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Finance ministry looking at opening insurance sector

Union Finance Secretary Montek Singh Ahluwalia assured the business community that the Indian economy will not meet a Southeast Asian-like fate as the fundamentals of the economy are strong with borrowings under control and comfortable foreign exchange reserves.

At an earlier seminar on the 'Southeast Asian Meltdown: the Indian Response', organised by the Federation of Indian Chambers of Commerce and Industry in Bombay, Dr Ahluwalia said that while India has a comfortable foreign exchange reserve of US $27 billion, its borrowings is only $7 billion.

''Our policy is very tight in terms of uncontrolled foreign exchange borrowings,'' he declared, adding that the Southeast Asian and East Asian crisis was the result of ''uncontrolled and unthoughtful'' foreign exchange borrowings, especially short-term.

The Union finance secretary said that this excess enthusiasm for excess investment in the region had led to the appreciation of the exchange rates and finally created a panic situation, as funds continuously flowed in. ''This was a result of wrong policy decision,'' he said and added that the excess short-term loans affected the fragility of the economy, which finally led to the crisis, and the countries -- South Korea, Indonesia, Taiwain and Thailand -- will take ''some time'' to come out of it.

Ahluwalia pointed out that the crisis is so severe and the amount required to come out of the crisis so high that the International Monetary Fund may not be able to render help in the volumes required. "The task in front of these countries is enormous, and the countries facing the crisis will take time to come out of it," he said.

Ahluwalia declared that India at this stage needed to speed up exports. He admitted that there was a decline in the global trade and said that if exports are less it will not affect the balance of payments of the country, since the deficit could be covered through long-term financing.

"Our exports is currently of the order of seven per cent of the GDP, and efforts should be to make it cross 12 per cent," he said. He felt businessmen should not worry about investments as India is still a favoured investment destination.

Earlier, FICCI President K K Modi pointed out that the collapse has given the policy makers in India a sneak preview of what went wrong in the Asian growth model and an option to reexamine the changes that the country needs to incorporate to be able to withstand similar problems.

Speaking on the occasion, State Bank of India M S Verma said that the South-Asian crisis was a result of liability and currency mismatches. ''Banks and financial institutions were dollarising the economies in the Southeast Asian countries,'' he said, adding that the ''signs of collapse'' were visible and it should have been rectified.

Exim Bank of India Managing Director Y B Desai stated his bank will support ventures by Indian entrepreneurs in Southeast Asian countries. "It will forge further cooperation among India and the Southeast Asian countries," he said, "India should go there and take advantage of their needs.''

Warning of flaws in India, Kotak Mahindra Finance Vice-Chairman Uday Kotak said, ''There are some fundamental flaws in our system that need to be rectified, otherwise, if India faces a similar situation, it may not be able to come out of it. It will be a pity if you cannot recover your money because of flaws in the legal system.''

At another meeting, Ahluwalia stated that the provident funds and insurance sectors need to be opened up for channelising long-term flow of funds into the capital market for the development of various infrastructure projects..

Addressing a seminar on 'Measures for Restoring Investors Confidence in the Capital Market' organised by the All-India Industries Association in Bombay, Ahluwalia said that the present government was of the view that opening up the insurance and provident funds sectors for augmenting long term resources for vital projects was necessary.

"At present, there is a strong resistance from these sectors to be opened up and we will have to overcome such conservative approach. Even in the current limitation, the Life Insurance Corporation was not fully deploying its funds in the equity market due to various risk factors and also because of certain obligations to subscribe to government market borrowing programmes," he said.

The finance secretary pointed out that unless there is a significant decline in government short-term borrowing programme, LIC, banks and other institutions cannot enlarge their involvement and bring in more funds in the capital market.

Dr Ahluwalia said that his ministry was actively reviewing the policy measures to remove various constraints in the way of achieving the estimated six per cent growth rate in 1997-98, and would address issues related to private investment in infrastructure projects and opening up the insurance sector in the next budget proposals.

UNI