Against openness

BJP's opposition to more FDI in insurance imperils the health of the sector, and its own credibility on reform

The Union cabinet has proposed that the foreign direct investment (FDI) sectoral limit in insurance be raised to 49 per cent from the present 26 per cent. But the finance minister's call for supporting the bill continues to face resistance from the main opposition party, the BJP. This, they argue, is with a view to ensure that foreigners do not get to dominate India's insurance sector.

If the BJP has its way, therefore, the low insurance penetration in the Indian economy is likely to continue. The party's opposition is difficult to understand, given that the NDA government had presided over the opening up of the sector to FDI. Like the opposition to GST, this is another policy stance of the BJP that appears to arise more from obstructionism rather than any principled disagreement. The long-term interest of the economy lies in a reduction in the monopoly of the LIC. The domestic private sector does not have the resources and capital required for the growth of this industry. The experience of the last decade has shown that clearly.

The insurance sector needs medium- to long-term investments in view of the high volumes of spending involved, particularly in the initial stages of a firm's existence. FDI investors are best positioned to provide this support. Second, the insurance business in India is sorely in need of technical expertise, which comes with the ownership and control that experienced FDI investors bring with them. Foreign investment in the modern Indian insurance industry is a relatively recent phenomenon. The sector opened up to foreign players with the 1999 Insurance Regulatory and Development Authority Act, which introduced the 26 per cent sector limit on FDI. But the percentages created an odd set of incentives for the various stakeholders. A foreign investor could not participate in the industry without an Indian partner. The Indian investors could take easy advantage of the situation by remaining sleeping partners, and pocketing substantial returns with minimal effort. Arguably, this has been the case with several joint ventures in insurance, where the foreign partner has brought in considerable technical expertise in the area. The partnerships have survived for all these years, presumably in the hope that a change in the law to open up the sector would come about. But political whims have kept change at bay, and the number of frustrated foreign investors exiting the business is only increasing. With no single investor given the incentives to expend resources in an insurance firm, the sector is likely to stagnate.

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