FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE INDEX: CHAPTER TOPIC PG. NO. 1 INTRODUCTION TO INDIAN ECONOMY AND FOREIGN DIRECT INVESTMENT (FDI) 1 2 TYPES OF FOREIGN INVESTMENTS (FDI & FPI), MEANING, DEFINITION AND NOTES RELATED TO FDI 4 3 FDI – A HISTORICAL PERSPECTIVE IN INDIA 8 4 FDI IN INDIA – AN OVERVIEW 11 5 INDIAN INSURANCE SECTOR – INTRODUCTION, ROLE, PRIVATISATION, OVERVIEW AND OPPORTUNITIES 20 6 TYPES OF FDI TYPE OF FDI IN INDIAN INSURANCE SECTOR 28 7 ENTRY ROUTES FOR FDI IN INDIA ENTRY ROUTES FOR FDI IN INDIAN INSURANCE SECTOR LIST OF FOREIGN ENTRANTS IN GENERAL & LIFE INS. 35 8 FDI REGULATION IN INDIA 39 9 FDI POLICIES 41 10 INDIA’S FEATURES AS A HOST COUNTRY FOR FDI AND BUSINESS COMPLAINTS 44 11 ADVANTAGES AND DISADVANTAGES OF FDI ADVANTAGES OF FDI IN INDIAN INSURANCE 51 12 EMERGING TRENDS IN INSURANCE DUE TO FDI / (POSITIVE IMPACTS OF FDI) 56 13 GOVERNMENT PROPOSAL TO LIFT FDI CAP TO 49% IN INDIAN INSURANCE 63 14 IMPACT OF FDI AND LIBERALISATION ON INSURANCE 64 1
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
INDEX:
CHAPTER TOPIC PG.
NO.
1 INTRODUCTION TO INDIAN ECONOMY AND FOREIGN
DIRECT INVESTMENT (FDI)
1
2 TYPES OF FOREIGN INVESTMENTS (FDI & FPI),
MEANING, DEFINITION AND NOTES RELATED TO FDI
4
3 FDI – A HISTORICAL PERSPECTIVE IN INDIA 8
4 FDI IN INDIA – AN OVERVIEW 11
5 INDIAN INSURANCE SECTOR – INTRODUCTION, ROLE,
PRIVATISATION, OVERVIEW AND OPPORTUNITIES
20
6 TYPES OF FDI
TYPE OF FDI IN INDIAN INSURANCE SECTOR
28
7 ENTRY ROUTES FOR FDI IN INDIA
ENTRY ROUTES FOR FDI IN INDIAN INSURANCE SECTOR
LIST OF FOREIGN ENTRANTS IN GENERAL & LIFE INS.
35
8 FDI REGULATION IN INDIA 39
9 FDI POLICIES 41
10 INDIA’S FEATURES AS A HOST COUNTRY FOR FDI AND
BUSINESS COMPLAINTS
44
11 ADVANTAGES AND DISADVANTAGES OF FDI
ADVANTAGES OF FDI IN INDIAN INSURANCE
51
12 EMERGING TRENDS IN INSURANCE DUE TO FDI /
(POSITIVE IMPACTS OF FDI)
56
13 GOVERNMENT PROPOSAL TO LIFT FDI CAP TO 49% IN
INDIAN INSURANCE
63
14 IMPACT OF FDI AND LIBERALISATION ON INSURANCE
SECTOR / (NEGATIVE IMPACTS OF FDI)
– AS SUBMITTED BY LEFT PARTIES TO UPA
64
15 CONCLUSION 72
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
PHASES OF INDIAN ECONOMY POST 2000:
Political Coalitions have started providing stable governments.
Government to get out of owning and managing businesses: Disinvestment
Policy.
Gradual relaxation in the FDI Policy.
TYPES OF FOREIGN INVESTMENT:
Capital flows come in three primary forms:
Portfolio equity investment, which involves buying company shares, usually
through stock markets, without gaining effective control.
Portfolio debt investment, which typically covers bonds and short- and long-
term borrowing from banks and multilateral institutions, such as the World
Bank.
Foreign direct investment (FDI), which involves forging long-term
relationships with enterprises in foreign countries.
DIFFERENCE B/W FDI AND PORTFOLIO INVESTMENT:
FDI Foreign Portfolio Investment (FPI)
Investment in physical assets Investment in financial assets
Tends to be long term Tends to be short term
Difficult to withdraw Easy to withdraw
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Does not tend be speculative Tends to be speculative
Expectation of technology transfer No Expectation of technology transfer
Direct impact on employment of labour
and wages
No direct impact on employment of
labour and wages
Abiding interest in management. Fleeting interest in management.
FOREIGN DIRECT INVESTMENT (FDI) - MEANING:
FDI refers to an investment made to acquire lasting interest in enterprises operating
outside of the economy of the investor. Further, in cases of FDI, the investor´s
purpose is to gain an effective voice in the management of the enterprise. The
foreign entity or group of associated entities that makes the investment is termed the
"direct investor". The unincorporated or incorporated enterprise-a branch or
subsidiary, respectively, in which direct investment is made-is referred to as a
"direct investment enterprise". Some degree of equity ownership is almost always
considered to be associated with an effective voice in the management of an
enterprise.
