Why LIC should not be disinvested

Hyderabad: The Union Budget's most controversial proposal is to disinvest Life Insurance Corporation of India (LIC), which has 29 lakh individual policy holders besides 11 lakh enrolled in group policies. The disinvestment will have huge implications for not only policy holders but also for the national economy as this public sector major supports government expenditure to significant levels.

Budget proposal

Union Finance Minister Nirmala Sitaraman in her budget speech said, "Listing of companies on stock exchanges discipline a company and provides access to financial markets and unlocks its value. It also gives an opportunity for retail investors to participate in the wealth so created. The government now proposes to sell a part of its holding in LIC by way of Initial Public Offer (IPO)".

Government's defence

There is a specific reason why the Union Government is so desperate to sell stakes in the premier Public Sector Undertaking (PSU). Its revenues are plummeting because of economic slowdown and the government policy of doling out sops to corporates in the name of stimulus to trigger growth. For instance, it has foregone revenue of over Rs. 1.45 lakh crore due to 10 per cent reduction in Corporate Income Tax last September. Even in this budget too, the government is losing a revenue of Rs. 40 lakh crore due to changes in personal Income Tax and Rs. 2,.5000 crore due to the changes in dividend distribution tax.

Meanwhile in the financial year, 2019-20, the Union Government has already revised its tax collection estimates. Now, the Revised Estimates suggest a less tax revenue to the tune of Rs. 1.45 lakh crore. Estimates indicate that there would be a fall of at least three lakh crores when actual tax accrual figures for the full financial year are available.

Amid the bleak tax scenario, it is hoping to raise revenues through disinvestment of central PSUs. In the last budget, the government hoped to generate Rs. 1.05 lakh crore through PSU disinvestment. But, in the first nine months of the fiscal, the actual collections stood at a mere Rs. 18,000 crore. Now, the Finance Minister hopes to raise Rs. 65,000 crore by the end of the full year, which certainly sounds unrealistic.

Despite the low accruals due to disinvestment, the Minister has put the disinvestment targets for the financial year 2020-21 at as high as Rs. 2.10 lakh crores. The government intends to raise at least Rs. 90,000 crores through disinvestment in financial sector PSUs alone that include IDBI and LIC. Given the impressive fiscal performance of LIC, the government is optimistic of milking this premier financial institution to realise its ambitious disinvestment targets. Given the fact that the IDBI and the Air India are loss-making PSUs, the Minister is hoping mainly on profit-making PSUs like LIC and the BPCL.

Selling the family silver

Thus, the disinvestment of LIC has nothing to do with better corporate governance or any other professed objectives. It is simply an exercise to meet the mounting fiscal deficit aggravated by the government's inability to either kick-start growth or raise public resources by taxing those who can pay. Thus, the disinvestment of LIC is nothing but selling the family jewellery for meeting the daily routine expenses that does not in any way make prudent economics.

Financing public expenditure

To substantiate this statement, let me explain the contribution of LIC to the government kitty. The Centre invested equity of a mere Rs. 100 crore. In just 2018-19 alone, the LIC has paid a dividend of Rs. 2,611 crores to its owner, the government of India. The total dividend paid by LIC since inception in 1956 is as high as Rs. 26,005.38 crore. The LIC paid a sum of over Rs. 10,000 crores towards Income Tax, GST, among other things in just one year. Besides, it contributes more than 25 per cent to the total budgetary efforts of the government.

The total investments of LIC as on March 31, 2019, is of the order of Rs. 29.84 lakh crore. It should be noted here that 82 per cent of LIC investments are in central and state government's securities and other securities. The annual surplus available for investments for LIC ranges from Rs. 3.5 - Rs. 4.5 lakh crore. It needs no special mention that no private insurance firm will come forward to make available funds for social and infrastructural development, especially of such a higher magnitude.

Fallacious argument

The argument that the disinvestment shall improve the performance of LIC is simply fallacious, if not preposterous. The LIC mobilizes small savings of the people and makes them available for national development. The LIC is known for international performance records in various aspects of life insurance business. The public sector LIC no longer operates in a protectionist and non-competitive environment. Even after two decades of opening up the insurance business to private companies, both Indian and foreign, it still enjoys a market share of 73 per cent. The LIC started its operations with a paltry sum of Rs. five crore in 1956. Today it commands a humongous asset base of about Rs. 31 lakh crore. The total life fund of LIC as on March 31, 2019, was Rs. 28.28 lakh crore. The motto of LIC is to mobilise people's savings for people's development.

Mortgaging policy holder interest

The apologists of LIC disinvestment claim that such a policy measure would preserve and promote the interests of policy holders. The claim is unsubstantiated. The LIC was created by an act of Parliament to protect the insuring public from the rapacious business practices of fraudulent private players. Insurance is a long-term investment by ordinary Indians, who seek the benefit, especially in the hour of personal grief. Therefore, protection to the policy holders is more vital in life insurance than any other financial sector activity.

As the government owns the LIC, the policies offered by it enjoy sovereign guarantee. This gives enormous confidence to people taking policies. Besides, it boosts the Corporation’s business.

In fact, ever since the liberalisation of the insurance industry in the country, private players have been consistently demanding the removal of this sovereign guarantee for the LIC policies in the name of a level-playing field. Such a demand is erroneous given the fact that LIC, unlike private insurance companies, contributes significantly to financing government's developmental efforts.

However, in a bid to allay the fears of LIC's present and future policy holders in the wake of the government's decision to go for an IPO, the Finance Minister in her post-budget media briefing clarified that the LIC policy holders will continue to retain the sovereign guarantee as the PSU is not privatised but only disinvested. However, the experience of other PSUs in this regard gives scope for fears that disinvestment ultimately lead to outright privatisation.

Unparalleled performance

According to the IRDA report 2018-19, the total operating expenses of LIC decreased by 3.19 per cent while that of private companies increased by 17.5 per cent. As per this report, the LIC repudiated 0.43 per cent of the claims from the individual business and 0.02 per cent of the claims from the group insurance business.

On the other hand, the private companies repudiated 2.83 per cent of claims from individual business and 0.44 per cent from group business. This reveals the fact that the servicing standards of the LIC are, in fact, way too superior to the private players in the industry.

The net Non-Performing Assets (NPAs) ratio of LIC stood at one per cent last fiscal. These NPAs account for only 0.80 per cent of its overwhelming asset base. This indicates the high standards of business of LIC, which is no comparison to private players. Therefore, individual complaints of employee work culture, if any, should not be confused with the service and business standards demonstrated by LIC.

At a time when the Union Government desperately needs financing of public investment in the wake of falling revenues, selling stakes in LIC will, in fact, hurt the efforts aimed at revenue mobilisation.