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BW Businessworld

The Wait Just Got Longer

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Faced with realpolitik, on Thursday the UPA government took the face-saving decision of deferring the proposal to raise the limit on foreign direct investment in insurance firms, possibly until after the 2014 elections. The indefinite deferment of the proposal, which had been pending for years, dashed the hopes of foreign insurers to spread their wings in a promising emerging market.

When the government's Chief Economic Adviser Kaushik Basu had acknowledged in a statement in Washington last month that economic reforms have slowed down and may remain that way till 2014, the year of general elections, it had sparked off a major political row in India (Courageous Adviser). Basu ultimately had to issue a clarification.

Hemmed in by maverick allies and the fallout from a slew of corruption scandals, the Congress party-led central government has failed to carry out any meaningful structural reforms since it was re-elected in 2009. Thursday's move underlined the difficulty Prime Minister Manmohan Singh's beleaguered government faces driving reforms that are sorely needed to shore up weakening economic growth.

Domestic and foreign insurers, which have invested billions of dollars in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent.

Finance Minister Pranab Mukherjee on Friday said in a federal structure with multi-party democracy reforms are possible only with broad consensus after dialogues and discussions.

"While some stakeholders might be desirous of fast-paced reform process, reforms are possible only with broad-based agreement after dialogue and discussion," he said in the Lower House of the Parliament, the Lok Sabha.

"With a federal structure and vibrant multi-party democratic polity, reforms in India have been made possible through a process of dialogue and consensus with different stakeholders," he said.

Perhaps, the government ought to take a leaf out of the Chinese experience (Sequencing Reforms ). For the first twenty years, China concentrated only on the export, agricultural and infrastructure. The reforms in retail, banking and other problematic areas were not touched. At the same time, huge expenditure by the Government on the social sector lifted some 500 million people from poverty. Only afterwards, it aimed at opening banking, insurance and retail sectors. It took twenty five years of sustained growth of 10 per cent to make such transition from one type of reforms to another.

Blocked Reforms
Several reform steps have been blocked by partners in Singh's coalition government, most notably the Trinamool Congress, which is now standing in the way of the insurance bill as well as a plan to allow foreign airlines to take stakes of up to 49 per cent in domestic carriers.

"There is no question of supporting the government on 49 per cent FDI limit in insurance sector," a Lok Sabha MP belonging to Trinamool said, declining to be named.

As well as proposing a rise in the limit on FDI, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market.

"Our stand is clear: unless the FDI cap is kept at 26 per cent for the insurance sector, the government should not expect our support for the bill," former finance minister and opposition leader Yashwant Sinha told Reuters.

A Congress party MP conceded that the proposal to increase the FDI limit for foreign insurers may now be shelved until after the elections due in two years.

Finance Minister Pranab Mukherjee had promised to push through three critical finance-sector reforms, including the insurance bill and one on pensions, during the current or next session of parliament. Unless he can win over allies and opposition parties, however, they will remain on hold.

A parliamentary standing committee headed by Sinha has asked the government to cap FDI in the pension sector at 26 per cent, confounding the government's plans to raise the limit in tandem with an opening up of the insurance sector.

Insurance reform is widely seen as crucial because, according to Insurance Regulatory and Development Authority (IRDA) estimates, the sector needs a capital infusion of over $12 billion over the next five years.

India has 24 life insurance companies and an equal number of general insurance companies that include subsidiaries of HDFC, Metlife and Aviva.

A survey by Ernst & Young had come out with the fact that consumers prefer the brand of the service provider, customer service and convenience over price while buying general insurance products

A number of legislative measures or amendments are being taken up in this session of Parliament as part of financial sector reforms, he said.

The Union Cabinet had approved on Thursday a Bill to regulate the micro finance industry and bring micro lenders under the purview of the Reserve Bank.

This has paved way for introduction of Micro Financial Sector Development and Regulation Bill in Parliament.

(With Agencies)