Insurance can play big role in routing savings to infra sector

Jul 15 2014, 02:31 IST
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SummaryDevelopment of infrastructure is one of the top priorities for the new government.

Development of infrastructure is one of the top priorities for the new government. This has multiple effects on the economy as it generates demand for basic construction and industrial goods, which, in turn, can create huge employment opportunities.

The insurance sector can play an important role in channelising long-term funds from the household sector to infrastructure development. In the global competitiveness index, India ranks 86th (2010-11) where as China and Brazil rank 50th and 62nd. This indicates the enormity of the task. Infrastructure development planning is based on availability of financing options and funds. The requirement is huge.

The sub-committee on infrastructure constituted by the Planning Commission, while finalising the 12th Five-Year Plan, had estimated an investment of R41 lakh crore at the 2006-07 price level. In nominal terms, this amount translates into R65 lakh crore over a period of five years. Even though India is a leader in the domestic savings rate, the fund mobilised is nowhere close to the requirement.

Resources available from banks, NBFCs, insurance and pension sector, development agencies, bond funds and foreign direct investment together do not meet even half of the requirement.

The insurance sector is eminently positioned to provide long-term finance to the infrastructure sector. Insurance companies mobilise savings of people for the long term and, as per guidelines, they must invest up to15% of life fund in the housing and the infrastructure sector. Up to 2006-07, the combined investment of all life insurance companies was above 15%, but it fell marginally below 15% by 2010-11. Non-life companies could invest up to 16% in infrastructure during 2009-10, but their share to insurance sector investment is quite low. The trend, therefore, is depressing and needs to be reversed at the earliest.

At this juncture, what is more crucial is the issue of capacity of the insurance sector to grow its business and channelise the savings of the people into the infrastructure sector. In 2010-11, the penetration level of the insurance sector had dwindled to 4.10%. Penetration indicates share of total premium earned in the GDP of the year. The Planning Commission has envisaged this to grow to 6.40% by 2017. A growth of more than 50% in rate of penetration is not an easy target given the current sluggishness in the industry and the fact that even 28 non-life insurers together are not able to breach the barrier of 1% penetration.

The present contribution of

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