Economic Environment and Insurance-Part-1

8/14/2019 Economic Environment and Insurance-Part-1

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Economic Situation by Dr. Tarun Das 1

Economic Environmentand Insurance, Part-1Dr. Tarun Das, Eco.Adviser.

MOF


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Contents of this presentation

I. Economic Reforms1. Financial sector reforms

2. Agreement on Trade under WTOII. Macro Economic Environment

1. Sustained Economic Growth2. External Sector under control


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1.1 Economic Reforms inIndia

Since July 1991 India has takencredible reforms in industry, trade,financial and fiscal sectors.

To improve efficiency, productivity andcompetitiveness of Indian industriesand to impart dynamism to the overallgrowth process.

Emphasis is on so-called LPG(liberalisation, privatisation andglobalisation of the Indian economy) .


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1.2 Basic Characteristics of Reforms

Gradual, Step by Step and Evolutionary Approach, not a Big Bang, Shock Therapy or Revolutionary ApproachGeneral political consensusStrong emphasis on human face Sovereignty constraintAgency constraintGovernment ownership of reformsPrioritisation and sequencing of reformsNo write-off / rescheduling of external debtPractically no sacrifice made by people


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1.3 Financial Sector ReformsCapital markets Strengthening SEBI as regulator Liberalisation in primary/ secondary markets

Banking Major Steps taken for tackling NPAs

Reduction of government equity in banks Reduction in CRR, SLR & lending rates

Pension, Provident, Insurance Funds

Opened for private and foreign participationEstablishment of IRDA as a regulatory entitySeparate regulatory body for pensions


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1.4 Progress of Financial Sector Reforms

Status in June 1991

CRR 25% SLR 38.5% Bank Rate 12% Rev.Repo Rate- NA PLR above 21% Deposit and interest

rates are controlled

Capital issues andprices determined bythe CCI in MOF

Status in June 2005

CRR 5% SLR 25% Bank rate 6% Rev.repo rate 5% PLR 10.5% to 12% Deposit and interest

rates are liberalised The office of CCI

abolished and SEBIestablished


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1.5 Progress of Financial Sector Reforms

Status in June 1991 Indian firms not

allowed to raise fundsfrom foreign stockexchanges

Portfolio investmentby foreign investors inIndian companies not

allowed Foreigners not

allowed to buy G-secs

Status in June 2005

Indian firms allowed toraise foreign funds byGDR, ADR, FCCBs &offshore funds

FIIs, NRIs and OCBsallowed to buy stocksin Indian markets s.t.

overall limit of 49% FIIs/ NRIs/ OCBs

allowed to buy G-secs


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1.6 FDI Caps in FinancialSectors

Sectors FDI Cap (%) Procedure1. Banking 74% s.t. RBI

guidelinesAutomatic

2. NBFCs(19 items)

100% s.t. min.capitalizationnorms

Automatic

3. Insurance 26% s.t.licenseobtained from theIRDA

Automatic

4. VentureCapital Funds Sector-specific Automatic


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1.7 New Initiatives inInsurance

National Agricultural Insurance Scheme operationalsince Rabi 1999-2000.

Agricultural Insurance Corporation incorporated inDecember 1999.

Farm Income Insurance scheme initiated in 18districts in 12 states on pilot basis since Rabi2003-04.

A community based Universal health InsuranceScheme and Varishtha Pension Bima Yojanalaunched in July 2003.


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1.8 General Agreement on Trade inServices (GATS)- Main Features (1)

First multilateral agreement on services trade

No tariff and other generalized protectionmechanisms are allowed.

Four principal modes for services trade- viz.cross border flows (Exim), consumption abroad

(foreign tour/study), commercial presence(FDI/FII), presence of natural persons(consultants).

Allows members for choice of services and to

limit the degree of provisions, in which they allowmarket access and make national treatmentcommitment


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1.9 General Agreement on Trade inServices (GATS)- Main Features (2)

Most Favoured Nation (MFN) exemption with atransition period of 10 years and review after 5years by 2000

Mutual recognition of qualifications, whichshould not be discriminatory and substitute forprotection

No restrictions on money transfer for servicesrendered

Govt can negotiate commitments in Annexesdealing with movement of natural persons,financial, telecom and air transport services.


