Lobbying pays off as finance minister backs plans to raise the FDI limit to 49%
As one of the insurance industry’s coveted BRIC economies, the Indian insurance market has been slow to open up its doors to foreign competition.
But there are tentative signs reform may be on the cards. The most significant piece of legislation to affect the industry – the Insurance Laws (Amendment) Bill 2008 – proposes a change to the foreign direct investment (FDI) limit from the current level of 26% to 49%.
The bill is to be tabled in parliament and has the backing of Indian finance minister Palaniappan Chidambaram. Speaking this week in a presentation at Washington think-tank, the Peterson Institute, he said: “I am keeping my fingers crossed. I sincerely hope that the efforts of the insurance industry in speaking to the opposition will be helpful and I can pass the Bill.”
It is understood the passage of the bill and increase in FDI for insurers is critical to close the India-EU trade pact. Negotiations for a free trade agreement intensified in April with the EU also pushing for significant duty cuts in auto, wines and spirits and dairy products and a strong intellectual property regime.
Lobbying pays off?
Foreign insurers have continued to press for a lifting of the FDI limit. A letter from international trade groups including the Association of British Insurers, European Insurance and Reinsurance Federation and the International Underwriting Association in November 2011 stated that: “In order to continue growing, and to service the widely anticipated acceleration in premium growth in the Indian insurance market, private insurers will need a substantial capital infusion.”
For its part, Lloyd’s has been pushing for changes to the FDI rules, which would allow its insurers to set up branch operations in India. It sent a trade delegation to Mumbai last year to explore license opportunities and build ties with Indian regulator, the Insurance Regulatory and Development Authority (IRDA).
For his part, the new IRDA chief TS Vijayan supports greater levels of FDI in the insurance industry. In an interview with India’s Economic Times he said: “Given that the insurance industry, particularly the life insurance industry, is capital intensive and needs at least seven to 10 years to breakeven, there is a huge strain on the domestic partner since it has to bring in 74% capital at the point of each injection.
“The much-awaited change in the limits would certainly catapult the sector to a new high in terms of number of players and expanding the reach of the sector.”
The opportunities for insurers in India are very much linked with the country’s growing and maturing economy. In his presentation to the Peterson Institute, Chidambaram said a government committee had been set up to ensure stimulus projects went ahead. The government is planning a $1trillion infrastructure development project over the next few years.
“Like many countries we responded [to the financial crisis] with stimulus packages, adopting three in quick succession,” he said. “In hindsight it appears the first was necessary, the second was questionable and doubtful, and the third was perhaps entirely avoidable.”
While the stimulus packages helped to stabilise India’s growth rate (currently projected at 6.4% for 2013-2014, up from 5% the previous year), there was a heavy price, according to Chidambaram. One was inflation and the other “out of control” fiscal deficit.
He said the Indian government was trying to emulate the Japanese in executing its big projects, with the Delhi metro offering a “shining example” of a project that was executed on time without a cost overrun. (India’s first modern public transport system consists of six lines with over 190km of track and 142 stations, of which 35 are underground.)
But Chidambaram added that 215 large projects had been postponed, each one worth more than $50m. The committee set up to clear these projects has had some early success in clearing the backlog, getting $14bn worth of projects in the oil and gas, coal, road and power sectors back on track in its first three meetings.