India has already become 7th largest economy of the world and it is expected to become 5th largest economy soon. The growth rates of direct taxes in 2016-17 and 2017-18 have been significant. A growth of 12.6% was recorded last year, and 18.7% till January 2018. The Budget2018-19 is farmer friendly, common citizen friendly, business environment friendly and development friendly. It will add to ‘Ease of Living. This budget has devoted attention to all sectors, ranging from agriculture to infrastructure. The government will contribute 12 per cent of wages of new employees in employee provident fund for all sectors for the next three years. Aimed at promotion of employment, the move will also help in promoting job creation. Contributions from women employees will be brought down from 12 per cent to 8 per cent. The Government has taken up programmes to direct the benefits of structural changes and good growth to reach farmers, poor and other vulnerable sections of our society and to uplift the under-developed regions. In order to take care of the education and health care needs of Below Poverty Line (BPL) and rural families, The Budget proposes to increase the cess on personal income tax and corporation tax to 4 percent from the present 3 percent. The new cess will be called the “Health and Education Cess.”
The Budget is focused on consolidation and agriculture, infrastructure and healthcare. It’s a good stance, as agriculture and the rural economy remain the foundation for India’s overall growth story. With two of three citizens living in villages, their income and consumption patterns are indeed critical to increasing demand for industry. The standard deduction of Rs 40,000 (from around Rs 34,000 now) allowed for transport, medical reimbursement for salaried tax payers can at best be termed a token gesture. The 10 per cent tax on mutual fund dividends at the hands of the investor will hit the middle class. The main focus of the Budget 2018, has been on the rural sector and infrastructure development. The focus of the Government next year will be on providing maximum livelihood opportunities in the rural areas by spending more on livelihood, agriculture and allied activities and construction of rural infrastructure. The Budget has given a big thrust to Medium, Small and Micro Enterprises (MSMEs) to boost employment and economic growth. 2017-18 disinvestment target of Rs.72,500 crore has been exceeded and expected receipts of Rs.1,00,000 crore.
MERGER OF THREE PSU’S:
The proposal is part of the government’s divestment drive and follows the listing of two other public sector insurers: New India Assurance (NIA) and General Insurance Corporation (GIC). The government had offloaded 11.65% stake in NIA and 12.5% in GIC for Rs 7,653 crore and Rs 9,704 crore, respectively. While the shares of NIA are trading 16.5% below its offer price on BSE, GIC is trading 17.4% below its offer price. The profitability of most general insurance companies including state-owned ones has been under pressure owing to rising underwriting losses and higher claims. The merger of the three general insurance companies is expected to be a positive given the benefits from greater economies of scale and reduction in unhealthy competition. It would also benefit private sector insurers. A merger prior to listing would also result in better valuation of the entity. The merger of the three state-run insurers would lead to the creation of a mammoth organisation and would be a key part of the government’s divestment target for fiscal year 2018-19. The suggestion for consolidation came from the All India Insurance Employees Association (AIIEA) – Secretary of Standing Committee and would result in elimination of competition between the three PSU companies, reducing marketing expenses, raising cost efficiencies, streamlining of processes and systems by adopting the best prevailing, and finally, enabling an increase in the risk retention capacity, which directly results in saving in the cash outflow of re-insurance premiums. Merger of the three general insurance companies is expected to be positive given the benefits from better economies of scale and reduction in unhealthy competition thereby benefiting the private sector insurers also. The merged entity will have higher scalability and lower operational costs.
As part of divestment of public sector entities, the government will merge three general insurance firms into one and subsequently list the entity on stock exchanges. Three public sector general insurance companies — National Insurance Co Ltd, United India Assurance Co Ltd and Oriental India Insurance Company — will be merged into a single insurance company and be subsequently listed. The government has begun strategic disinvestment in 24 public sector units (PSUs), including national carrier Air India. As part of divestment of stake in its general insurance firms, the government diluted stakes in New India Assurance Co Ltd and and General Insurance Corporation of India last year. The number of insurance companies getting listed, with the smaller ones getting listed at the tail end can impact their valuations The proposed merger of three general insurers would create a mega insurance company in the public sector domain and the consolidated entity is likely to come out with a public issue. Under the Gross Direct Premium underwritten up to December, in the current fiscal, New India Assurance was at ₹16,806.45 crore; National Insurance ₹11,732.21 crore; Oriental Insurance ₹8,396.18; and United India Insurance was at ₹11,987.03 crore. The proposed insurance company’s premium would be at more than ₹30,000 crore. The consolidation is a step in the right direction and would lay the foundation for the merged entity to become collectively stronger. These state-owned companies were based in different regions and therefore were not in the best position to scale up across the country.
