At first blush, the wave of financial sector reforms unveiled by the government on Thursday appears to have pulled off the impossible. The rapturous surge witnessed on the stock market tells us the investing classes are happy, while the somewhat muted reaction of Opposition parties suggests the insurance and pension sector initiatives cannot easily be painted as “anti-people.” If the entry of multinational retail behemoths raises fears about the potential loss of jobs and livelihoods, insurance and pension reforms hold out the prospect of better social security for the middle class without the immediate danger of a “employment displacement” effect. In insurance, at least, the reform being contemplated is also quite modest: foreign insurance companies will be allowed to hold 49 per cent equity in their Indian operations but this still does not make for majority control. The private insurance sector is starved for capital and the increase in foreign equity cap will enable foreign partners to pump in money. Whether they will actually do so is another matter, given their own financial problems and their inability to crack the Indian market. For those squeamish about opening the pension sector to foreign investment, the reform has a silver lining: the regulator for the sector will finally acquire teeth. Banks and some mutual funds have already evinced interest in offering pension fund products and passage of the pension Bill will facilitate this process.
As junior partners restricted to a 49 per cent equity share, foreign pension fund companies may not be the threat some believe them to be. But the pension reforms being introduced are hardly a remedy to the absence of a viable and well-funded system of social security in India. On the positive side, millions of private sector employees and the self-employed — most of whom have no viable pension plans to subscribe to today — may get new options as a result. Remember, the government is in no mood or position to offer its services here; some of its own employees are now governed by the National Pension Scheme. On the negative side, the Western, especially American, private pension model has not exactly been an unqualified success on its home turf. Millions of Americans are unprotected or their retirement benefits have been compromised because of insufficient regulation and the lack of official oversight. As for insurance, many of the companies looking to enhance their positions in India were key players in the 2008 global financial meltdown. That is why Parliament needs to focus sharply on the quality of the regulator and regulations that will govern the pension and insurance business from now on, especially since it will increasingly be in private hands.