FIRE encompasses the financial, insurance, and real estate sectors, which collectively form a significant part of the economy. The FIRE economy comprises various businesses such as banks, credit unions, credit card companies, insurance agencies, mortgage brokers, investment brokerages, real estate agencies, hedge funds, and others.
The FIRE economy expanded after 2008 due to higher asset prices and financialization. However, during the housing bubble and 2008 crisis, the FIRE economy faced consequences like debt defaults, business failures, unemployment, reduced demand, and debt deflation.
Financial Sector:
India’s financial sector plays a crucial role in the country’s economic progress, offering global opportunities and stability. It comprises commercial banks, insurance firms, non-banking financial companies, co-operatives, pension funds, mutual funds, and other smaller financial institutions.
Potential:
- As of January 2023, India’s mutual fund industry managed Rs. 39.62 trillion in assets.
- The NSE emerged as the world’s largest derivatives exchange in 2020, and the BSE partnered with Ebix Inc to establish an insurance distribution network.
- In FY23, US$ 7.17 billion was raised through 40 IPOs, and the number of companies listed on the NSE increased to 2,113 by December 2022.
- In November 2022, UPI recorded 7.30 billion transactions valued at Rs. 12.11 trillion. During the same month, IMPS witnessed 482.46 million transactions worth Rs. 4.66 trillion.
- Indian banks launched ‘Account Aggregator,’ enabling consumers to consolidate their financial data. NPCI International Payments (NIPL) collaborated with Liquid Group to enable QR-based UPI payments in 10 countries.
- The IFSC Authority formed an expert committee to recommend the development approach for a sustainable finance hub and provide a roadmap.
- In 2021, the government launched e-RUPI, a purpose-specific digital payment solution. e-RUPI is an e-voucher sent to the beneficiary’s cell phone as a QR code or SMS string.
- India’s low credit-to-GDP ratio hampers economic growth. Opening alternative capital sources for public sector banks and addressing the credit gap for MSMEs can enhance this ratio.
- State-owned banks in India hold 70% of assets, distorting markets and impeding financing for crucial development areas. Reliance on government funds due to limited access to the capital market highlights the need to explore alternative avenues for capital infusion to support PSU banks.
- India’s MSMEs, which contribute significantly to the economy, face a credit gap of around USD 400 billion. Formal lending sources cover only USD 150 billion of their financing needs. Digitalization efforts like India Stack can help, but additional data infrastructure is needed for transparency and credit support across MSME value chains.
- India Stack initiated digital economy foundations, but sustained momentum is crucial. Public sector banks, holding 70% market share, should be incentivized to drive digitalization for efficiency, scalability, and inclusive growth.
- India must pursue sustainable growth aligned with ESG principles. Financial institutions should adapt business models to meet regulations and go beyond minimum requirements, pioneering new opportunities and setting themselves apart from competitors.
Road Ahead:
- India’s financial services industry has experienced significant growth and is expected to continue its momentum. The private wealth management sector in India has tremendous potential, with an estimated 6.11 lakh high-net-worth individuals projected by 2025.
- India’s robust banking and insurance sectors drive its dynamic global economy. Relaxing foreign investment regulations has attracted interest from insurance companies to increase stakes in joint ventures with Indian partners.
- The Association of Mutual Funds in India (AMFI) aims for significant growth, targeting nearly a five-fold increase in assets under management (AUM) to Rs. 95 lakh crore and more than a three-fold growth in investor accounts to 130 million by 2025.
- The fintech space in India is expected to further drive growth across various segments. The mobile wallet industry is projected to grow at a compound annual growth rate (CAGR) of 150%, reaching US$ 4.4 billion by 2022.
- India’s stock market has attracted growing investor interest, with Goldman Sachs forecasting it to surpass US$ 5 trillion by 2024. This would make it the world’s fifth-largest stock market, surpassing the UK.
Insurance Sector:
India’s insurance industry is experiencing significant growth driven by rising incomes and increased awareness. It is the fifth-largest life insurance market among emerging economies, growing at an annual rate of 32-34%.
Fierce competition in India’s insurance industry has spurred innovation, and up to 26% of foreign direct investment (FDI) is allowed through the automatic route. The sector is regulated by the Insurance Regulatory and Development Authority of India (IRDAI) and comprises 57 insurance companies, including the public sector Life Insurance Corporation (LIC) as the sole life insurer and six public sector non-life insurers.
Government Initiatives:
- The Union Budget 2023-24 proposes limiting income tax exemption for high-value life insurance policies. Under the proposal, policies with a total premium up to Rs. 5 lakh will be tax-exempt.
- Pradhan Mantri Fasal Bima Yojana (PMFBY), the government’s flagship crop insurance initiative, has contributed significantly to the growth of premium income in this sector.
- Ayushman Bharat (Pradhan Mantri Jan Arogya Yojana) (AB PMJAY) aims to provide health coverage of Rs. 5 lacks per family per year for secondary and tertiary care hospitalization.
- During FY23, insurance cover was provided to 44.6 crore individuals under PM Suraksha Bima and PM Jeevan Jyoti Yojana.
