JOIN USThe Union cabinet’s decision to increase the foreign direct investment (FDI) limit in the insurance sector from the existing 26 per cent to 49 per cent is welcome for many reasons. The proposal has been pending for long, ever since the UPA government came up with the Insurance Laws (Amendment) bill in 2008.
The UPA government approved the proposal two years ago but the legislation could not be passed because of opposition from the BJP and the left parties. While the left was ideologically opposed to it as it is against foreign capital, the BJP’s opposition was political, as it opposed most of the reform policies of the UPA government on some ground or the other.
The argument that it will adversely affect the country’s economic sovereignty is wrong, as the experience of many other countries shows. The NDA government has done well now to go ahead with the proposal and it is one of the first major economic policy decisions of the government.
The insurance industry is highly capital-intensive and needs infusion of funds for a long term before it starts giving returns. Therefore companies are hesitant to enter the field. Indian companies in the field are short of capital and had to enter into joint ventures with foreign companies for funds, technology and expertise.
The cap of 26 per cent was a severe constraint and its hike to 49 per cent will help in induction of more capital. In fact there is a case for increasing it to even 100 per cent. It is 100 per cent in Japan, 80 per cent in Indonesia and 50 per cent in communist China. It is estimated that the increase in cap will lead to an inflow of about Rs 25,000 crore in the near term. The decision will also increase the trust and confidence of potential investors in the economy.
India’s population is badly underinsured. Only 6 per cent have some form of insurance and the state of health insurance, which is very important, is still worse. Those in rural areas are mostly uninsured. With increased capital availability and transfer of expertise, it will be possible to expand coverage and offer more products that suit the needs of diverse sections of the population.
The entry of more players will increase competition and the quality of service, and create more employment opportunities. The inflow of funds on long term basis will also aid other sectors of the economy like infrastructure.