Once a direct investment enterprise has been identified, it is necessary to define
which capital flows between the enterprise and entities in other economies should be
classified as FDI. Since the main feature of FDI is taken to be the lasting interest of a
direct investor in an enterprise, only capital that is provided by the direct investor
either directly or through other enterprises related to the investor should be classified
as FDI. The forms of investment by the direct investor which are classified as FDI
are equity capital, the reinvestment of earnings and the provision of long-term and
short-term intra-company loans (between parent and affiliate enterprises).
A direct investment enterprise is an incorporated or unincorporated enterprise in
which a single foreign investor either owns 10 per cent or more of the ordinary
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shares or voting power of an enterprise (unless it can be proven that the 10 per cent
ownership does not allow the investor an effective voice in the management) or
owns less than 10 per cent of the ordinary shares or voting power of an enterprise,
yet still maintains an effective voice in management. An effective voice in
management only implies that direct investors are able to influence the management
of an enterprise and does not imply that they have absolute control. The most
important characteristic of FDI, which distinguishes it from foreign portfolio
investment, is that it is undertaken with the intention of exercising control over an
enterprise.
DEFINITION:
Foreign direct investment (FDI) is defined as "investment made to acquire lasting
interest in enterprises operating outside of the economy of the investor." The FDI
relationship consists of a parent enterprise and a foreign affiliate which together form
a transnational corporation (TNC). In order to qualify as FDI the investment must
afford the parent enterprise control over its foreign affiliate.
In other words, FDI refers to “Net inflows of investment to acquire a lasting
management interest in an enterprise operating in an economy other than that of the
investor. It is a sum of equity capital, reinvestment of earnings other than long term
capital and short term capital as shown in the balance of payment.”
According to WTO,
“Foreign Direct Investments (FDI) occurs when an investor based in one
country (home country) acquires an asset in another country (host country)
with the intent to manage that asset”. The management dimension is what
distinguishes FDI from Portfolio Investment in foreign stocks, bonds and other
financial instruments because the PI has no intent about managing the asset.”
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IMPORTANT NOTES RELATED TO FDI:
FDI does not necessarily imply control of the enterprise, as only a 10 percent
ownership is required to establish a direct investment relationship.
FDI does not comprise a “10 percent ownership” (or more) by a group of
“unrelated” investors domiciled in the same foreign country—FDI involves
only one investor or a “related group” of investors.
FDI is not based on the nationality or citizenship of the direct investor—FDI is
based on residency.
Borrowings from unrelated parties abroad that are guaranteed by direct investors are
not FDI.
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FDI - A HISTORICAL PERSPECTIVE IN INDIA:
It is misleading to suggest that India is new to foreign capital. Foreign capital had a
substantial presence in Indian industry prior to 1947, and was mostly concentrated in
the primary sectors and services. Foreign firms, mostly British, dominated India’s
mining, plantations, trade and much of the fledgling manufacturing base. Further FDI
flows played an important role in the early post- Independence years, as India turned
abroad for both technology and capital. By the late 1950s, the Indian government
invited foreign capital in many sectors, including pharmaceutical drugs, aluminium,
heavy electricals and chemicals.
During the 1960s inflows concentrated on manufacturing, especially the technology-
intensive industries. By the end of the 1960s, around 60 per cent of all foreign direct
capital was concentrated in the manufacturing industries.
However, in the aftermath of two famines and the devaluation of the Rupee in the
1960s, there was a hardening of policy. Foreign oil majors were nationalized in the
early 1970s. The government did not rule out new foreign investment but now
wanted it on restrictive terms. The Foreign Exchange Regulation Act (FERA) of 1973
introduced a clause that required firms to dilute their foreign equity holdings to 40 per
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cent if they wanted to be treated as Indian companies. There were new restrictions
on technology imports, with a preference for licensing over financial collaboration,
and restricted rates of royalty payment. Intellectual property rights were severely
curtailed by a revised Patents Act in 1970: product patents were abolished in
industries such as pharmaceuticals and chemicals.
By the mid-1980s, growing concern about stagnation and technological
obsolescence in Indian industry led to a push for economic reform and deregulation.
To encourage exports, export-intensive firms were granted exemptions from the
usual FERA limits on foreign equity ownership. In an attempt to modernise
manufacturing industry, restrictions on technology transfers and royalty payments
were relaxed. However, despite official claims, foreign investment projects were still
very vulnerable to bureaucratic discretion. Foreign equity inflows remained paltry
and, to a large extent, Indian industry came to rely on foreign debt capital to meet its
foreign exchange needs.
The 1990s began with a major crisis. In the wake of the Gulf War, and the
consequent expulsion of Indian expatriate labour from the Middle-East, foreign
exchange remittances fell. As the balance of payments position deteriorated, a
panicked withdrawal of funds deposited in India by Non Resident Indians
exacerbated the problem. The real possibility that India might default on its external
obligations led to a downgrading of India’s credit rating. As part of the reforms
agreed with the IMF, the Rupee was devalued, and fresh attempts were made to
liberalise the trade regime and the regulatory framework.
Industrial licensing was abolished in all but a handful of industries. Foreign direct
investment was now permitted in many sectors from which foreign capital had been
excluded in the past. These included the infrastructure sectors previously
monopolised by state enterprises: power generation, highway and port construction,
telecommunications, oil and natural gas exploration. The services sector, where
foreign capital had been eliminated as a matter of deliberate policy, was reopened:
fresh investment was approved in financial services, retail banking, insurance, and
recently in the media and retailing. The cap on foreign equity participation was raised
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to 51 per cent for most industries, and even 100 per certain some cases. Restrictions
on the use of international brand names were removed. Reforms in the technology
policy provided greater recognition of intellectual property rights.
