RBI For Higher FDI Cap in Insurance Sector

Monday, April 30, 2012
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New Delhi: The Reserve Bank has said there is a case for hiking FDI cap in insurance and some other sectors in view of India's growing integration with the global economy, if local economic and political scenario permits.

"... as the economy integrates further with the global economy and domestic economic and political conditions permit, there may be a need to relook at the sectoral caps (especially in insurance) and restrictions on FDI flows (especially in multi-brand retail)," RBI has said in a study, released earlier this month, on FDI flows to India.

The study said there are certain sectors, including agriculture, where FDI (Foreign Direct Investment) is not allowed, while sectoral caps in some sectors such as insurance and media are relatively low compared to the global patterns.

"In this context, it may be noted that the caps and restrictions are based on domestic considerations and there is no uniform standards that fits all countries," it added.

RBI said the demands for raising the present FDI limits of 26 per cent in the insurance sector may be reviewed taking into account the changing demographic patterns as well as the role of insurance companies in supplying the required long term finance in the economy.

Commenting on the need for a higher FDI limit in the insurance sector, Monish Shah, Senior Director of consultancy giant Deloitte in India, told PTI that insurance is a high gestation, capital intensive business and the sector needs fresh capital to fund its existing businesses and expansion.

"Increased capital will benefit the industry as a whole by increasing the insurance access and penetration in the country.

"Increase in FDI in insurance from a strategic minority to a dominant minority is one of the reforms which is being eagerly awaited by several industry players; as despite the slowdown, Indian insurance sector remains attractive in the long term," he added.

Noting that life insurance industry is long-term in nature and requires years of capital infusion, MetLife India's Managing Director and Country Manager Rajesh Relan said: "Capital infusion through FDI will help grow the industry by increasing customer coverage with a range of innovate products that are clearly focused on today's uninsured.

He further said that growth of insurance sector would also help in developing other sectors and providing capital to the government for long-term infrastructure projects.

The RBI study found that sectoral cap was higher than India even in China for insurance and a few other sectors, while countries like Brazil and Russia have higher sectoral caps than India across most of the sectors.

About the retail sector, it said that "given the international experience, it is argued that FDI in retail would help in reaping the benefits of organised supply chains and reduction in wastage in terms of better prices to both farmers and consumers.

"The main apprehensions in India, however, are that FDI in retail would expose the domestic retailers - especially the small family managed outlets - to unfair competition and thereby eventually leading to large-scale exit of domestic retailers and hence significant job losses.

"A balanced and objective view needs to be taken in this regard."

The RBI further said that another important sector was the generation, transmission and distribution of electricity produced in atomic power, where FDI is not permitted at present, may merit a revisit.

"In this context, it may be noted that electricity distribution services is a preferred sector for FDI. According to UNCTAD four out of top ten cross-border deals during 2009 were in this segment, which led to increase in FDI in this sector even in the face of decline in overall FDI," it noted.

Akash Gupt, Executive Director PWC India, said that FDI in multi-brand retail is going to improve the back end infrastructure and the efficiency and therefore will have a positive impact on the goods.

"Insurance sector today needs substantial amount of money, its bleeding heavily. And since Indian entrepreneurs don't have that amount of money and the only way is to let foreign players enter the segment and hike the investment limit to 49 per cent from 26 per cent," he added.

Gupt said that foreign investors were expected to invest money immediately after the FDI cap was raised in insurance, as they understand that there is substantial growth in this country.

"Globally capital is scarce. An appropriate due diligence is going to be made by the foreign investor before he makes the investment but I don't see any foreign investor ignoring India," he noted.

Ritesh Chandra, Executive Director and Head Consumer Practice at Avendus capital, said that the RBI's objective is to attract a large quantum of FDI through opening up of multi-brand retail business for foreign investors.

"FDI in retail has long term benefits for the economy which outweigh any potential threats to domestic retailers... The so called threat to "mom and pop" stores is completely unfounded, as the structure of the distribution and retail network in India is completely different from the developed markets," he added.

Source: PTI
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