India's incumbent United Progressive Alliance (UPA) coalition government, led by the Congress Party, is pushing ahead with further FDI reform. Following its earlier decisions on September 14, 2012, to allow 51% FDI in multi-brand retail and civil aviation, it announced a second installment of far-reaching initiatives on October 4, 2012, which would allow FDI of up to 49% in insurance companies and also allow foreign investment in pensions. It currently permits investment of up to 26%.
The big question is whether these legislative changes will pass muster in parliament as the UPA government is now in minority position following the exit of its key ally, Trinamool Congress, from the coalition. Trinamool Congress withdrew from the coalition in September, in opposition to the government's FDI reforms. There appears to be intense opposition across the political spectrum to FDI. However, the main opposition party, the Bharatiya Janata Party, has signalled that it is not opposed to FDI in general but only in multi-brand retail.
Hiking the FDI cap in insurance – that will automatically extend to pensions when it becomes law – and permitting foreign reinsurance companies to set up shop in India will benefit the private sector insurance companies that require an injection of $12bn over the next five years. Besides FDI, the cabinet decision on the Pension Fund Regulatory and Development Authority Bill also provides statutory backing to the regulator for this sector, which has so far been only working through an executive order.
“We need the insurance and pension bills for infrastructure. We need them as anything that channels savings into investments helps. You need long-term loans and they can come from insurance and pensions. So, if we have a robust insurance and pension sector, it could encompass the next tier of investments. For example, highway bonds, the Rural Electrification Corporation bonds. These are bills that are going to contribute to the infrastructure,” said Naina Lal Kidwai, country head of HSBC, to the Times of India.
Although the stock markets have boomed in response to this flurry of moves, there are concerns that the latest reforms will be blocked in parliament. But the UPA government is unfazed by such a possibility, as it believes that such reforms are vital to the economic fortunes of the country. It takes confidence from the fact that bills have previously been passed following discussions with the main opposition party.
N Chandra Mohan is a business and economics commentator based in New Delhi