On the whole, in the nearly six decades since Independence, policy towards private
foreign capital has moved closely with exigencies of India’s external payments
position. Nevertheless the changing policy environment had a direct effect on the
extent of foreign capital in Indian industry and its contribution to the economy.
Athreye and Kapur (2001) studied the long-term relative performance of multi-
national and domestic firms in India, using company-level data collected by the
Reserve Bank of India. They found that multinationals were dominant in many
Insurance industry in today’s uncertain environment has assumed
paramount importance.
Today people have become very conscious about their future and so they are
spending nearly 6 times on life insurance than they did before. The number of
life insurance policies in India is the largest in the world and this sector
contributes nearly 4 % in the GDP. The Indian insurance companies
recorded a growth nearly 20% in premium in dollar terms, compared to the
world market growth rate 0f only 3%.
Insurance would assist businesses to operate with less volatility and risk of failure and provide for greater financial and societal stability from the growth pangs of an estimated growth rate over 8 % in GDP
Government has arranged for disaster management and for funds. NGOs and public institutions assist with fund raising and relief assistance. Besides government provides for social security programs. There is considerable impact upon government in these respects. Insurance substantially steps in to provide these services. The effect would be to reduce the strain on the tax payer and assist in efficient allocation of societal resources
Facilitates trade, business and commerce by flexible adaptation to changing risk needs particularly of the mushrooming Services sector.
Like any other financial institution insurance companies generate savings from the insurance sector within the economy and make available the same in well directed areas of the economy deserving investments ; a sector with potential for business as is the case with Indian insurance provides incentive to develop it all the more faster
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It enables risk to be managed more efficiently through risk pricing and risk transfers and this is an area which provides unlimited opportunities in the Indian context for consulting, broking and education in the post-privatization phase with newer employment opportunities
The insurance industry of its own accord is interested in loss minimization. Its expertise in understanding losses assists it to share the experience across the economy thus enabling better loss control and preservation of national assets
In its risk pricing and investment decisions the insurance industry sets the tone for investment by others in the economy. Informed assessment by the insurance companies thus signals allocation of resources by others contributing to efficiency in allocation. In India visibility of LIC and GIC have been dwarfed by governments’ actions and other high profile institutions like ICICI, IDBI and UTI. Of late AIG is visible in the media and its investment announcements are being followed keenly by institutional investors in India. ING Savings Trust and Zurich are active in asset management and are being keenly followed by retail investors.
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PRIVATISATION OF INSURANCE SECTOR:
Insurance is the fastest growing sector in India since 2000 as Government allowed
Private players and FDI up to 26%. Life Insurance in India was nationalised by
incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance
companies at that time were taken over by LIC.
In 1993 the Government of Republic of India appointed RN Malhotra Committee to
lay down a road map for privatisation of the life insurance sector.
While the committee submitted its report in 1994, it took another six years before the
enabling legislation was passed in the year 2000, legislation amending the Insurance
Act of 1938 and legislating the Insurance Regulatory and Development Authority
Act of 2000. The same year that the newly appointed insurance regulator -
Insurance Regulatory and Development Authority IRDA -- started issuing licenses to
Functions for assisting the FDI approval holders in obtaining various approvals and
resolving their operational difficulties. FIIA has been interacting periodically with the
FDI approval holders and following up their difficulties for resolution with the
concerned Administrative Ministries and State Governments.
2004 INVESTMENT COMMISSION:
Headed by Ratan Tata, this commission seeks meetings and visits industrial groups
and houses in India and large companies abroad in sectors where there was dire
need for investment.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA):
FDI in Indian Insurance is allowed up to 26% through automatic route. However,
license from IRDA has to be obtained as IRDA being apex regulating institution for
Insurance Sector in India.
FOREIGN DIRECT INVESTMENT POLICIES:
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Foreign direct investment (FDI) has become a key battleground for emerging markets and some developed countries. Government-level policies are needed to enable FDI inflows and maximize their returns for both investors and recipient countries.
Foreign direct investment (FDI) policies play a major role in the economic growth of developing countries around the world. Attracting FDI inflows with conductive policies has therefore become a key battleground in the emerging markets.
Developed countries also seek to bring in more FDI and use various policies and incentives to attract overseas investors, particularly for capital-intensive industries and advanced technology.
The primary aim of these policies is to create a friendly business environment where foreign investors feel comfortable with the legal and financial framework of the country, and have the potential to reap profits from economically viable businesses. The prospect of new growth opportunities and outsized profits encourages large capital inflows across a range of industry and opportunity types.
Investors tend to look for predictable environments where they understand how decision-making processes work. Governments therefore are incentivized to build up a track record of rational decision making. The business environment often requires work to remove onerous regulations, reduce corruption and encourage transparency. Governments often also seek to improve their domestic infrastructure to meet the operational needs of investors.
Providing fiscal incentives for attracting FDI is a subject of controversy – analysts have argued both in favor and against the idea. A general consensus is developing in favor of certain incentives which have been proven historically to grow profits and therefore foreign investments.
When policies are effective, significant FDI investments are injected into countries that help the domestic economy to grow. Different countries and regions offer various kinds of fiscal incentives, with a related variance in the level of FDI investments attracted.
