Policyholders in LIC could be forgiven for watching with a helpless sense of dj vu. LIC has bailed out the government before. It bought shares in state-owned banks in 2009. In 2010, it bought the government's stake in a mining firm. This time, it is injecting a billion dollars into some state banks. It has also bought out part of the government's stake in an oil firm.
Taxpayers should have been outraged at LIC's decision earlier this month to buy $2.5 billion of overpriced shares in the Oil and Natural Gas Corporation (ONGC). Analysts believe the government sold them at a 5-7% premium to the market price of R283. The shares were trading at about R282 on Tuesday.
Holders of LIC's 300 million insurance contracts possibly know that the insurance firm might have lost 25% of the value of its investments so far in government-owned businesses.
The situation is also eerily familiar for millions of investors in India's first mutual fund, the US-64. The fund collapsed after the state-sponsored manager, the Unit Trust of India (UTI), took heavy losses on its investments, including those in other state-owned units in the 1990s.
And yet, reactions are muted in a country where the government's fiddling with the accounts of businesses it owns is par for the course.
"If the government wants to use the state-owned companies to fund its capital raising programmes, then these companies can financially turn weak at some point of time," said Deven Choksey, chief executive of Mumbai-based brokerage KR Choksey. "This can be a dangerous proposition for the country as a whole."
Beyond raising eyebrows, though, the risk that the firm entrusted with providing basic insurance for millions of Indians could suffer massive losses is giving no one sleepless nights.
On the contrary, observers find such risks are a small price to pay for the safety afforded by the countrys unique model of state capitalism. The government owns a majority stake in the country's biggest banks, oil firms and the biggest players in the resources sector.
The government's long reluctance to reduce its stranglehold on the financial sector has meant two things: government debt is massive, equivalent to more than 70% of the economy, and the interbred government sector is trapped in a complex and opaque web of unhealthy cross-holdings.
The system has its fans, particularly after the 2008 Lehman collapse and, then, the European debt crisis, which felled institutions across the developed world. India's banks stood strong through both crises.
The government has also played godfather when necessary. It stepped in when UTI floundered in 2002, facilitating a deal that ensured investors could trade their worthless units in the fund for bonds. It is in the process of bailing out state-owned loss-making airline Air India. AI, which employs 28,000, is getting $4 billion worth of debt restructured by government-owned banks. Ailing private airline Kingfisher isn't going to be that fortunate.
When the world is in a crisis, "it is difficult to argue that this particular form of financial repression or regulation which the government has adopted as its way of keeping the Indian financial system safe doesn't work", said Jahangir Aziz, chief Asia economist, JPMorgan.
In LIC's case though, the question of the soundness of these investments is somewhat irrelevant, simply because the company won't run out of funds for many, many years. With assets of $300 billion, one-fifth of India's economic output, LIC will continue to rake in more in insurance premiums from a young and untapped population than it pays out in claims for several more decades.
The government, meanwhile, is struggling to contain its fiscal deficit as it foots a massive bill for a populist agenda that includes fuel subsidies, food handouts and guaranteed rural wages.
The Budget for the year ending March 31 provided just R60,000 crore to recapitalise banks. The largest bank, the State Bank of India, alone needs R80,000 crore to meet a minimum Tier-1 capital adequacy requirement of 8% by month's end.
For all the arm-twisting by the government, LIC's investment income has grown exponentially, from about R3,22,000 crore in the fiscal year that ended March 2006 to R7,77,000 crore five years later.