|Friday, 24 February 2012 00:00|
If it wasn’t bad enough that overall savings in the economy fell from 36.82% of GDP in 2007-08 to 32.3% in 2010-11, and household savings from 22.42% to 22.8%, what made this worse was the greater shift towards physical assets like gold and land which are not as easily available for investment purposes. According to the quick estimates for 2010-11, household savings in financial assets fell from 11.63% of GDP in 2007-08 to 10% in 2010-11—while financial savings were 1.08 times non-financial savings in 2007-08, they were just 0.78 times non-financial savings in 2010-11. It is this distortion that the Prime Minister’s Economic Advisory Council (PMEAC) says needs to be corrected if growth has to be sustainable.
While there are natural reasons like the flight to security in times of trouble that are responsible for households preferring to buy large quantities of gold for instance, as the PMEAC points out, government policy has contributed to this—in the event, PMEAC has said the government needs to work towards making investment in insurance and mutual funds at least as attractive as they were till March 2010.
The first to set the ball rolling in the road to distorting the incentive structure was Sebi that abolished the upfront 2.25% commission on mutual funds in August 2009, which is when investments in mutual funds started falling. If this wasn’t bad enough, the insurance regulator decided to come up with its own pro-aam aadmi policies. Sales commissions on insurance were always excessively high and this, for instance, ensured that banks and others didn’t want to sell the New Pension Scheme among others—typically, in unit-linked insurance products, 40-50% of the first-year premium was given to agents as commission. However, Irda went the other extreme and, in September 2010, capped the first-year commission at 7% of the premium and at 5% for the second and third year. In between, it issued guidelines on a minimum guaranteed return on pensions and later it insisted on capital-protection schemes. All of which ensured a sharp drop in the number of insurance products for sale and the first-year premiums in the insurance industry for the period April-December 2011 fell 17% as compared to the same period last year. In the three quarters of the current financial year, over 3 lakh active agents have quit the profession as they no longer find it attractive to sell insurance policies, partly due to the reduced commission on Ulips—these accounted for 60% of all life insurance policies—and withdrawal of pension products from the market since January this year. Since the new norms on Ulips were announced in September 2010 by Irda, around 5.5 lakh active insurance agents have quit the profession.
It is not anyone’s case that changes are not needed in the incentive structure for financial savings or that some of the new regulations aren’t good for consumer protection, but all the regulators need to sit down together to ensure the changes aren’t killing the market for financial savings.