The Union Cabinet has approved the legislation to raise Foreign Direct Investment (FDI) cap in the insurance sector to 100 per cent from the present 74 per cent.
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With a view to take the economic agenda forward, the Union Cabinet has approved the legislation to raise Foreign Direct Investment (FDI) cap in the insurance sector to 100 per cent from the present 74 per cent. The decision was long pending since the introduction of the new economic policy in the early nineties due to objections raised by opposition parties, especially the Left. Thus the opening up of the insurance sector to FDI made slow progress over the years and finally reached the culmination. It may be mentioned that Union Finance Minister Nirmala Sitharaman had announced the decision to raise the FDI limit in the last budget. Announcing the increase in FDI limit, she had asserted that the enhanced limit would be enforced on the condition that it would be permitted to insurers who invest their entire premium income in India.
Those familiar with the insurance sector will know well that it is a capital intensive sector and requires long-term investments before yielding returns. This is why the sector remains as a state monopoly for a long period and private players have started entering in this sector only when the FDI cap was raised to 26 per cent, and subsequently to 49 per cent since 1999 in collaboration with domestic firms through joint ventures. Although such efforts have definitely increased insurance penetration in India, it is still below the global level. As a result, a vast majority of the Indian populace is still being denied both life and non-life insurance facilities.
So, the government’s decision to raise the FDI cap is aimed at tapping this vast market, which can infuse a fresh lease of life to the insurance. Already withdrawal of GST on health and life insurance has boosted insurance payments by 35 per cent in year-on-year growth. The said sector is expecting similar growth once the cap on FDI investment is completely withdrawn after the passage of the Insurance Laws (Amendment) bill in the parliament. For record, it may be mentioned that life insurance penetration in India is only about three per cent and penetration of general insurance stands at little over one per cent.
This is why insurance penetration in the country is a must- not only to boost economic development, but also to enhance the living standards of the citizens in India, especially those living in rural areas. After the recent decision on FDI, the sector is expected to grow 7 per cent annually over the next five years. Moreover, the entry of private players will energise the sector and people may become aware of the need to enrolling in life and general insurance policies. Well, India is not the only country to lift FDI cap; many countries like China and Brazil among others, have already allowed 100 per cent FDI in the said sector. All in all, it’s a welcome move, provided the government exercises regulatory oversight to protect the interest of policy holders as consumer interests remain central to the reform agenda.