Governments are increasingly setting up promotional agencies to foster foreign direct investment. These agencies promote FDI-friendly policies, identify prospective sectors and investors, and structure specific deals and incentives for major foreign investors such as multi-national corporations (MNCs).
Global trade associations also play a major role in some of these investment activities. These associations are tasked with creating a positive environment for foreign direct investors and ensuring that both investors and recipient countries enjoy a favorable environment.
The formation of human capital is vital for the continued growth of FDI inflows. To enable the most beneficial, technology and IP-driven FDI, highly skilled personnel are necessary. Governments must therefore enact policies to provide training and
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skills upgrading to develop their workforce and meet the employment needs of foreign investors.
A GOVERNMENT KEEN TO ENSURE FDI SHOULD FOLLOW THE FOLLOWING
POINTS:
Clear the way for free entry and exit in domestic markets by creating
competition in products, services and labor markets and incentives to upgrade
productivity and to prevent exploitation of consumers, employees and
workers.
Promote education, employee training, and infra
Structure to increase domestic capacity to absorb and diffuse good new
practices introduced by foreign investors.
Create a policy framework that encourages the adoption of appropriate social
and environmental standards in corporate practices.
INSURANCE AND STEPS TAKEN BY GOVERNMENT TO PROMOTE
INSURANCE SECTOR:
The Indian Insurance sector is having a dream run. Today people have become very
conscious about their future and so they are spending nearly 6 times on life
insurance than they did before. The number of life insurance policies in India is the
largest in the world and this sector contributes nearly 4 % in the GDP. The Indian
insurance companies recorded a growth nearly 20% in premium in dollar terms,
compared to the world market growth rate 0f only 3%.
According to a study, the life insurance market premiums is like to be around
US$100 billion by 2012, and its contribution to GDP is likely to rise by 6%. The
general Insurance Company has also grown to nearly 12% in 2007. Meanwhile the
government has also taken few measures to boost this industry. Some of such
measures are:
FDI up to 26% has been permitted.
Some state governments have also taken the initiatives to promote this
sector. The government of Andhra Pradesh has decided to issue health cards
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to 18 million people living below poverty lines. As a result nearly 60 million
people of the state will have insurance cover.
INSURANCE SECTOR RECOMMENDATIONS:
There is scope for greater FDI inflow in the insurance sector if the cap of 26 per cent
foreign equity is raised. The experience of opening up of this sector to FDI has set at
rest the fears that were expressed earlier regarding the effect of such opening. The
public insurance monopolies have responded to private entry by trying to increase
their efficiency and effectiveness. This process would be enhanced and sustained by
more effective competition. The regulatory system is in place and the Insurance
Regulatory Authority (IRDA) is functioning effectively. Therefore, the present
scenario highlights that foreign equity cap can now be raised to 49 per cent.
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INDIA’S FEATURES AS A HOST COUNTRY FOR FDI:
FACTORS AFFECTING FDI IN INDIA:
Rate of interest
Speculation
Profitability
Costs of production
Economic conditions
Government policies
Political factors
WHAT ARE FOREIGN INVESTORS LOOKING FOR?
Good projects
Demand Potential
Revenue Potential
Stable Policy Environment / Political Commitment
Optimal Risk Allocation Framework
ADVANTAGES INDIA HAS TO OFFER:
Stable democratic environment over 60 years of independence
Large and growing market
World class scientific, technical and managerial manpower
Cost-effective and highly skilled labour
Abundance of natural resources
Large English speaking population
Well-established legal system with independent judiciary
Developed banking system and vibrant capital market
Well developed accountancy, legal, actuarial and consultancy profession
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INDIA – LAND OF OPPORTUNITIES:
STRONG MACRO-ECONOMIC PERFORMANCE:
Sustained Economic growth;
o 7% - Current Year
o 8% - decade
o Over 6% - Next 50 Years – Goldman Sachs
Exports growth - over 19 % in 2002-03;
Non Oil imports growing at 31%-Economic vibrancy
Positive balance of trade with USA and China
FII Investment – over US$ 5 billion so far this year
Developed Banking system moving rapidly towards ICT integrated core
banking/net banking
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Mature Capital Market – NSE third largest, BSE fifth largest in terms of
number of trades
ECONOMIC LIBERALIZATION IN INDIA:
1. FISCAL POLICY REFORMS :
a. Stable tax regime with just 3 rates for both Excise as well as Customs
duties
b. Full National treatment for foreign Cos. incorporated in India
2. INDUSTRIAL POLICY REFORMS :
a. Capacity licensing dispense with
b. Compulsory licensing only in 6 sectors: restrictions on grounds of
national security, public health, public safety
c. FDI policy being progressively liberalized
3. TRADE POLICY REFORMS :
a. Most items on Open General License, Quantitative Restrictions lifted;
4. MONETARY POLICY AND FINANCIAL SECTOR REFORMS :
a. Interest rates brought down – Bank rate/Prime lending rate lowered
b. Banking Sector reforms – prudential norms stiffened
c. Securatization Act for better security for creditors
d. Competition law enacted. Competition Commission constituted
e. Independent regulators in place for Insurance sector (IRDA) and
Capital Markets (SEBI)
5. EXCHANGE CONTROLS RELAXED;
a. Profits and dividends can be freely repatriated.
