India – Fascinating, Frustrating and Growing

This is the second in a series of articles on the Asia insurance marketplace. The next article in this series will focus on Japan and will appear in an October issue of Insurance Journal.

An ancient Indian parable tells the story of four blind men, who each describe an elephant in different ways. Depending on the part they touch, the beast is variously a wall, a rope, a tree or a snake. The fable fits India well, as no country seems to offer so many contrarieties.

It’s the world’s largest democracy, yet embedded in its society is a rigid caste system thousands of years old. A technology driven economic boom co-exists with some of the world’s most grinding poverty. Its civil service runs the country, but is also routinely castigated as a bureaucratic nightmare. E.M. Forster summed it up in A Passage to India, by concluding simply, “India’s a muddle.”

“The caste system may be incomprehensible in the West,” said Dr. Herbert E. Gooch, director of the master’s program in Public Policy and Administration at Cal Lutheran University, “but it’s the essence of Indianism.” In his view, the lessening of the rigidities within the system in certain parts of the country explains why economic growth has been regionally fragmented, rather than concentrated in one area, as is China’s development along its coast. “India has never been as egalitarian as China,” he continued, “but, where the idea of ‘keeping caste’ has become less important, more [economic and social] opportunities have been created.”

Modernizing a civilization that began in the Indus Valley 5,000 years ago, contemporary with the Egyptians along the Nile and the Sumerians beside the Tigris and the Euphrates, is not an easy task, but India may have some advantages. The caste system may be alien, but “Indo-European” is the term applied to most European languages, including English. Ancient Sanskrit, as it developed in India, is usually recognized as the family’s oldest tongue. Successive invasions, most recently by the British, have layered India with a multitude of cultures, languages and political systems. English has returned to its roots. Although 30 percent of the population speaks Hindi, “English enjoys associate status but is the most important language for national, political and commercial communication,” according to the 2004 edition of the Central Intelligence Agency’s “World Factbook.”

“The British system [of administration] is more attuned to the modern world,” said Gooch. “Take Bangalore [India’s outsourcing capital], for instance. It was a well run state under the British through local officials with a big emphasis on education.” Other regions, notably Mumbai (Bombay), India’s financial and movie production center, and New Delhi, the capital, have enjoyed similar advantages. They are, however, select regions in a large mosaic.

The Factbook estimates India’s population at 1.065 billon as of July 2004, second only to China. Just feeding that many people is a major undertaking. The Factbook notes that India’s “fundamental concerns include the ongoing dispute with Pakistan over Kashmir, massive overpopulation, environmental degradation, extensive poverty, and ethnic and religious strife, all this despite impressive gains in economic investment and output.”

That last phrase is all-important for the insurance industry. You can’t sell insurance, and the related services that go with it, to people who not only have no money to buy it, but also have nothing to insure; therefore raising living standards becomes a threshold for creating an insurance market. Indians are crossing that threshold in increasing numbers, and the world’s insurers and brokers are beginning to take notice.

In a 1931 speech, Winston Churchill observed that “India is no more a political personality than Europe. India is a geographical term. It is no more a united nation than the Equator.” Well, even the greatest statesmen are sometimes wrong. Not only has Europe become a (somewhat) unified political entity, but India is now a unified and thriving democratic state. Long dominated by the Congress party, which led the fight for independence from Britain, the country embarked on a socialist economic policy that oversaw the nationalization of most of the country’s industries, including insurance.

By the 1990s, it had become evident that a state directed economic model could not produce the economic growth India required to meet the needs of its burgeoning population. The situation led to “an opening up of the Indian economy,” said Gooch, “with less state owned enterprises and less government regulation—more on the lines of Japanese and British socialism.”

The process accelerated with the eclipse of the Congress Party and the rise of the Bhartiya Janta Party, or BJP. The Party describes its rise to power and its philosophy on its Web site, as follows: “In 1996 it emerged as a single largest party in a hung parliament and then in 1999 came into power as a part of NDA Alliance under the leadership of Shri. Atal Bihari Vajpayee. The BJP led NDA alliance completed its five year regime in year 2004 [when it was defeated at the polls in May by a resurgent Congress-led coalition].”

The BJP espouses a philosophy of “integral humanism.” Its announced aim is to “establish a democratic state guaranteeing equality of opportunity and liberty of faith and expression.” It describes this commitment as “Sarva Dharma Sambhav,” indicating also “value based politics.” It “stands for decentralization of economic and political power,” and is pledged to “build up India as a strong and prosperous nation with a progressive and enlightened in outlook.”

Although it’s been generally characterized as a “Hindi Nationalist” party, Gooch observed that, for all its emphasis on “Hindu values” and “Indian nationalism” [including the development of nuclear weapons], its economic philosophy “more closely resembles neo-conservatism in the U.S.” It favors deregulation and devolving more power upon India’s 29 states and six territories in contrast to Congress’ commitment to centralization.

“The BJP is more open to investment, and more welcoming to [foreign] companies,” Gooch said. One of its first acts was to open up India’s closed insurance industry. On Dec. 2, 1999, the Indian Parliament passed the Insurance Regulatory & Development Authority Bill (IRDA), setting up an insurance regulatory commission, and not coincidentally giving foreign insurance companies the opportunity to acquire stakes in Indian companies, albeit limited to 26 percent, which had been denied to them since nationalization in 1972.

Manoj Kumar (CPCU, ACII, ARe, ARM, FIII, MBA) began his award-winning article, published by the Geneva Association (http://www.einsuranceprofessional.com/artgeneva.htm), with the observation that “A thriving insurance sector is of vital importance to every modern economy. First because it encourages the savings habit, second because it provides a safety net to rural and urban enterprises and productive individuals.” He then added, “with the nation’s infrastructure in a state of imminent collapse, India couldn’t have afforded to be lumbered with sub-optimally performing monopoly insurance companies.”

