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Lok Sabha Insights – Ordinances on Coal and Insurance

 

Lok Sabha Insights – Ordinances on Coal and Insurance

26/12/2014

A day after budget session was concluded 2 ordinances were promulgated; one was for Coals Mines Allocation ordinance which was redone as government failed to get relevant legislation passed in both houses. Other one was for FDI in insurance which raised FDI limit from 26% to 49% under automatic route.

Government by this act signaled to international and domestic investors, and opposition that era of policy paralysis is over and its economic agenda can’t be undermined.

Ordinance for coal mines allocation was unavoidable as 80-85% power sector capacity in country is thermal based. Any delay in allocation of coal mines can cause deep damage to economy. This government is committed on revival of economy, and more particularly manufacturing and Infrastructure sector. For both these sectors, regular power supply is the backbone. Further, much emphasized good governance will require government to supply regular power to households too. Government also rolled out new schemes for universal rural electrification. To pursue these goals coal supply to power plants can’t be compromised.

Further, government this year has strict fiscal deficit targets – 4.1%. It is said that 90% of this target has already been incurred. Deptt. Of Economic Affairs has projected that government is likely to miss this target. Auction of 206 coal blocks is expected to yield about 7.5 lakh crores. This, if done will remove much of government woes. On the other hand, current account deficit can also be a problem. Though prices of crude oil are spiraling downwards, yet current account deficit is on rise (from 1.2% to 2.1%) because of rising gold imports. In absence of domestic coal supply, CAD situation will worsen.

Other steps taken by government to improve its financial position are – increased import duty on edible oil, increased excise duty on Fuel, Disinvestment.

Further, coal blocks were cancelled in first place because of arbitrary allocation. Now auctions will be through electronic media and are expected to be much transparent. This will realize adequate wealth of common resources for the people.

But, new allocations won’t solve all the problems of the sector. Mess is much deeper as Coal India still remains in possession on highest reserves and is quite inefficient. Further, there are serious problems with infrastructure such as coal washing technologies, lack of transport linkages etc.

Similarly, Insurance act was amended to allow 49% FDI. This was however a non-urgent matter and government could have waited for budget session. However, we can observe that there is consensus on this issue among two largest parties. FDI in this field is expected to attract Rs 50000 Crore investment in 5 years. Insurance coverage in India is quite low. It is an investment based sector. Most important thing is that insurance provides safety net/ social security to vulnerable people. New companies will bring, along with investment, differentiated products and specialized human resource. As of now, variety of insurance products is lacking. There are different risks that people face in there day to day life, business, agriculture, travel etc. Insurance companies plan differentiated products to cover each of this risk.

This risk is quantified by experts known as ‘actuaries’. India severely lacks them and FDI will result in more of them operating for Indian market.

Further, as has happened in banking sector, increased competition will force Indian companies to be more efficient, innovative and bigger. Currently there are numerous medium insurance companies operating in different field. Increased FDI will result in consolidation of market and when market will mature, few big players will remain. Bigger players in this field have more credibility, efficiency, economies of scale, penetration and can be effectively regulated by agencies.

In the beginning, it is expected that current foreign companies operating (at 26%) will increase their share in Indian companies to 49%. Overtime, new companies will start coming up. However, investors know that this is a mere ordinance; they will choose to wait for final legislation to be passed.

Anyways, government has option to call joint meeting if there is deadlock in house and it will most probably have majority in upper house next year. So it can confidently rely on ordinances.

Article 123 allows president to promulgate ordinances, provided both houses are not in session and t circumstances exist which render it necessary for him to take immediate action. These ordinances shall be laid before both houses of parliament within six weeks of reassembling. As maximum gap between two sessions can be of 6 months, maximum life of an ordinance is 6 months and 6 weeks.

Ordinance can be promulgated N number of times. It has remained always a controversial issue. It was argued in DC Wadhwa vs. State of Bihar (1987) the legislative power of the executive to promulgate Ordinances is to be used in exceptional circumstances and not as a substitute for the law making power of the legislature.