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FDI FEATURES:
OPENNESS Largely automatic;
small negative list;
FDI in most sectors;
uniform application of policy;
ownership restriction in a few sectors;
no min. cap in most sectors;
freely repatriable;
M&A policy considered restrictive
FDI LEGISLATION Covered under Foreign Exchange Management
Act (FEMA)
TECHNOLOGY
COLLABORATION
Most liberal (rated No.1 in terms of ease of
licensing)
EMPOWERED BODY Foreign Investment Promotion Board (Small set
to service FIPB)
Rated as the best BPO destination.
Best technology licensing regime
Rated among the most favourite investment destinations.
Major destination for foreign venture capital funds.
Sixth most attractive investment destination.
Also among the top 10 Tourist Destinations.
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INSURANCE:
FDI up to 26% allowed on the automatic route
However, license from the Insurance Regulatory & Development Authority
(IRDA) has to be obtained
There is a proposal to increase this limit to 49%
INDIA - THE BACK OFFICE HUB:
India has become the most preferred destination – Outsourcing trend
increasing
o GE,TI, Intel, CISCO, Microsoft, Dell, Sun Micro, Oracle, LG, Ford, American
Express and other financial sector companies.
Customer needs are being met
o Large pool of skilled English speaking workforce – skills and scalability, 24x7
support
o Productivity and quality enhancement
o Conducive policy environment and Government support
o Highly improved telecom infrastructure
o Call center career is aspirational unlike a low choice in the West
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WHY DOES INDIA ATTRACT MAXIMUM FDI INFLOWS?
India is potentially active in terms of investments and provides a galore of
opportunities to the foreign players into the market. Foreign companies who aspire to
become a global player would grab the opportunities, India provides in terms of
investments. The foreign companies enjoy the rights to set up branch offices,
representative offices, and also carry out outsourcing activities in terms of various
developmental programmes in India. All these have opened up innumerable options
for the foreign investors to expand their businesses at a global level. This is clearly
noticeable from below presented graph showing FDI flows in India:
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BUSINESS COMPLAINTS:
Excessive government interference
High tariffs and excessive indirect taxes
Differential tax rates for foreign companies
Restrictions on foreign investment
Substandard Infrastructure
Questions about sanctionity of contract
Weak enforcement of intellectual property
rights
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ADVANTAGES AND DISADVANTAGES OF FDI:
This is a very subjective question. It will depend on the country that is being invested
in, the industry where the investment is being made, the firm that is making the
investment and amount of investment that is being made.
1. FOR HOME COUNTRY / FOREIGN INVESTORS:
ADVANTAGES:
The advantages of the Foreign Direct Investments are that the majority victorious
domestic companies, particularly those with only one of its kind compensation,
spend abroad. The second advantage to be considered to be is the direct investment
that makes companies more victorious internally. Companies with Foreign
investment generally tend to be most profitable as well as it is to have a more stable
sales and earnings.
Jumping the tariff wall (and other non- tariff barriers)
Securing access to minerals and other resources located in the host country
Lower wage in host developing countries for labour.
Protection of market shares in exports if MNC's competitors also have
established plants in the area.
DISADVANTAGES:
The disadvantages of foreign direct investments are cost of travel and
communications abroad. It also does not very much relate to local business tax laws,
business atmosphere in particular and other government regulations. Another
disadvantage could be the language and culture differences.
insurance sector in India are approximately the same as in the UK, which is 1/7th of
Indian population. There is the new concept of 'bancassurance' that has paved the
way for more job opportunities in the financial sector. There is a growing demand for
specialists in the area of marketing, finance and human resource management apart
from the demand for technical expertise from professionals in underwriting and
claims management subjects.
Inflow of foreign capital
There has been a huge inflow of funds into the country with foreign capital splurging
in the Indian insurance companies as startup capital.
Indigenous reinsurance
Even the reinsurance sector looks for magnificence with global players like Swiss
and Munich Re keen on entering into insurance in India.
The technology transfer
Apart from the above monetary aspects there would also be revolution in the transfer
of technologies and knowledge from the global participants in the fields of training,
risk management, underwriting, introduction of new policies etc.
With more participants in the market, there has been a healthy competition with
increased advertisement expenditure for brand building. There would be scientific
pricing methods.
Linkages and spillover to domestic firms:
Various foreign firms are now occupying a position in the Indian market through Joint
Ventures and collaboration concerns. The maximum amount of the profits gained by
the foreign firms through these joint ventures is spent on the Indian market.
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EMERGING TRENDS IN INSURANCE DUE TO FDI (POSITIVE IMPACTS OF FDI):
Insurance is one sector whose contribution to GDP has been quite significant. Post
independence, the Indian Government nationalized the private life insurance
companies with a view to raise funds for the infrastructure developments, which
lagged behind pathetically. The scatter of general insurance companies was brought
under one umbrella - the General Insurance Company in 1972.
Nationalization, however, brought with it the public sector bureaucracies,
cumbersome procedures and inefficiencies but still these nationalized companies
managed to have millions of policyholders, who had no other options.
While the early 90s brought forth liberalization on all major economic fronts, the
insurance was left untouched. But before long, the passage of IRDA bill in 1999
paved the way for the liberalization of Indian insurance sector.
Why open door policy became inevitable
57
During the last three decades, global insurance penetration as a percentage of the gross domestic product has more than doubled from around 3.5 per cent in 1970. The insurance sector thus has grown more strongly than the overall economy. Insurance is one sector whose contribution to GDP has been quite.
FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
The insurance premium in India accounted for a mere 2 per cent of GDP as against
the world average of 7.8% during 90s. The insurance premium as a percentage of
savings in India is 5.95% as compared to 52.5% in UK. The nationalized insurance
companies could barely unearth the vast potential of the Indian population since the
policies lacked flexibility and the Indian life insurance products were not linked to the
contemporary investment avenues. However, Claim settlement ratio of LIC stood at
95% and GIC at 74% which was much higher than the global average of 40%.
THE CHALLENGES BEFORE INSURANCE INDUSTRY:
But the other side of the coin, say observers, gives a low picture. Large-scale
operations and bureaucracies entangled in the public sector companies were the
main areas of concern of the nationalized insurers. The state owned insurance
companies, experts say, have not shown much initiative to venture into the rural
areas to sell crop insurance or any other personal insurance.
Insurance majors are yet to venture deep into the rural areas. Other areas,
which require in-depth study, are the pension segment and health insurance.
More liberalized actions are needed not only to drive the Indian economy
towards an annual growth rate of 7% to 8% but also to sustain the growth.
A faster growth would attract foreign direct investment (FDI) inflow of $10
billion every year as against the current FDI in the range of 3 billion.
58
An insurance area whichrequires an in-depth study, is the pension segment. Indian demand for pension products is huge, keeping in mind the lack of comprehensive socialsecurity system.
FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
A Report on Infrastructure points out that 85% of investible funds for infrastructure
have to be generated indigenously and the study revealed that India would require
$100 billion over the next five years to meet its infrastructure needs.
Given the saving scenario in India, there is much more growth potential and the
liberalized insurance sector is likely to mobilize the long-term funds for infrastructural
investments.
Multinational insurers are keenly watching the transformation of Indian insurance
sector, mainly because the domestic markets have become saturated for the
respective insurers. International insurers capture a significant part of their business
from their multinational operations only. UK' largest life and non-life insurers acquired
40% to 60% of their total premium from their multinational operations. The foreign
investors are finding the Indian market more attractive because even a small share
of a growing market looks lucrative. For examples, the Korean insurance market, the
30th largest market in the world premium volume in 1971 obtained the 6th position in
1996, the reason being its multinational operations.
Global investors prefer Indian insurance markets
The other reason as to why the global insurers are interested in investing their funds
is the nature of the operations over a wide geographical area would eliminate
sudden dips in earnings due to the unexpected risk spread.
A report presented by the world's second largest reinsurer Swiss Re on global
insurance, reports complete saturation of international market.
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Foreign investors are finding Indian market more attractive because even a
small share of a growing market looks lucrative.
Os
GLOBAL INSURANCE COMPANIES OPT FOR INDIAN BPOs:
The Associated Chambers of Commerce and Industry of India had recently
conducted a research on the BPO activities in India and reported 15% annual growth
for indigenous BPO demand. The report also revealed that the BPO industry is
growing at an astounding rate of 70% per annum with employment opportunities to
over 100,000 people.
By 2009, the BPO is estimated to employ one million people with a revenue flow of
$17 billion.
INSURANCE SECTOR FLOWS IT BPOs FOR CLIENT SERVICING:
The Insurance sector thus is in the process of outsourcing business opportunities.
Insurance sector find more potential for outsourcing business operations owing to
the nature of voluminous transactions like claims processing, loan processing and
customer servicing. Insurance companies with large volumes and repetitive
transactions around the world are working towards lowering the cost and upgrading
the service quality to their customers and business partners.
INSURANCE BPOS AND INDIA:
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Private insurers have already proved their success by way of performance during last financial year by way of more than 70% growth in the premium income.
FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
Working towards an effective cost control management, the insurance companies
are on the lookout for outsourcing the service agencies for the purpose. All the
related activities such as new business prospects, policy administration, claims
management and customer service are carried out by the BPOs.
The insurance sector is no exception to BPOs.
T
CHANGING PATTERNS OF INSURANCE AND TECHNOLOGY:
The insurance industry has assimilated a number of changes since the last few
years. All these changes were the result of certain clearly noticeable external
influences. For one, the changing socio-economic and political scenario formed the
perfect setting for these developments to take shape. The worldwide trend
towards convergence, consolidation and globalization had its impact on the
insurance industry as well. Fast changing technology, new and widening
patterns of distribution and the changing profile of the customer were
powerful drivers of change. The growing trend towards deregulation in many
Asian countries further increased the pace of change.
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Norwich Union, the UK insurance company already has BPOs set up in
New Delhi and Bangalore or processing general insurance claims. Aviva
operates in India with 1200 employees. The time difference between
Greenwich and India provides scope for the India operations to work round
the clock, 365 days. Aviva has 350 centers for servicing the British
customers. 2000 employees are engaged in back office functions and for
handling British insurance claims.
FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
Investors worldwide are keeping their fingers crossed as they make strategies,
hoping the Government will announce increase in FDIs (26% to 49%) in Indian
Insurance companies.
LOOKING BEYOND CONVERGENCE AND GLOBALIZATION:
All this time the insurers strongly believed that size matters as it was perceived as
the key to market domination and lower costs. It was soon clear that in the globalised
environment to industrial group will have the kind of capital required for global
domination and no single group can emerge a winner of all business sectors.
BRAND BUILDING BY INSURERS:
In a marked departure from the past financial services, organizations are now
focusing on brand building.
