Spreading the safety net farther and wider

Waiving GST on health and life insurance premiums may be a regressive move from the tax standpoint, but its economic benefits outweigh costs. Insurance offers an efficient mechanism for social security and reduces the burden on the state. It works as a hedge against healthcare cost inflation and inadequate livelihood security. India lags in insurance penetration and has set a target of achieving universal coverage over the next quarter century. Affordability has been an issue, partly due to low coverage, and the tax waiver will contribute substantially to insurance sector reforms. Investments in the sector have slowed down, and earlier this year, GoI raised the FDI limit from 75% to 100%.

There is some urgency for a GST carveout for insurance, which addresses social security needs intra-generationally. This assumes significance as India approaches its peak population before adverse demographic effects set in. Insurance reforms have been long in the making, allowing state-run monopolies to keep costs low by distributing profits to their customers. Private insurers must set aside a bigger share of profits for shareholders, which affects their competitiveness. Unlike banking, which permits wider innovation, private insurers haven't been able to make big inroads against public sector dominance. Growth is critically dependent on well-capitalised foreign players, whose investment plans are being held back by their local partners. Profits in the general insurance business are concentrated in healthcare, throttling capital flow to other segments.

Revenue implications of the GST exemption are likely to be subsumed by changes in consumer behaviour as insurance penetration improves. Households can adjust their savings requirements with adequate insurance, thus freeing up a bigger slice of income for consumption. The timing of the GST reforms coincides with slowing consumption growth. Exemption for insurance will, on its own, contribute to the intended policy outcome of bolstering domestic consumption to mitigate external volatility.