Passage of insurance bill is a firm step towards growth | comment | Hindustan Times
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Passage of insurance bill is a firm step towards growth

comment Updated: Mar 15, 2015 14:05 IST

For a capital-scarce economy, allowing overseas investors to deploy funds in high-growth sectors is, perhaps, the first step in seeking to spin jobs and multiply income. Each piece of structural adjustment faces its own dynamic of resistance, pacing out its passage through departments, ministries and social and political stakeholders.

Political debates in Parliament, and outside, are a manifestation of this democratic phenomenon. It took the Narendra Modi-led NDA government nearly 10 months to pass its first major reform measure as Parliament approved the amendment in the insurance law to allow greater foreign investment of up to 49% from 26% in the sector.

The passage of the insurance Bill on Thursday marks the culmination of a more than six-year-old process of bringing in changes in a law after it was first introduced by the Congress-led UPA government in 2008.

In a democracy, reform is essentially a political process. Wider consultations are important, but not to the extent that it holds up critical reforms that can hurt a country’s image as an investment destination.

Last year, the government bit the bullet when it lifted state controls on diesel prices. It has followed it up with bidding of coal mines, which is set to result in a windfall for coal-rich states that could significantly bolster their ability to fund development schemes and create jobs.

A higher foreign investment in insurance is more about reversing the slowdown in the economy, and less about allowing foreign investors access to household savings. India is in dire need of resources to fund its infrastructure needs. Frugal households could well turn out to be the primary financiers of these mammoth projects.

India’s savings rate could reach 40% of GDP in the next few years and can potentially be sustained at high levels for well over a decade, primarily due to its armies of young people entering the workforce. Insurers need funds to maintain a healthy capital base, offer a wider bouquet of products, protect consumer interests against insolvency and deepen insurance penetration in India.

Rising hospitalisation costs demonstrate the need for increasing insurance penetration in India, for which companies need additional capital. Life insurance penetration, defined as the ratio of premium underwritten in a given year to GDP, is about 3.17% in India, lower than more than 10% in Japan and about 6% in Australia.

Of the 24 life insurance companies in India, only 17 of them reported profits in the last fiscal year. Hopefully, the passage of the Bill will trigger a turnaround, both for the sector as well as the country’s status as a favoured place to invest in.