Don't use LIC to bail out failing banks, Mr Modi. Is this the reform you had promised?
Prime Minister Narendra Modi often seeks sympathy from his electorate by projecting himself as a victim, carrying the burden of the alleged excesses of his predecessor. According to him, he was handed over an economy with high fiscal deficit and an almost bankrupt banking sector.
But if Modi's predecessor was responsible for the economic mess that he inherited, he must cut the roots of the evil that allowed previous governments to proliferate and sustain such excesses.
One of the reasons behind the problematic economic decisions of Modi's predecessor was the cushion provided by the Life Corporation of India (LIC).
The insurance company is India's largest in the sector and with assets of more than Rs 27 lakh crore, it would be quite valuable when listed on the stock exchanges. The company enjoys an unmatched brand equity with more than 2/3 market share in a sector that boasts of 12 private sector companies.
But it is this brand equity that successive Indian governments have misused over the years by forcing the LIC to bail out Initial Public Offers or IPOs of government PSUs. By doing so, the government manages to keep its fiscal deficit down through having higher proceeds under its disinvestment process.
The government also forces the life insurer to purchase its stake in companies that are not doing well. All these cardinal sins were committed by Modi's predecessors and now he is doing the same.
If the talks of investing in the government owned IDBI bank are fructified, the LIC would be increasing its stake in one of the worst performing public sector banks in the country. The bank had reported gross non-performing assets worth Rs 55,588.26 crore against Rs 44,752.59 crore on year-on-year basis in the fourth quarter of last financial year.
It is a fact that Modi government is finding it difficult to turn around the messy government sector banks that are reeling under the burden of rising bad loans. But by making one of its badly run companies subsidised by a company that is responsible for managing the investments of general public the Modi government is committing the same crime that it accuses other governments of.
Most bad economic decisions are taken with a back up plan that helps government brush the wrong decision under the carpet. By milking LIC, the governments in the past have managed to keep economy's fiscal deficit at a much lower level than it should could have been, allowing the then finance ministers to further increase the exposure to silly economic decisions.
If the Modi government actually wants to rid India of distorted economic polices and make it a truly liberal economy, where a bad economic decision is not sustained through a number of other bad decisions, it must stop the policy of using LIC's money to bail itself out.
Introducing Goods and Services Tax, putting Air India for sale and passing the Insolvency and Bankruptcy Code may be called desirable economic reforms that will help clean the mess that Indian economy is in at the moment, but a real reform is something that pushes the government to be on its toes before making reckless decisions that needs to be bailed out later. This is why, interfering with LIC and telling its management to invest in loss making/ low return assets must be stopped. Does Modi, the reformist have the courage to do it?