STOCKS OF GENERAL INSURERS:
Stocks of general insurers surged in anticipation of the boost to their business. Shares of general insurance companies rose with ICICI Lombard General Insurance Co. Ltd surging over 5%, the New India Assurance Co. Ltd rising 5.45% and even life insurers gaining on the hope of greater insurance penetration. In the absence of any big announcements, bank shares lagged with the BSE Bankex closing in the red.
GOVERNMENT FUNDED HEALTHCARE SCHEME:
India is clearly moving towards a framework of National Universal Health Insurance scheme. This would be a precursor, and an experiment, and, therefore, it looks like this would need to be a Public-Private partnership between the government and the Insurance companies. The Government is slowly but steadily progressing towards universal health coverage. Ayushman Bharat will help 10 crore families in their medical need. This is the biggest ever government-sponsored health care programme in the world. World’s largest govt-funded health programme -‘National Health Protection Scheme’ will cover 10 crore poor and vulnerable families by providing upto Rs 5 lakh per family per year. It will provide 5 lakh rupees per family per year for medical reimbursement, under National Health Protection Scheme. This will be world’s largest health protection scheme that would cover for 50 crore Indians. The proposals for a national safety net for the poor in particular and the health insurance sector in particular will act as a catalyst to increase health insurance penetration. Increased medical insurance coverage is likely to provide more business opportunities. However, given the precarious profitability of the earlier schemes, the pricing of the scheme would remain a key monitorable. Extending the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJY) and the Pradhan Mantri Suraksha Bima Yojana (PMSBY) is a positive move to bring more people into the insurance ambit. The government will launch a flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families of around 50 crore people providing coverage up to Rs 5 lakh per family a year for secondary and tertiary care hospitalisation. The proposed National Health Protection Scheme is a great move to bring health insurance to almost 40 per cent of the population and is move towards universal health insurance. The focus on health and wellness indicates that government is driving a robust health and well-being ecosystem.
The government is progressing towards universal health coverage. Tuberculosis claims more lives every year than any other disease. The government will provide ₹600 crore for nutrititonal support to all TB patients. National Healthcare Programme would also mean increasing usage of generic products, slightly negative for pharma companies but higher volume can offset the price loss. Health Insurance increased for the poor families. Insurance companies will be in limelight. The most appropriate thing to do would be for the government to partly subsidise the premium payment and leave the operationalisation and risk-carrying to Insurance companies, which today are well established both from the point of view of risk capitalisation and also on operational maturity. The only weak link here would be the health provider network (hospitals and clinics), which needs to fall in line to offer suitable services on a single protocol and IT system network. The next big step in health Insurance in India would be to bring the health provider network under regulations and discipline which will enable the actual service delivery under one National Standard. However, the health and general insurance companies will need to look at offering attractive features for people to increase their sum insured levels to match up to these levels of premia. Normally people do not want to take very high sum insured policies and are satisfied with 5 lakh sum insured policies which may not fill the entire exemption limit. In that case, people will need to look at additional policies like critical illness policies (fixed benefit policies) normally offered by life insurance companies. So it is an opportunity for the life insurance companies also. A lot of work can be done here to look at enriching the features of health policies and also looking at covering extended families here and senior citizen covers need to be favourably looked at – for which companies need to invest in Analytics and Preventive Chronic Care mechanisms to maintain favourable loss ratios.
EXEMPTION FROM MEDICAL:
The proposed deduction under Section 80D, which includes amount paid towards health insurance premium for covering senior citizens (60 years and above) has been increased from existing limit of Rs 30,000 to Rs 50,000 is a positive step and would help increase penetration of health insurance. It would have positive impact on the health insurance companies. However, the existing limit of Rs 20,000 for citizens under 60 has not been revised. With this announcement India, like countries which provide higher health insurance cover for their citizens, will also have people with higher life expectancy. Senior citizens have got a bunch of goodies: Rs 50,000 per annum exemption for medical insurance under Sec 80D, etc is a big relief. Senior citizens will now be able to claim benefit of a deduction of ₹50,000 for medical insurance premium. For critical illnesses, ₹1,00,000 deduction will be given for medical expenditure. In a country where there is a very low social security provided by the government, it is important to drive people towards a more secure future, not only for them but also for their loved ones. It is imperative to invest in long-term financial instruments along with the short-term instruments like motor/ bike insurance. A separate limit of Rs. 50,000 per annum for life insurance will give a much required boost to the industry that serves approximately 36 crore customers today. The individual exemption limits for paying health insurance have been increased to Rs. 40,000 (from Rs.25,000) for the taxpayer and to Rs. 50,000 (from 30,000). This means that an additional Rs. 20,000-35,000 can be favourably looked at by individuals for allocating to health insurance premiums. India still looks at tax benefits for insurance premium payments and this would, therefore, be an effective stimulus towards increase of penetration of Health Insurance.
