The logjam between the Congress and the Bharatiya Janata Party (BJP) over the passage of the Insurance Amendment Bill in the monsoon session of Parliament has carried on for too long. And, the industry is not amused.
The proposal to increase foreign direct investment (FDI) cap in insurance from 26 per cent to 49 per cent has been debate for over nine years. The Congress and the BJP have publicly stated their desire to increase the FDI cap. What stops them from agreeing inside Parliament?
We need protection
Only 6 per cent of Indians have insurance cover. Of this, 4.4 per cent have life insurance and 5 per cent have a reasonable health cover. Most small businesses (family-owned) have no insurance.
Lakhs of people lose all their savings when disaster strikes. After 66 years of independence, should we not aspire to provide adequate protection to our citizens? Why not good crop insurance for our agriculturists, weather insurance, life cover, health insurance and protection for all our assets?
India is woefully underinsured. We need long-term capital to invest in our insurance industry --- which is critical, protects human life and is a key resource for the country’s infrastructure.
According to the 12th Plan, India has to spend $1.2 trillion on infrastructure and faces a gap of nearly $300 billion in funding. Raising the FDI cap for the insurance sector will provide a strong impetus for meeting the long-term financial needs of infrastructure companies.
Finance Minister P Chidambaram had stated in his Budget speech in July 2004 that the Government wanted to raise the FDI cap in insurance to 49 per cent. Unfortunately, the Left parties, then allies of the government, opposed the move. After Chidambaram moved out of the Finance Ministry, the policy move never got the attention it deserved, even though the Left parties were not part of the new government. The opportunity to mass the Bill is back.
Weak investment sentiment
Our parliamentarians, through the Standing Committee on Finance, deliberated the issue on FDI in insurance three years ago. The world has changed since then. India is in a very different and difficult economic situation. There is scarcity of domestic capital. Developed markets are rebounding and emerging markets are under pressure.
Investor sentiment towards emerging markets, including India, is edgy. Under the circumstances, should we further delay giving global investors a positive signal? India’s domestic life insurance industry has undergone de-growth and market consolidation over the last few years, despite being one of the top ten insurance markets in the world. If we do not immediately seize the opportunity to encourage more capital, our long-term growth will be hit. Global investors will be disappointed and revisit their options.
The government is reportedly contemplating a sovereign bond issue. In addition to NRIs, global insurance companies and pension funds are typically potential subscribers to sovereign bonds.
Capital flows
The rupee has been under immense pressure in the last few months. Stable FDI inflows will put pressure on the speculators. When the Standing Committee on Finance deliberated on insurance FDI, the economy was not faced with such a grim situation. This is not a time for grandstanding. It is time for increasing the FDI cap to 49 per cent, commensurate with voting rights. Indian industry would also expect similar rights while investing abroad.
If we do not do it now, foreign capital will find its way to other competing markets.
The earlier notion of allowing FIIs to invest 23 per cent instead of raising FDI cap to 49 per cent would have not only compromised interests of all foreign insurers but would have been seriously detrimental to India’s or insurance industry’s interests. We would have once again fallen in the hands of speculative capital flows. Global investors need to allocate capital to different asset classes in competing markets to make it productive. Even the strategic investments in key growth potential markets are judged on the basis of returns they give to shareholders over a reasonably long period of 10-15 years.
Global insurance companies that wish to invest in markets like India are patient. However, the leadership of these global insurers is also accountable to their stakeholders and cannot hold on to capital for incremental investments for an endless period.
Testing patience
There are no limitations imposed on 100 per cent foreign commercial or investment banks, AMCs or NBFCs. What is the reason behind limiting foreign ownership to 26 per cent in the insurance sector, when all companies have to function within the strict regulatory framework of the IRDA? FDI cap of 26 per cent in India is among the lowest in the world. For China it is 50 per cent; Japan, South Korea, Vietnam, Hong Kong and Taiwan allow 100 per cent; Indonesia has a limit of 80 per cent and Malaysia 51 per cent.
It is hoped the two key political parties will take a constructive view and ensure the passage of the Insurance Amendment Bill with 49 per cent FDI in the monsoon session of Parliament.
(The author is the former Country Head and Chief Executive of AIG in India.)