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1.10 GATS Framework All services are covered under GATS. MFN treatment National treatment Transparency in domestic regulations

Objective and reasonable regulations Unrestricted International payments Individual countries commitments are

negotiated & put on binding commitments Progressive liberalization


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1.11 Twelve Board Groups of Services

(i) Business services

(ii) Communication services(iii) Construction & engineering services(iv) Distribution services(v) Educational services

(vi) Environmental services(vii) Financial services(viii) Health Services(ix) Tourism and travel services(x)Recreational, cultural, sportingservice(xi) Transport services(xii) Other services n.i.e.


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1.12 The Annex on FinancialServices

1. Insurance and related activities1.1 Direct insurance includingco-insurance: life and non-life;

1.2 Reinsurance and retrocession;1.3 Insurance intermediation,

such as brokerage and agency;1.4 Services auxiliary to insurance,

such as consultancy, actuarial,risk assessment and claimsettlement services.

2. Banking and other services


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1.13 Principles of theservices negotiations

1. Public services are excluded. 2. Liberalization does not mean

deregulation or privatization.3. A voluntary process.4. The right to regulate is a

fundamental premise of the GATS. 5. A democratic process.

6. Universal services.7. Transparency .


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1.14 Indias Initial Commitmentsmade in 1995 up to 31-12-1997

(c) Insurance

India made no commitment in lifeinsurance area. In non-lifeinsurance, India committed to

continue with the current practice,which was quite restrictive.(d) Reinsurance, Retrocession &

Insurance intermediation

relating to reinsurance. A minimum of 10% of the premiumof overall was committed to bereinsured abroad.


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. Commitment

under Fifth Protocol in 1998 Number of new bank branches for foreign banks

increased from 8 to 12 per year. Liberal policy on ATMs. In NBFCs, national treatment was unbound

when market access was unbound. New commitments in stock broking and financial

consultancy services. In insurance, status quo was maintained. In the area of reinsurance, the existing binding

was aligned to the market.


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1.16 Impact on Financial Sectors

Item Mar-96 Mar-98 Mar-041.No.of foreign banks 33 42 33

2.New private banks 9 9 103.Gross NPA ratio 24.8 16.0 7.24.Net NPAs ratio 10.7 8.2 3.05.Op. profits ratio 1.6 1.8 2.7

6.Net profits ratio 0.2 0.8 1.17.CRAR (Capital adequacy ratio) No. of Banks-- Below 9% 31 6 2-- 9 to 10% 10 16 1-- Above 10% 43 71 878.Number of banks 84 93 90


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1.17 Impact on Insurance SectorItems 1999 20041.No.of public insurers in life ins. 1 12.New private insurers in life ins. 0 133.No.of public insurers in non-life ins. 5 64.New private insurers in non-life ins. 0 85.Insurance penetration 1.9 3.3 (premium as % of GDP)6.Market share of private cos. (%)

---- Life insurance 0 22---- Non-life insurance 0 20

7.Annual GR of premium (2000-05)

---- Life insurance 35.1%---- Non-life insurance 14.4%


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1.18 Comparative position of insurance

in India and China in 2003

Items India Rank China Rank 1.Share in global lifeinsurance premium-Share in total business

0.81

78.5

18 1.94

69.2

8

2.Insurance density -US$-Life-Non-life

16.412.93.5

74 36.325.111.2

71

3.Ins. penetration (%)-Life-Non-life

2.882.260.62

54 3.332.301.03

44


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. us a neEconomicGrowth


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2.1 India emerged as one of the fast est growingin 1990-2001

6.2 6.0 5.9

10.0

7.77.4

6 .76 .5

6.36.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

C h i n a

I r e l a n d

M y a n m

a r

U g a n d

a

M o z a m

b i q u e

M a l a y

s i a C h i l e

L i b e r i a

D o m . R

e p I n d i a

Countr

A v e r a g e g r o w

t h r a

t e i n 1 9 9 0 s

( % )

2 2 India moved on a higher growth


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2.2 India moved on a higher growthpath

(Real GDP growth rate in per cent)

5.6

1.3

5.9

7.8

5.8

4.0

8.5

6.9

4.8

4.4

6.16.5

7.37.3

5.1

0

1

2

3

4

5

6

7

8

9

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05


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2.3 Sectoral growth rates in India (%)Sectors 1980-90 1992-2000 2002-05Agriculture 3.1 3.3 1.2

Industry 7.2 6.5 7.0Mining 7.7 4.0 6.9Manufacturing 7.4 5.9 7.4Utilities 8.9 5.7 4.4Construction 4.6 8.2 6.7Services 6.5 8.3 8.6

