Following weeks of limited action by Prime Minister Narendra Modi to act on campaign pledges to make India an easier place for business, the government faces a closing window to change a narrative of disappointment.
With seven days left before parliament ends its current session, the administration has the task of demonstrating power to force change by corralling lawmakers behind a bill opening up Indian insurers to 49 percent foreign ownership. The opposition, which first proposed the bill, is blocking it in the upper house, where Modi’s party lacks a majority.
“The decision is crucial for the positive perception of the Indian reform agenda to the rest of world,” said A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte in Singapore, which oversees $450 million. “Investors around the world are expecting the new government to deliver and they seem to be pursuing such an approach though nothing much has happened so far.”
At stake is overturning a perception that the government, which swept into office in May with the biggest lower-house majority in three decades, will fail to deliver on a platform of economic opening. The rupee is Asia’s worst performer after Modi refrained from cutting subsidies in his first budget, stopped short of allowing foreigners majority stakes in defense companies, and blocked a global trade deal.
Failure to push through the insurance bill will cast doubt on the government’s ability to overhaul pension, land and labor policy, which also need parliament approval, according to Arati Jerath, a New Delhi-based independent political analyst. Modi also plans to pass legislation within eight months to establish a goods and services tax that would make India a single market.
“People have high expectations from Modi,” Jerath said. “If he is not able to push the development agenda, they will be very disappointed.”
Modi’s cabinet yesterday allowed overseas investment in railway infrastructure for the first time and raised the ownership cap in Indian defense companies to 49 percent, two steps previously announced in the budget. The insurance bill requires approval from lawmakers because banks and insurance companies were created by an act of parliament.
The Insurance Laws (Amendment) Bill was introduced in 2008 by the then ruling Congress Party and was blocked by Modi’s Bharatiya Janata Party and others ideologically opposed to foreigners handling Indian savings. Potential investors include New York-based American International Group Inc. and U.K.-based Standard Life Plc.
The Congress, now in opposition, is concerned about lack of clarity on Indian ownership and control of the companies after amendments proposed by the BJP, said Congress leader Anand Sharma. It wants the bill to be scrutinized by a parliament panel before being put to a vote, a move that would delay its passage by at least a couple of months.
“Reference to a select committee does not mean taking a confrontationist position,” Sharma told reporters in New Delhi on Aug. 5. The Congress is in favor of raising foreign direct investment to 49 percent from 26 percent now “but it does not mean that we should have a situation where parliamentary processes are bypassed and curtailed,” he said.
The BJP wants to push through the legislation before Modi visits the U.S. in September, according to Subhash Kashyap, a former secretary-general of the lower house of parliament. If the bill is defeated in either house, the government can call for a joint session, where it needs a simple majority to pass, he said.
“It’s early days to conclude that the government will call for a joint session,” said Paranjoy Guha Thakurta, an analyst who has written about Indian politics for more than three decades. “Both the largest political parties have been hypocritical.”
The government is talking to the opposition parties including Congress to arrive at a consensus, Parliamentary Affairs Minister M. Venkaiah Naidu said Aug. 5. The administration is willing to accept any meaningful suggestion for the passage of the “most progressive reform,” he said.
“The government is in a hurry as the country needs investment,” Naidu said.
Wider insurance penetration will encourage financial savings, generate long-term funds for infrastructure development and support continued expansion, the country’s finance ministry said in its annual economic survey on July 9.
Raising the investment limit and clarity on rules may lure in as much as 250 billion rupees ($4 billion), Shashwat Sharma, a partner at KPMG India, wrote in a July 24 report. “This will definitely evoke interest of global players both present in India and others planning an imminent entry.”
Insurance penetration in India, defined as the ratio of premium underwritten in a given year to the country’s total economic output, has slipped every year from 5.2 percent in 2009 to 3.96 percent in 2012, according to latest data available from the regulator.
India had the highest insurance penetration among the BRIC grouping, which also includes Brazil, Russia and China, while being lower than the 6.5 percent global average, the data show.
“The move will bring in more capital into this sector and can help in improving the insurance penetration in the country,” said Kaushal K. Mishra, chief executive officer of Tata AIG General Insurance. “Many large international insurers have still not entered India as they are not sure about what is going to happen here.”