This is on account of the realization that we now live in a lifestyle society in which the
brand image is as important as the product. Global insurance majors like Allianz,
AXA and ING have already done much in this direction and are building awareness
about their brands.
It is now a major challenge for the domestic brands, who have to build a global brand
before the global majors take over.
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SHAREHOLDER VALUE:
In the past, insurers were giving more importance to maintenance of their solvency
margin rather than making profits. American and European insurers now find its
approach difficult, when they have to compete for capital with companies engaged in
other industries. So the emphasis is shifting now to shareholder value and return
through better capital management. Insurance companies like Swiss Re and Chubb
have proved highly successful in increasing shareholder value.
FURTHER SCENARIO:
Global players with strong brands in the insurance industry today set up their back
office operation in low cost countries, manage capital on a global basis, make use of
their special skills worldwide and use their superior managerial ability to secure
leadership positions in the industry. Such companies find opportunities for growth in
Asian countries like India where they may soon have to compete with global Asian
majors in the industry.
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In this fast developing scenario it will not be enough if the companies have futuristic strategies. Implementation of the strategies, effectively adapting them to ongoing changes can spell success.
FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
GOVT. PROPOSAL TO LIFT FDI CAP TO 49% IN INDIAN INSURANCE:
The Indian government has proposed to increase FDI in the insurance sector to
49%. Currently, only up to 26% FDI is allowed in the Indian insurance sector under
the automatic route subject to obtaining a license from Insurance Regulatory
Development Authority (IRDA). According to “Booming Insurance Market in India
(2008-2011)”, a recent report from RNCOS, the Indian insurance market, particularly
life insurance sector, will get a strong boost from the proposed FDI hike. Increasing
limit to 49% is expected to raise the FDI in life insurance sector by around 2.5 times
from the present level of approx Rs 2,500 Crore.
The senior insurance industry analyst at RNCOS opined, “The proposed increase in
FDI will attract more foreign inflow into the Indian economy and strengthen the
country’s insurance industry. This increase (in FDI) will bring more capital and help
the sector in maintaining the growth momentum. The insurance sector has been in
strong need of the capital investment, in fact, the requirement has increased
dramatically due to recent losses on unit-linked products with weak stock market.
Also, being a capital intensive sector, the insurance sector requires huge
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investments over a prolonged period of time, and therefore, there is constant need
for capital infusion that can be met through FDI.”
Increasing FDI limit will also encourage the insurance sector to come up with more
innovative distribution channels, enrich the current product portfolio, upgrade
technology, and bring best global practices into the country. Beside this, raising FDI
cap would also help insurers to expand their coverage to rural and micro-insurance
segments as penetration in rural and remote areas require additional capital infusion.
( NOTE: RNCOS, incorporated in the year 2002, is an industry research firm. It has a
team of industry experts who analyze data collected from credible sources. They
provide industry insights and analysis that helps corporations to take timely and
accurate business decision in today's globally competitive environment.)
IMPACT OF FDI AND LIBERALISATION ON T H E I N S U R A N C E S E C T O R
(NEGATIVE IMPACTS OF FDI)
(AS SUBMITTED BY THE LEFT PARTIES TO THE UPA)
The Finance Minister, while presenting the first Budget of the UPA government, has
proposed to raise the FDI cap in three sectors. Three sectors of the economy fully
meet this description. They are insurance, telecommunications and civil aviation.
The specific proposal for the insurance sector is to raise the FDI cap from 26 to 49
percent. The argument about this move is unjustifiable on several grounds.
PRIVATE PLAYERS, FOREIGN EQUITY AND PROFITABILITY:
The Union Government had opened up the insurance sector for private participation
in 1999, also allowing the private companies to have foreign equity up to 26 per cent.
Following the opening up of the insurance sector, 12 private sector companies have
entered the life insurance business. Apart from the HDFC, which has foreign equity
of 18.6%, all the other private companies have foreign equity of 26 per cent. In
general insurance 8 private companies have entered, 6 of which have foreign equity
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
of 26 per cent. Among the private players in general insurance, Reliance and
Cholamandalam does not have any foreign equity.
The following table gives an aggregate picture of the current scenario of the
insurance sector in India.
Accord
ing to the Annual Report of the IRDA, 9 out of the 12 private companies in life
insurance suffered losses in 2006-07. The aggregate loss of the private life insurers
amounted to Rs. 38633 lakhs in contrast to the Rs.9620 crores surplus (after tax)
earned by the LIC. In general insurance, 4 out of the 8 private insurers suffered
losses in 2006-07, with the Reliance, a company with no foreign equity, emerging as
the most profitable player. In fact the 6 private players with foreign equity made an
aggregate loss of Rs. 294 lakhs. On the other hand the public sector insurers in
general insurance made aggregate after tax profits of Rs. 62570 lakhs. Not only are
the public sector insurance companies more profitable than the private ones, the
private insurer which is most profitable (Reliance) is one which has no foreign equity.
If profitability is taken to be an important indicator of efficiency, it is clear that the
case for further hike in the FDI cap in the insurance sector cannot be made on
efficiency grounds.
QUESTIONABLE REPUTATION OF THE FOREIGN PARTNERS:
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
The record of some of the foreign companies who have started operating in India is
being questioned abroad. A recent article published in The Economist (May 4, 2006)
on ‘AIG’s Accounting Lessons’ (AIG is Tata’s partner in India) came with the
screaming headline which said it all: “The world’s largest insurance company shows
how to polish profits statement”.
