India presses on with reforms: Cabinet clears insurance, pension FDI bills

Reuters: The cabinet approved bills on Thursday to attract foreign investment into insurance and pensions among a package of new measures to restore confidence in the economy, although the reforms will face a tough fight in parliament.

The steps followed big-ticket policies unveiled last month, including hiking diesel prices and inviting in foreign supermarkets, aimed at fending off a cash crunch and reviving growth, which has slowed to a nearly three-year low.

Those reforms helped India’s markets rally in recent weeks. The latest moves have added to the positive sentiment and could boost interest in a forthcoming sale of shares in state-owned companies, but they are still far from becoming law.

“The main thing is getting parliamentary approval for this. The challenging part is actually starting now, because there is a lot of opposition to FDI (foreign direct investment) in insurance and pensions,” said Sonal Varma, India economist with Nomura.

The bills would allow up to 49 per cent foreign ownership of insurance companies and in the pension sector, Finance Minister P. Chidambaram told reporters. Currently, foreign investors are barred from buying into pensions, and the cap for insurers is at 26 per cent.

“The insurance regulator has categorically stated that insurance requires huge capital. It will only come if we can raise the FDI limit,” Chidambaram said.

Most of India’s 24 insurance companies have lost money in the past decade, hit by restrictions on foreign holding and by regulatory changes.

Anticipation of the outcome of the cabinet meeting earlier triggered gains in financial stocks such as State Bank of India and ICICI Bank, driving the BSE Sensex to a 15-month high, while the Nifty hit 17-month highs.

Prime Minister Manmohan Singh faces a tough fight to win parliament’s approval for more foreign investment in the economy, especially with two state elections looming and after an outcry over the decision to allow foreign supermarkets into the retail sector.

The pension and insurance bills have been proposed for several years. Unlike last month’s measures, they need to be approved by parliament, where the coalition government is in a minority after its largest partner, the Trinamool Congress, pulled out due to last month’s reforms.

Trinamool’s leader, Mamata Banerjee, reacted angrily to the new announcements and threatened to call a no-confidence motion against the government.

“The government must go to save the country,” she said.

Giving some hope to the government, the normally obstructive opposition Bharatiya Janata Party (BJP) said it was waiting for further details and was not totally opposed to the latest reforms.

“I am optimistic that they will be able to win the support of all sections of the house, especially the principal opposition party,” Chidambaram said, saying he aimed to introduce the bills in a session due to start at the end of the year.

The cabinet also signed off on a shareholder-friendly bill to make corporate management more accountable, which would overturn a half-century old law.

It set guidelines for long-term debt for infrastructure projects, cleared a bill for tougher antitrust rules and another plan to allow more options trading on commodities exchanges. India’s economic growth rate was around 5.5 per cent in the last two quarters, a far cry from the near double-digit rate of recent years. Global credit rating agencies have warned India could lose its investment grade rating because of unsustainable budget and current account deficits. Last week a government panel, led by former finance secretary Vijay Kelkar, warned of a “fiscal precipice” if the government does not urgently slash fuel, food and fertiliser subsidies to curb a deficit that could hit 6.1 per cent of gross domestic product this fiscal year.

The first set of reforms announced last month have boosted the rupee, which partly recovered from a sharp drop in value this year, but the Reserve Bank of India says more action is needed to save the budget and reduce inflation.

 “The diesel price hike barely scratched the surface. The more important signal will be to act on the Kelkar committee recommendations and have a fiscal roadmap,” said A Prasanna, chief economist at ICICI Securities Primary Dealership.