- The Indian government plans to sell a 7% stake in LIC for Rs. 50,000 crores in 2022, making it the largest initial public offering (IPO) in India. It is part of the banking and insurance sector consolidation.
- In 2021, the Indian government signed an agreement with the World Bank to enhance the quality of health services in Meghalaya, including the state’s health insurance program.
- The Parliament passed the General Insurance Business (Nationalisation) Amendment Bill 2021, aiming to allow the privatization of state-run general insurance companies.
- Union Budget 2021 increased the FDI limit in insurance from 49% to 74%. India’s Insurance Regulatory and Development Authority (IRDAI) announced the issuance of digital insurance policies by insurance firms through Digi Locker.
- In 2021, the government extended a one-year insurance coverage scheme of Rs. 50 lakh for healthcare workers nationwide. In the same year, the government announced a Rs. 3,000 crore infusion into state-owned general insurance companies.
Challenges:
- The government is concerned about ambiguity in insurance contracts, which contributes to many pending consumer cases. Simplifying and clarifying insurance policy terms and using understandable language can help reduce consumer cases.
- State-owned insurers dominate the insurance sector, worrying private and foreign insurers. Easing regulations and re-evaluating government guarantees and mergers are crucial for the industry’s future.
- The government also highlights the problem of inflexible policy terms. Consumers should be aware that they should not sign policy documents without understanding the terms and conditions properly.
- The government points out the lack of decision-making powers given to representatives of insurance companies for out-of-court settlements, which adds to the pending consumer cases.
- The government raises concerns about agents not providing complete policy documents to consumers when they sign up for insurance, leading to consumer complaints.
- The government notes that denying claims based on pre-existing diseases is another factor contributing to the high number of pending consumer cases in the insurance sector.
Road Ahead:
- India’s life insurance industry has a promising future with regulatory changes and evolving business practices. It is projected to grow at an annual rate of 14-15% for the next three to five years.
- With over 110 Insurance Tech startups in India, the use of IoT in the insurance market goes beyond telematics and customer risk assessment. These ventures are set to greatly enhance the industry, boost insurance penetration, and contribute to its overall development.
- The government has played a pivotal role in expanding the insurance sector through initiatives like Pradhan Mantri Fasal Bima Yojana (PMFBY) for crop insurance and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) for affordable life insurance coverage.
- India’s insurance sector is poised for growth due to favourable demographics, including a growing middle class, a young population, and increased awareness of protection and retirement planning.
Real Estate:
The real estate sector includes housing, retail, hospitality, and commercial sub-sectors. Its growth is linked to the corporate environment and demand for office space, as well as urban and semi-urban accommodation.
Potential:
India’s real estate sector is set for substantial growth, targeting a market size of US$1 trillion by 2030. It is the second-largest employment generator and anticipates increased NRI investment. The sector is projected to contribute 13% to the GDP by 2025.
Demand for retail, hospitality, and commercial real estate is rising, while the urban housing shortage stands at around 10 million units. Positive trends and significant investments make India’s real estate market highly attractive.
Government Initiatives:
- Allocation of Rs. 79,000 crore for PM Awas Yojana in the Union Budget 2023-24, representing a 66% increase from the previous year.
- The Reserve Bank of India (RBI) keeps benchmark interest rates unchanged at 4%, boosting the real estate sector with low home loan interest rates.
- Income tax relief measures for real estate developers and homebuyers under the Atmanirbhar Bharat 3.0 package.
- The government has approved Rs. 25,000 crores alternative investment fund (AIF) to revive stalled housing projects.
- Creation of the Affordable Housing Fund (AHF) with an initial corpus of Rs. 10,000 crores in the National Housing Bank (NHB) for micro-financing of housing finance companies (HFCs).
- Establishment of numerous special economic zones (SEZs), with a significant presence in the IT/BPM sector.
Challenges:
- Land availability is a challenge in the real estate sector. Revisions to land acquisition laws are needed to allocate underutilized land for development, providing relief to developers.
- Infrastructure projects face delays due to funding issues and lengthy approval processes. Single-window clearance can expedite approvals, reducing time and cost escalations.
- Overpopulation calls for the creation of new cities and urban centres to accommodate the growing population.
- Outdated building techniques and reliance on extensive human labour hinder construction efficiency. Adoption of modern building techniques can reduce construction time and labour costs for faster project delivery.
- The real estate sector encounters challenges including unsold inventory, market stagnation, vacant properties, unclear land titles, and procedural difficulties. Factors like stringent development norms, unfavourable loan-to-value ratios, competition from renting and alternative investments hinder its growth.
Road Ahead:
- SEBI approved the REIT platform in India, creating an Rs. 1.25 trillion market opportunity. Developers adapt to meet consumer demands and global standards through professional management, centralized processes, qualified professionals, and efficient project management.
- The government aims to construct 20 million affordable houses under the ambitious Pradhan Mantri Awas Yojana (PMAY), driving residential sector growth.
- The inflow of foreign direct investment (FDI) in the Indian real estate sector is promoting transparency. Developers have improved their accounting and management systems to attract funding and meet due diligence requirements.
