In her maiden budget speech in 2019, the finance minister’s clear focus was to leverage the insurance sector to integrate India further with the global financial system. Her 2020 budget was focused much more on domestic matters. There are two key points in the budget.
LIC’s listing, a boost to transparency
The first is the announcement of the listing of Life Insurance Corporation of India (LIC). This is a positive and welcome move. LIC is one of the largest household savings mobilizers and investors in listed securities. In late FM Arun Jaitley’s words, it would be one of the most prized “family jewels.” Divesting a part of its holding would fetch substantial proceeds to the government, for it to balance its budget. Simultaneously, listing would benefit its policyholders indirectly. A large proportion of LIC policyholders are investors in traditional endowment plans. Their investment returns are dependent on the performance of the corporation. However, they have limited visibility on the corporation’s workings, besides the annually declared bonuses. Listing enables a closer scrutiny of the corporation’s governance by market watchers and analysts. More frequent reporting is likely to strengthen the investment discipline. In the long run, it would make the corporation more efficient.
The second major move is the reduced importance of deductions under the new income tax regime. Life insurance premium gets deduction under section 80C, health insurance under 80D. Historically, individuals have awaited increase in the deduction limits under this section. The last such increase had happened in 2018. Such deductions have a two-fold purpose. Other than offering a lower tax incidence to individuals, the deductions incentivized sound financial behaviour. For example, many individuals take solace from the fact that their health insurance premium also helps them save tax. This leads to a spike in retail insurance sales in the last quarter of the fiscal year. In the new regime, for individuals earning up to Rs 15 lakh, these sections may become irrelevant. The details of deductions and exemptions to be removed remain to be seen. It is likely that the tax incidence would be lower without these deductions. First-time buyers may defer their insurance purchase, as an artificial deadline of March 31 may not be looming anymore. For individuals earning above Rs 15 lakh, the erstwhile limit remains unchanged.
In other initiatives, the government has proposed that the Deposit Insurance and Credit Guarantee Corporation (DICGC) would increase Deposit Insurance Coverage from Rs 1 lakh to Rs 5 lakh per depositor. After the recent issue with a domestic bank, the limit of Rs 1 lakh had become a major issue. Such increase will be a relief to small depositors, especially senior citizens, who invest a bulk of their corpus in bank fixed deposits. The government also mentioned the NIRVIK, Niryat Rin Vikas Yojana. Launched last year, this scheme allows for higher insurance coverage of 90 per cent of defaults for exporters through Export Credit and Guarantee Corporation. It would allow exporters to avail credit at lower interest rates.
Unlike last year, there were no measures announced specifically to attract capital into the sector. For now, the current FDI limit of 49 per cent remains unchanged. The ambitious Pradhan Mantri Arogya Yojana also remains broadly unchanged, with focus now much more on strengthening its hospital network in districts that have no empanelled provider. There is a lot more that can be done in areas such as insurance for natural catastrophes and SME business insurance.
It is said that the budget is as much about messaging as about the fiscal health. The word insurance was mentioned six times in her speech this year as compared to 12 in the previous one. The FM, however, did announce that one of her major aims would be to achieve “social security through pension and insurance penetration…benchmarked to international standards.” There is a possibility that more insurance initiatives may be announced over time, outside the budget.(The writer is Principal Officer and Managing Director, SecureNow