Trade,hotels 6.2 8.5 9.4

Trans & Telecom 5.8 7.4 13.6Financial services 9.4 8.8 7.6Social ,personal 6.0 7.4 5.2All Sectors 5.5 6.4 6.5

2 4 Sectora s ares n In a % n


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2.4 Sectora s ares n In a % nGDP)Sectors 1993-94 2003-04 2004-05

Agriculture 32.9 24.0 21.1

Industry 23.9 23.8 27.2Mining 2.1 2.3 2.8Manufacturing 14.9 13.8 16.1Utilities 1.3 1.1 2.1

Construction 5.6 6.6 6.2Services 43.2 52.2 51 .7 Trade,hotels 13.8 16.3 16.3 Trans & Telecom 5.4 7.4 7.5

Financial services 11.5 13.6 13.7Social 12.5 14.9 14.2All Sectors 100.0 100.0 100.0


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2.5 Trend of GDS as % of GDP

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1990-

91

1991-

92

1992-

93

1993-

94

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

R a t

i o t o G D P ( % )

Household P vt.C orp P ublic Total


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2.5-A Composition of HH FinancialAssets

0.0

10.0

20.0

30.0

40.0

50.0

60.070.0

80.0

90.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Years since 1990-91

I n %

t o

T o

LifeIns PPF Others


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2.6 Trend of GDI as % of GDP Trend o f Investment

0.05.0

10.015.020.025.030.0

1 3 5 7 9 1 1

1 3

Years since 1990-91

A s

% o

f G D P

Pvt.Corp Public Total


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2.7 Composition of sectoral GDI (%)

1990-91 2002-03A. Agriculture & allied 8.4 8.9B. Industry 53.0 46.9C. Services 38.5 44.2

--Trade, hotels 3.9 0.6--Transport, comm. 11.7 10.8--Finacial sectors 14.4 13.6-- Govt,social,personal 8.5 19.2

D. Total GDI 100.0 100.0


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2.8 Trends of Inflation (%)and GR of Broad Money (M3)

05

1 0

1 52 02 5

1 3 5 7 9 1 1

1 3

1 5

Ye a r s s in c e 1 9 9 0

G r o w t h R a t e ( % )

C P I

W PI

M3

eco er n n s r


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. ecovery n n us ry(Production growth rate in per

cent)

0.6

2.3

8.59.1

6.16.7

4.1

6.7

5.0

2.7

5.7

78

13.0

0 .0

2 .0

4 .0

6 .0

8 .0

10.0

12.0

14.0

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

200

4-05

%

2 10 Industrial Growth


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2.10 Industrial GrowthRates

by Broad Sectors Sectors 2002-03 2003-04 2004-05(Weight)

Mining (10.5) 5.8 5.2 4.3Manuf (79.4) 6.0 7.4 8.8Elect (10.2) 3.2 5.1 5.2OVERALL (100) 5.7 7.0 8.0


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.Rates

By Use-basedClassificationSectors 2002-03 2003-04 2004-05

[Weight]Basic (35.6) 4.9 5.4 5.5Capital (9.3) 10.5 13.6 12.6Intermed. (26.5) 3.9 6.4 5.8

Consumer(28.7) 7.1 7.1 11.3-Durables (5.4) -6.3 11.8 14.0-Non-dur (23.3) 12.0 5.8 10.4

2 12 G f f


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2.12 GR of Infrastructuresectors

Sectors 2002-03 2003-04 2004-05 Rail Traffic 5.3 7.5 8.0Ports cargo 9.0 10.0 11.3

Cell phones 21.5 115.1 10.4 Air-Exp cargo 13.3 1.0 12.6 Air-Imp cargo 18.6 13.4 24.4 Air-Int.Pass 4.8 6.5 14.0

Air-Dom.Pass 9.6 13.1 23.6Highways Up, .. -16.6 161


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2.13 Employment growth rate in India(%)

Sectors 1983-1993 1993-2000

Agriculture 2.2 0.0Mining 3.7 -1.9Manufacturing 2.3 2.6Utilities 5.3 -3.6Construction 4.2 5.2

Trade 3.8 5.7 Trans & Telecom 3.4 5.5Financial 4.6 5.4Social 3.6 -2.1All Sector 2.7 1.1


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2 15 Improvement in


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2.15 Improvement inHuman Development

Poverty ratio declined: from 39% in 1987-88 to 36% in 1993-94, further to 26% in 1999-2000.

