Insurance takes a hike

| Updated on July 25, 2014

Raising the FDI cap is sound economics and pragmatic politics

A sense of déjà vu is inescapable over the Cabinet’s decision to hike the Foreign Direct Investment cap in the insurance sector to 49 per cent from 26 per cent. After all, the Cabinet — although not this Cabinet — had given its nod to exactly the same proposal on October 4, 2012. That approval could not be translated into legislative action, primarily because of opposition from the BJP. At that time, the BJP had held the insurance proposal hostage to its demand for reversing the UPA’s decision to allow FDI in multi-brand retail. Two things have changed since then. One, now that it is in power, it has the mandate to enforce its stance on FDI in retail. And two, it is now its primary responsibility to revive growth and spark investment flows. Allowing foreign investors to hold a greater stake in Indian insurance ventures will help both.

For too long, the ownership issue has overshadowed the policy debate in insurance. FDI caps on insurance vary widely from country to country — it is 50 per cent in China, 100 per cent in Japan and 80 per cent in Indonesia. There is little concrete evidence to show that one level is better or worse than another. Insurance in general, and life insurance in particular, is a long-term and capital-intensive business, with minimum break-even periods of over a decade. Only those with a long-term interest in the sector will commit the kind of funds for the kind of periods required. And they will only come if they see a market with large growth potential, and one which offers a transparent regulatory environment. India offers both. In fact, in potential, India is one of the best insurance markets in the world. Only 6 per cent of the population is insured, and less than 5 per cent have reasonable medical insurance, though even this is largely in the form of hospitalisation cover.

To reach others and penetrate the underserved rural areas, insurers need both capital and technology. Allowing holdings of up to 49 per cent (with no restrictions on voting rights, as the Finance Minister has clarified) could bring in an estimated ₹22,000 crore in capital inflows, to add to the ₹30,000 crore already infused by the 23 life insurance JVs in the market. Greater control will imbue investors with the confidence to also transfer domain knowledge and technology. A better capitalised insurance sector will be able to offer more products — and thereby raise more long-term funds, which are sorely needed by India’s growing infrastructure sector. One hopes the Centre will learn the right lesson from this move and stop paying heed to the ‘ swadeshi’ argument which has stalled both growth and development in a number of sectors.

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Published on July 25, 2014
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