent auction of the 2G telecom spectrum was supposed to raise Rs 40,000 crore. It hardly raised anything close to that amount.
The disinvestment process which is supposed to raise Rs 30,000 crore during the course of the year has not raised a single rupee nearly eight months into the year.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard:“By end September the government’s tax receipts amounted to less than 40 percent of the year’s Budget target.”
During the first half of the financial year (i.e. between April 1 and September 30) the fiscal deficit was at Rs 3,36,000 crore or 65.6% of the targeted fiscal deficit of Rs 5,13,590 crore. Fiscal deficit is essentially the difference between what the government earns and what it spends.
What all this tells us is that the government of India is spending more and more money and is not earning enough of it. Also it is not in a position to control it expenditure.
And that has made it desperate enough to bend its own rules. The Economic Times reports that the finance ministry has allowed Life Insurance Corporation of India to own upto 25% of a listed company. The Insurance Regulatory and Development Authority(Irda) of India, the insurance regulator, allows insurance companies to own up to 10% stake in a listed company.
Irda has blasted the government for going ahead with this decision. As The Economic Times reports “The Insurance Regulatory & Developmental Authority, which had in 2008 amended investment norms to prohibit an insurer from holding more than a 10% stake in a company, openly criticised the government’s decision, with Chairman J Hari Narayan saying it was against prudence. “It is against the (Irda) Act and against any prudence,” he said.”
And for once I agree with Irda. There are multiple reasons for the same.  As George Orwell wrote in Animal Farm “All animals are equal, but some animals are more equal than others.” The government is working on this principle by allowing LIC of India to own up to 25% of a listed company when the other insurance companies can own only up to 10% of a listed company. There can’t be two separate rules for companies in the same line of business, which is insurance in this case.
Also what happens in a situation when LIC ends up investing in a company which turns out to be a dud? Imagine what would happen when LIC decides to get out of the shares of such a company. The stock price of the company will fall impacting returns of investors who have bought insurance plans from LIC. As the old saying goes “putting all eggs in one basket” is a pretty risky proposition and goes against the basic principles of investing.
So the question is why is the government going ahead with a move which is fundamentally so wrong? As Hari Narayan toldThe Economic Times “They have to understand the gravity of the issue and the potential danger…I do not agree with the government.”
But the thing is that the government is desperate to raise money one way or another. Its attempts at selling the 2G telecom spectrum have flopped miserably. It also knows that with all the scams its credibility is at an all time low. And if it tries to sell shares of public sector companies in the open market, the process might flop in the same way that the recent 2G spectrum auction did.
Hence, in this scenario the biggest hope for the government is LIC. The trouble of course is that in some of the companies that the government wants to sell shares of, LIC may already have a stake which is close to the mandated 10%. So to get around this the government has raised it to 25%.
As The Economic Times put it “The enhanced limit could herald good news for the struggling disinvestment programme as the finance ministry could lean on state-run LIC, the largest insurer, to deploy its funds to buy hefty stakes in public sector companies that the government may find hard to sell in the open market.”
So the government is getting ready to dump its stake in various public sector units to LIC. Money is being moved from one arm of the government (LIC) to another(the central government’s annual budget).
As I had written in another piece recently when it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March). At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest. Given this, the change from 10% to 25% has been made just at the right time.
The only loser in the process is the individual who puts up his hard earned money into insurance plans of LIC and ends up financing the fiscal deficit of the government. This is nothing but another form of “financial repression” where the premium that Indians pay towards their LIC insurance policies will end up financing the fiscal deficit of the government.
Hence, don’t be surprised if you LIC agents aggressively marketing unit linked insurance plans (Ulips) which invest in stocks very aggressively for the remaining part of the year. They will have no other option. The instructions will come from right at the top.
Also what this does not do anything about the basic problem which is that the Indian government is spending much more than what it can write cheques for.
The article originally appeared on www.firstpost.com on November 21, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])