Infant Mortality rate declined:from 94 in 1988 to 70 in 2001

Literacy rate improved:

from 52% in 1991 to 65% in 2001 Real wages for farm labour had

an increasing trend in 1990s.

3 E l S


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3 External Sector

Is Under Control


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3.1 Improvement in Current AccountBalance on External Sector (as % of GDP)

-3.1

-0.3

-1.7

-0.4

-1.0

-1.7-1.2 -1.4

-1.0 -1.0-0.5

0 .71 .2

1 .8

-0.7

-4

-3

-2

-1

0

1

2

3

1 9 9

0 - 9 1

1 9 9

1 - 9 2

1 9 9

2 - 9 3

1 9 9

3 - 9 4

1 9 9

4 - 9 5

1 9 9

5 - 9 6

1 9 9

6 - 9 7

1 9 9

7 - 9 8

1 9 9

8 - 9 9

1 9 9

9 - 0 0

2 0 0

0 - 0 1

2 0 0

1 - 0 2

2 0 0

2 - 0 3

2 0 0

3 - 0 4

2 0 0 4

- 0 5


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3.2 Acceleration in Export Growth Rate

9 .0

-1.5

3 .8

20 18.4 20.8

5 .3 4 .6

-5.1

10.8

21

-1.6

20.3 21.1

24.4

17.2

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1 9 9 0

- 9 1

1 9 9 1

- 9 2

1 9 9 2

- 9 3

1 9 9 3

- 9 4

1 9 9 4

- 9 5

1 9 9 5

- 9 6

1 9 9 6

- 9 7

1 9 9 7

- 9 8

1 9 9 8

- 9 9

1 9 9 9

- 0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3

- 0 4

2 0 0 4

- 0 5

2 0 0 5

A p r

.


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3.3 Steady Increase inExport/GDP ratios (per cent)

5.86 .9 7 .3

8.3 8 .39 .1 8 .9 8.7 8 .3 8 .4

9.9 9 .410.610.8

12

02

4

6

8

10

12

14

1 9 9 0 - 9

1 1 9 9

1 - 9 2 1 9 9

2 - 9 3 1 9 9

3 - 9 4

1 9 9 4 - 9

5 1 9 9

5 - 9 6 1 9 9

6 - 9 7 1 9 9

7 - 9 8 1 9 9

8 - 9 9 1 9 9

9 - 0 0 2 0 0

0 - 0 1 2 0 0

1 - 0 2 2 0 0

2 - 0 3 2 0 0

3 - 0 4

2 0 0 4 - 0

5

i n U S

$ b i l l i o n


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3.4 Steady Increase inImport/GDP Ratios (per cent)

8 .87.9

9 .611.1

12.312.712.512.511.5

12.412.711.812.813.3

15.5

02

4

6

8

1 0

1 2

1 4

1 6

1 8

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

i n U S

$ b i l l i o n


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3.5 Steady Improvement inInvisibles/GDP Ratios (per cent)

-0.1

0 .7 0 .6

1 .11 .8 1 .6

2 .72 .4

2 .2

3

2 .2

3 .13 .3

4 .3 4 .5

- 1

0

1

2

3

4

5

1990-

91

1991-92

1992-

93

1993-

94

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

i n U S

$ b i l l i o n

b l


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3.6 Substantial increase inForeign Investment Inflows (US$ billion)

0 .1 0 .1 0 .6

4 .25 .1

4 .9

6 .05 .4

2 .3

5 .15 .9

6 .7

4 .6

1112.5

0

2

4

6

8

1 0

1 2

1 4

1 9 9 0 - 9 1 1 9 9 1 -

9 2 1 9 9 2 -

9 3 1 9 9 3 -

9 4 1 9 9 4 -

9 5 1 9 9 5 -

9 6 1 9 9 6 -

9 7 1 9 9 7 -

9 8 1 9 9 8 -

9 9 1 9 9 9 -

0 0 2 0 0 0 -

0 1 2 0 0 1 -

0 2 2 0 0 2 -

0 3 2 0 0 3 -

0 4 2 0 0 4 -

0 5

i n U S

$ b i l l i o n

3 7 Significant reduction in External


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3.7 Significant reduction in ExternalDebt Service Ratio (at end March)

(% of gross current receipts)35.3

30.227.5

25.4 25.9 26.223.0

19.5 18.817.1 16.2

13.4 15.8

17.8

12.3

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

3 8 Si ifi t d ti i E t l


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3.8 Significant reduction in ExternalDebt/GDP ratios (at the end March)

