Bloomberg News

India Pushes Economy Opening With FDI in Insurance, Pension

October 04, 2012

Prime Minister Manmohan Singh

Prime Minister Manmohan Singh’s plan to raise the limit to 49 percent will still need parliamentary approval after his Insurance Laws (Amendment) Bill introduced in 2008 stalled because of opposition from communist parties and Trinamool Congress, which quit the ruling coalition last month over a decision to allow foreign retailers. Photographer: Pankaj Nangia/Bloomberg

Indian Prime Minister Manmohan Singh is seeking to build on the biggest opening of the country’s economy in a decade as the cabinet is scheduled today to consider proposals to lift caps on foreign investment in insurance and pension industries.

Ministers will consider allowing overseas companies to own as much as 49 percent of local insurance ventures, from the current 26 percent, and for the first time permit foreign direct investment of as much as 26 percent in pension funds, according to two government officials with direct knowledge of the matter, who asked not to be identified, citing rules. The plans would need parliamentary approval to become law, which may prove difficult for a minority government.

After two years of policy paralysis, the Congress party-led government burst into life last month with decisions to throw open retail and aviation sectors, and its energy markets, to foreign investment and cut fuel subsidies. While the moves, which didn’t need the support of lawmakers, splintered Singh’s biggest ally from the ruling coalition, the prime minister defended his actions, saying only strong economic growth would pay for programs to aid millions of poor people.

‘Drastic Action’

“The market is in a sweet spot right,” said R.K. Gupta, the New Delhi-based managing director of Taurus Asset Management Ltd., which manages $672 million in assets. “The government knew it had to take drastic action to revive the economy and so far it is delivering.”

Singh’s administration has rejected a recommendation by a parliamentary panel, which in December said a further increase in foreign direct investment may not be in the interest of the country’s insurance industry, according to the people, who spoke yesterday.

The BSE India Sensitive Index (SENSEX), or Sensex, climbed 0.9 percent as of 10:39 a.m. in Mumbai, heading for a fifth weekly gain. The rupee appreciated 0.3 percent against the dollar on optimism that the economic changes sought by business leaders will attract foreign investment. The currency touched 51.865 a dollar, its strongest level since April 19.

The second round of big-ticket policy changes planned by the government may be harder to enforce because unlike foreign investment in retail and aviation, which are enacted by a cabinet decision, opening insurance and pensions requires parliamentary approval. Since the exit of Mamata Banerjee’s Trinamool Congress from the ruling coalition two weeks ago, the government has been reduced to a minority in both chambers of parliament.

Lacking Support

The Congress-led government has in the past been rebuffed in its efforts by rival political parties to lift the caps on insurance and pensions. Both bills have been introduced in parliament before, with the government lacking the support of parties ideologically opposed to private companies investing in pension or insurance companies, many of them state run.

Indian insurance companies gained on speculation the legislation raising overseas investment will be passed by ministers. Max India Ltd. (MAX) rose 2.5 percent, extending yesterday’s 6.1 percent rally, while Bajaj Finserv Ltd. (BJFIN) had a similar gain following yesterday’s 3.5 percent advance.

“It’s amazing how quickly expectations of the government have changed,” said Alex Mathews, research head at Geojit BNP Paribas Financial Services Ltd. (GBNP) in the southern city of Kochi. “The government looks set to continue with bold reforms.”

Aviva Plc (AV/), Allianz SE (ALV) and ING Groep NV (INGA) are among global insurers that will be able to further invest in their Indian ventures if the cap is raised.

‘Underachiever’

Singh, who was criticized by international and domestic media for his failure to get legislation passed, with Time magazine branding him an “underachiever” on the cover of its July 16 edition, is seeking to bolster an economy growing at near its slowest pace in three years and stem his party’s declining popularity following a series of corruption allegations and defeats in provincial elections.

The cabinet may also consider proposals today that will overhaul the way India distributes subsidized food to the poor as the government attempts to curb rampant theft that denies nourishment to many of the 350 million people living on less than 50 cents a day.

Ministers will discuss plans to fully computerize the five- decade-old Public Distribution System, the world’s largest effort to provide affordable meals, Food Minister K.V. Thomas told reporters yesterday without giving further details.

Coming amid the slew of policies to open a slowing economy to foreign investment, the move would deliver on a promise by Singh to balance bolstering growth with assistance for the nation’s poorest.

In a prime-time address to the nation on Sept. 21, Singh said his government would do more to spread the benefits of economic expansion in the 18 months leading up to the next elections.

His speech followed criticism from opposition parties and allies that the decisions to raise diesel prices and open the economy to foreign supermarket chains would erode farmers’ incomes and put the jobs of millions of small shopkeepers at risk.

To contact the reporter on this story: Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net

To contact the editor responsible for this story: Hari Govind at hgovind@bloomberg.net


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