FDI in Insurance Sector: Raise the Cap Close.

A parliamentary panel has rejected the proposal to raise foreign direct investment (FDI) in insurance to 49% from 26%. This does not help. India is one of the most under-insured countries and stalling the reform will hurt the sector's growth. Premiums paid by policyholders are on the books of insurers.

These companies need more capital to grow and meet their solvency needs - excess of assets over liabilities, maintained as a prudential measure in the interest of policyholders. Raising the FDI cap is in order, but incremental reform is not. The limit should be raised to 51% to let foreign promoters acquire a majority stake in their Indian joint ventures.

This will help them consolidate their accounts and make it attractive for their boards to sanction further investments in India. Better technology and managerial skills will make their operations more efficient. A vibrant insurance market can also mobilise long-term resources for investment in infrastructure. However, the panel, chaired by former finance minister Yashwant Sinha, is against any hike in the present global economic environment, saying it would hurt the industry. Instead, it wants the government to allow companies to raise money from the domestic capital market.

This is illogical. The proposal to amend the insurance law is an enabling measure. The point is that although many private insurers have entered the market, their operations are below potential, both in terms of their own ability and the market's needs. The importance of a well-penetrated insurance market cannot be over-emphasised.

The insurance regulator has estimated capital requirement at around Rs 61,200 crore over the next five years. This is not small change. Indian promoters have invested around Rs 21,000 crore over the last decade. Raising another Rs 61,200 crore from the domestic market is a tall order. The answer is to allow more foreign investment.

The FDI cap in the banking sector is 74%, although voting rights are capped at 10%. So, there is no reason why it should not be raised to 51% in insurance. The government should start talking to its allies and the BJP to make the reform politically acceptable.

Source : economictimes.indiatimes.com