28.7

38.737.533.8

30.827.0

24.624.323.622.122.621.120.218.616.7

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 04 5

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4 1 9 9

5 1 9 9

6 1 9 9

7 1 9 9

8 1 9 9

9 2 0 0

0 2 0 0

1 2 0 0

2 2 0 0

3 2 0 0

4 2 0 0

5

3 9 R d ti i C i l t T t l


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3.9 Reduction in Concessional to TotalExternal Debt Ratio (end March)

45.944.844.544.445.3 4 542.3

39.538.538.935.536.036.836.4

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

4 55 0

1991

1992

1993

1994

1995

1996 19

9719

9819

9920

0020

0120

0220

0320

04


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10.2

8 .3

7 .0

3 .9 4 .3

5 .4

7 .2

5 .44 .4 4 .0

3 .62 .8

4 .4 5 .1

0

2

4

6

8

10

12

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

3.10 Reduction in Short Term Debt toTotal External Debt Ratio (end March)


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3 .0 3 .2

2 .7

1 .3 1 .3 1 .4

1 .8

1 .3

1 .0 0 .9 0 .80 .6

0 .90 .7

0.0

0 .5

1 .0

1 .5

2 .0

2 .5

3 .0

3 .5

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

3.11 Reduction in Short Term Debtto GDP Ratio (end March)


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3 82

1 269 8

24 2 1 30 3 0 19 15 1 1 9 5 6 6 50

5 0

1 0 0

1 5 02 0 0

2 5 0

3 0 0

3 5 0

4 0 0

4 5 0

1991

1992

1993

1994

1995

1996 19

9719

9819

9920

0020

0120

0220

0320

0420

05

3.12 Reduction in Short Term Debt toTotal Foreign Exch. Ratio (end March)

3 13 S b i l B ild f


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5 .8 9 .2 9 .819.3

25.2 26.4 29.432.538.0

42.355

7 6

1 13

14 2

21.7

-2 0

0

20

4060

80

1 0 0

1 2 0

1 4 0

1 6 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

M a y

i n U S

$ b i l l i o n

3.13 Substantial Build-up of Foreign Exchange Reserves

(end March)

3 14 S d I i I


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2 .5

5 .3 4 .9

8 .6 8 .46 .5 6 .9

8 .2 8 .2 8 .611.3

13.8

182 0

6

0

5

1 0

1 5

2 0

2 5

1990

-91

1991

-92

1992

-93

1993

-94

1994

-96

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

i n U S

$ b i l l i o n

3.14 Steady Improvement in ImportCover of FER (Number of months)

(end March)


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3.15 FDI Outstanding (%)

Sectors Aug 1991 Aug 2003

1. Plantation & agriculture 9.5 1.42. Mining 0.3 0.13. Power 0.1 16.54. Manufacturing 84.9 50.45. Services 5.2 32.4

a)Financial & real estate na6.4b) Telecommunications na 19.8c) Transport na 1.9d)Hotels and retail trade na 2.7e) Others na 1.6

Total 100 100

3 16 Average Growth rates in


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3.16 Average Growth rates inIndia (per cent)

Decade Services ServicesExports Imports1950s 4.5 1.91960s 0.0 1.11970s 22.7 17.61980s 4.4 8.81990s 17.7 17.0

2000-2004 15.2 12.6

. ompos t on o serv ce


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pexports

of India (per cent)Period Travel Trans Insurance Govt Misc1950s 8.6 32.9 7.7 23.4 27.31960s 10.5 34.6 5.2 29.7 19.91970s 25.5 37.3 4.7 10.8 21.81980s 5.9 17.1 2.4 3.1 41.1 1990s 33.0

20.3 2.3 1.8 42.6

2000-04 15.4 10.7 1.3 2.0 70.6

Note: Misc includes financial, software and other modernservices.

. ompos t on o serv ce


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pimports

of India (per cent)

Period Travel Trans Insurance Govt Misc1950s 18.3 22.6 6.7 22.6 29.81960s 9.5 29.5 2.4 16.9 39.01970s 7.5 36.9 1.1 9.4 40.81980s 11.8 31.5 0.5 4.2 49.61990s 14.6 30.6 0.3 2.7 49.82000- 13.5 13.6 1.3 1.1 70.52004

___________________________________________ Note: Misc includes financial, software and other

modern services.


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E i Sit ti b D T D 57

Thank you

Documents

Economic Environment and Insurance-Part-1