Since IRDA’s passage foreign direct investment (FDI) from the insurance industry has been returning to India, not nearly to the extent it has flowed into China, but it’s begun to have an impact. According to figures published in the India Daily last July, FDI has totaled 8.25 billion rupees (around $180 million) with the “paid-up capital of the 27 players in the sector on March 31, 2003,” calculated at 41.72 billion rupees (over $900 million). Most of the investments have been in the life sector. U.S. investors include Prudential, New York Life and Met Life.

P/C investments are rarer. The U.K.’s Royal & SunAlliance became the first when it formed a joint venture with Sundaram Finance in October 2000 to return to the Indian P/C insurance market. R&SA was a substantial player there from 1825 until nationalization. It has invested $23 million for a 26 percent stake in Royal Sundaram Alliance Insurance Company Ltd.

Foreign investment could increase substantially, however. A proposal, currently before Parliament, would raise the foreign cap on insurance investments from 26 percent to 49 percent, but even though it’s supported by Prime Minister Manmohan Singh and Finance Minister Palaniappan Chidambaram, passage is by no means assured.

There’s still a lot of resistance to efforts to privatize the Indian economy, and the insurance industry in particular. Two giant state-owned companies, Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) and its subsidiaries, remain the country’s largest insurers. They have many supporters who argue that they provide essential protection at affordable rates to India’s far-flung populace. Leftist politicians in Parliament, who have vowed to oppose the plan, have always been highly critical of the privatization of the insurance industry. They see the new measure as further weakening the public sector for the benefit of private companies, who, in their view, are more interested in making money than they are in serving the public.

A recent article on the debate, published on Insurance Journal’s Website (Aug. 23, 2004), drew a number of comments both for and against the measure. One of the most interesting, posted by Narayanan, asked the rhetorical question as to why India’s leftists are so opposed to the measure, yet remain silent “when China, with a predominantly leftist ideology, is going out of its way to infuse foreign capital in the insurance industry?”

It is this need for capital that remains critical. Kumar points out that per capita insurance premium in India [1999 figures] is “a mere $6, one of the lowest in the world.” In the U.S. it’s $2,250. He also noted: “Insurance premium in India accounts for a mere 2 percent of GDP, compared to the world average of 7.8 percent and G-7 average of 9.2 percent.”

If the premium side of the ledger is rather anemic, the service side is positively bursting with health—another example of India’s contrary nature. Business processing offshore (BPO)—”outsourcing” for short—has given Indian entrepreneurs the chance to combine their skills with those of a well educated populace to create businesses that now operate worldwide and employ a lot of people. Bear in mind, if only 2 percent of India’s population is well off, that’s still 22 million people; that’s more than the population living in many medium-sized European countries.

Even the famously slow to change insurance industry has hopped on the bandwagon. In a recent report, “Global Insurance Outsourcing—The India Perspective: Overview, Trends, Insights and Competitor Profiles,” Dublin-based Research and Markets (http://www.researchandmarkets.com) notes that: “shrinking margins, higher claims disbursement and increasing competition in recent years, especially post-9/11, have forced insurance companies to look at outsourcing/offshoring to improve efficiencies and channelize resources towards the core functions of product development and innovation.”

According to Research and Markets “the banking, financial services and insurance (BFSI) vertical is among the fastest growing segments in the outsourcing industry and the Indian offshoring industry is particularly strong in this vertical. India’s BFSI outsourcing revenues in 2003 stood at $1.1 billion, which constituted 2.5 percent of global BFSI outsourcing, while its share of the overall global BPO market was only 0.41 percent. For the top five Indian vendors in the BFSI space, the insurance vertical accounts for 49 percent of revenues.”

For mutating economies, growth is the prime consideration, and India begins to rival China in that category. The economy grew by 8.2 percent in the fiscal year ended in March 2004, the fastest growth in 15 years, and second only to China’s (9.1 percent). True, India’s agricultural production grew by 9.1 percent, following a severe drought, and the sector still accounts for around a quarter of India’s total economic output. It also supports almost three-quarters of its population. Despite the uncertainty caused by the change in government, (one of the Congress Party’s main campaign themes was to shift budgetary priorities to offer more assistance to farmers) India hopes to achieve a growth rate between 7 percent and 8 percent this year, the same as China. Most analysts expect it to be somewhat less, between 5.5 percent and 6.5 percent, due to high oil prices and inflation worries.

Primarily due to their huge populations and developing status, comparisons between the two countries are inevitable—they’re often likened to the “tortoise and the hare” with China in the latter role. Over the last few years, more than one commentator has questioned whether or not the roles might be reversed.

The two countries are fundamentally different—culturally, economically and politically. Daphne Harden, a New York-based fashion designer and production coordinator, who’s worked in both for over 20 years, observed that in Chinese culture “it’s really important not to loose face,” which can be translated loosely as self-respect. In her view, the pervasive Hindu concept of Karma differs greatly. It involves rewards and punishments for conduct in this life made manifest in the next, and requires a belief in reincarnation. As a result “there’s a lesser sense of the importance of time,” which is seen as circular rather than linear.

It would take a great deal more space to contrast these two ancient philosophies, but Prof. Gooch feels that India may eventually overtake China in part because of the way the country works. “It’s a cauldron of experimentation,” he said, with an increasing number of companies trying different business models. Many fail, but some succeed. “The winds of modernity blow,” he continued, “but no one knows whose sails will be filled.” However, in the diverse society and culture that is India “you’ve got more sails up.”

Topics Legislation Europe China Market