Finance minister P Chidambaram indicated on Thursday that the government would introduce a legislation in the Budget session of Parliament to hike FDI cap in insurance sector to 49% from the existing 26%, triggering fears of a fresh policy feud with the Left.
Reacting to the suggestion, Left vowed to kill the latest attempt to relax the ceiling percentage — seen as a big put-off for international majors in the sector. It is likely to put up a stiff resistance with CPM's Prakash Karat insisting that communists had not diluted opposition to such proposals. [source]
The mistake that the Finance Minister is doing, despite knowing the fact that India needs 100% FDI in Insurance, is by indicating that the FDI cap will be increased to 49% and not 100%.
He knew the left would protest, but it would have been much easier to convince the left to accept say 74%, if they were protesting against 100%. Now, if our Finance Minister does yield to the left, there won't be much room.. Ah! the art of negotiation.. He should shop from Karol Bagh more often.
I have always maintained that the FDI cap on Insurance should be raised to 100%, the sooner the better. We already have a strong regulatory body. And there are BIG Insurance companies already knocking at our doors. Also, LIC is already BIG enough that it shouldn't be scared of competition. With the kind of brand recognition, penetration and trust that LIC commands in India, it shouldn't really be a big deal. LIC needs no protection from the government, and already with sovereign guarantee, which is far more protection than any Public Company would ever need.
Opening the FDI in the insurance sector would be good for the consumers, in a lot of way.
Not opening wouldn't benefit anyone other than the employees of LIC, for whom it was expected that the LEFT would protest.
Why India Needs an Increase in the FDI on Insurance?
By only Increasing the FDI in Insurance, we could even wait out a little longer on the FDI caps in other sectors. The CEO of a Private Insurer once told, that increasing the FDI in Insurance would take care of the year's FDI target of the country in one go.
But that is not the reason why I say that increasing the FDI in insurance only would affect a lot of other Industries in a positive way, and that we could even do without the FDI in many other sectors for sometime, Real estate for one.
FDI in insurance would increase the penetration of Insurance in India, where the penetration of Insurance is abysmally low with insurance premium at about 3% of GDP against about 8% global average. This would be through better marketing effort by MNCs, better product innovation , consumer education and so on.
How would it affect the economy?
India is hungry for Long term capital needs to fund the building of infrastructures, which is the need of the hour.
Infrastructure, or the lack of it has been the brake, which have hindered the leap of the Indian Economy. Despite shortcomings, Indian Economy has come a long way, but every industry leader would crib at the infrastructure bottlenecks that they have face everyday in their effort for growth.
Unlike new and progressive government policies that the left would jump into protest at every opportunity, investment in infrastructure is something the government won't face any protests. It would employ millions directly, and more millions indirectly. The only bottleneck being long term funds, infrastructures being very Huge and very long term investments. Even Public-Private partnerships wouldn't be sufficient, and how much can the world bank lend, without strings?
The answer lies in raising long term capital from the masses, and come to think of it, Insurance is about the only avenue where people put in money for as long as 3o years even more. An Increase in FDI in Insurance would indirectly be a boon for the Indian economy, the investments not withstanding, but by making more people invest in long term funds to fuel the growth of the Indian Economy.
With, good infrastructures, industry leaders would agree that they can gallop!!!