BLOCKCHAIN-THE TECHNOLOGY:
The government doubled the budget for the Digital India Scheme to Rs 3073 crore for FY19, a move being widely applauded across India Inc. The second development of investment of Rs 10,000 crore for rural Wi-Fi hotspots, giving 5 crore citizens access to broadband speed internet by the deployment of 5 lakh Wi-Fi hotspots should help bring more consumers online, increasing digital consumption of services like OTT, entertainment, banking, and e-commerce. T hese steps are a definite plus for the significant growth of the digital businesses in the country. The encouragement for technologies like machine learning, artificial intelligence, and block chain will encourage these technologies for widespread public use. This is actually great news, because all these tech companies are only beginning to find a market for themselves. And if the government becomes one of the key drivers and adopters of the tech companies and tech tools, it is actually going to be a great time for the ecosystem, The government will promote the use of blockchain – the technology that drives cryptocurrency. Distributed ledger system or the blockchain technology allows organization of any chain of records or transactions without the need of intermediaries. The government may unlikely permit the use of cryptocurrency such as bitcoins to buy products. The government doesn’t consider cryptocurrency legal tender or coin and will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities or as part of the payment system. the government may not likely ban cryptocurrency and prohibit the legitimate use of cryptocurrency as long as cryptocurrency is not used in the payment system. At present, companies such as Microsoft, Wikipedia, Expedia.com, KFC Canada, Bloomberg.com, Reddit, among others accept cryptocurrency from customers. In India, some of the travel portals, such as Flight Shop, e-Travel Smart, also accept cryptocurrency. Bitcoins or other cryptocurrency is like gold in more ways than one. Like gold, cryptocurrency has to be mined; it doesn’t have a central issuing authority and is a deregulated currency. There is no central bank that decides when and how many more cryptocurrency to produce. At present, there are around 17-million bitcoins in circulation and four million coins waiting to be mined. In India, there is no legal framework to regulate the use and trade of cryptocurrency at present. Till date, the Reserve Bank of India has issued three warnings and the Finance Ministry has issued one public statement to discourage the use of cryptocurrency.
The government estimates fiscal deficit for FY 2018-19 at 3.3 per cent. The ambitious health cover programme will go like crop insurance scheme where only insurance companies make money. The government will contribute 12 per cent of wages of new employees in EPF for all sectors for the next 3 years The rationalisation of costs would help bring down the combined ratio (a measure of profitability after taking into account the incurred losses and expenses) and improve profitability. The proposal to merge the non-listed state-run general insurers and get the merged entity listed would help economies of scale ultimately helping end customers who look forward to more access and belief to insurance as India has less than 3 per cent penetration. The plan to merge the three PSU general insurers and get entity listed will lead to improved operational efficiencies, adoption of suitable risks-based pricing model and ensuring sustained growth, will positively impact both the sector and customer in the long-term. This would encourage domestic and foreign investors to positively review their investment decision in the sector. The impact of the merger and listing, on the end consumers, would be visible only 5–6 quarters as the merger process is long. The only splash in the Union budget for the financial services industry is the flagship health insurance plan. Much like the crop insurance boost in the previous year, the health insurance scheme can fire up penetration of insurance. Increased allocation for education sector, too, is expected to give a boost to start-ups in the sector. Overall it’s a good budget for the economy which in turn will always have a positive impact on the insurance sector. Fiscal prudence and thrust on keeping inflation low will continue to have a beneficial impact for life insurance offerings.
Author
JAGENDRA KUMAR
Ex. CEO, Pearl Insurance Brokers
71/143, “Ramashram” Paramhans Marg,
Mansarovar, JAIPUR-302020
REFERENCES:
- http://www.financialexpress.com/budget/budget-2018-a-big-boost-to-health-insurance
- http://www.livemint.com/Money/EMshsgW8AwfybzipvIUI6N/Budget-2018-
- http://www.businesstoday.in/union-budget-2018-19/news/how-budget-2018
- http://www.thehindu.com/business/budget/union-budget-2018-mega-insurance
- http://www.firstpost.com/business/union-budget-2018-live-updates-shares
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