The Prudential Financial Services (ICICI’s partner in India) is facing an enquiry by
the securities and insurance regulators in the U.S. based upon allegations of having
falsified documents and forged signatures and asking their clients to sign blank
forms (New York Times, May 31, 2006 and Wall Street Journal, May 31, 2006). This
follows a payment of $2.6 billion made by Prudential to settle a class-action lawsuit
attacking abusive life insurance sales practices in 1997 and a $ 65 million dollar fine
from state insurance regulators in 1996.
It is evident that the questionable activities of these insurance companies are not
prevented by state imposed penalties and litigations. The financial health of many of
the foreign insurance companies operating in India is also a cause of serious
concern. The Economist (April 1, 2006) reports the sorry plight of Standard Life of
UK (HDFC’s partner in India), which is unable to remain afloat without the possibility
of raising money in debt or equity markets. Royal Sun Alliance also shut down their
profitable businesses in 2002.
According to the Mercer Oliver Wyman Report the German, Swiss, French and
British insurers suffer from severe capital inadequacy, which is a result of
undertaking risky investments in equity and debt instruments in the past. Several
issues of Sigma, a reputed Swiss journal on insurance, have reported that the U.S.
and Europe based insurance companies are faced with gloomy growth prospects in
the advanced country markets, with several companies experiencing negative
growth in the recent past. Moreover, tighter capital adequacy norms and other
regulations that are currently being imposed in the advanced countries are forcing
these insurance companies to seek less regulated markets in developing countries
to undertake their high-risk ventures. Raising the FDI cap in India at this juncture
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
would expose our financial markets to the dubious and speculative activities of the
foreign insurance companies at a time when the virtues of regulating such activities
are being rediscovered in the advanced countries.
COMPETITION IN THE INSURANCE SECTOR:
Even after the liberalisation of the insurance sector, the public sector
insurance companies have continued to dominate the insurance market,
enjoying over 90 per cent of the market share. In fact, the LIC, which is the only
public sector life insurer, enjoys over 98 per cent of the market share in Life
insurance.
Market Share of Life and Non – life Insurance sectors(as % of total premium underwritten by insurers)
Insurance Sector 2005-06 2006-07
Life Insurance Private Sector Public sector
0.54
99.46
1.99
98.01
General Insurance Private Sector Public sector
3.68
96.32
8.64
91.36
Source: IRDA Annual Report 2007 - 08
Given the huge market share enjoyed by the public sector companies, the argument,
which is often made by advocates of greater liberalisation, that the entry of private
players would bring down the cost of insurance due to enhanced competition, does
not seem to be convincing. The price making capacity of the market leaders in the
public sector is likely to remain intact for the time being. The foreign insurance
companies do have the reputation of charging less premium compared to the risks
involved and promising abnormally high returns, in order to grab greater market
share. Such competition, however, although capable of bringing down the
‘cost’ of insurance for a while, has often led to gigantic frauds and
bankruptcies.
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Moreover, as is the case in other markets, the initial flurry of entries into the Indian
insurance market would invariably be followed by a phase of mergers and
acquisitions that would lead to cartelization, precluding the possibility of competition
driving down the costs in the medium run. In the long run, other forms of non-price
competition like aggressive advertisement wars are likely to lead to increasing costs,
eventually harming the interests of the consumers. These phenomena in the
insurance market have been observed in several advanced countries. If the public
sector companies start imitating the strategies of the foreign insurance
companies in order to defend their market shares, it would be at the cost of
undermining their important social objectives, which they have been fulfilling
so impeccably till date.
IMPLICATIONS FOR RESOURCE MOBILISATION:
A major role played by the insurance sector is to mobilize national savings and
channelise them into investments in different sectors of the economy. However, no
significant change seems to have occurred as far as mobilizing savings by the
insurance sector is concerned, following the liberalisation of the insurance sector in
1999. Data from the RBI show that the trend of the savings in life insurance by the
households to GDP ratio, while showing a clear upward trend through the 1990s
signifying increasing business for the insurance sector, does not show any structural
break after 1999 (since liberalization) (see chart below). It can be inferred therefore
that the foreign capital which flowed in after the opening up of the insurance sector
has not been accompanied by any technological innovation in the insurance
business, which would have created greater dynamism in savings mobilization.
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95 96 97 98 99 2000 01 02 03
Years
Source: Handbook of Statistics, Reserve Bank of India
Far from expanding the market for the insurance sector, the business activities of the
private companies are limited in urban areas, where a fairly good market network of
the public sector insurance companies already exists. The glaring evidence for this is
the composition of agents operating in the insurance sector. According to the IRDA
Annual Report the number of insurance agents in urban and rural India was in
100:76 ratio in the public sector companies, in 2006-07. For the private
insurance companies this ratio was 100:1.4. Due to their urban-biased operational
activity, the private insurance companies can neither increase the insurance base of
the economy significantly, nor lead to substantial employment generation. Given this
scenario, further increase in foreign participation is only going to lead to intensified
competition for the urban insurance markets, rather than leading to a growth in
overall savings.
While the proposals for hike in FDI were placed, the arguments advanced were that
FDI will continue to be encouraged and actively sought, particularly in areas of
infrastructure, high technology and exports.
ARE THESE ARGUMENTS TENABLE?
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No new technology or product is brought into the country: The issue of foreign equity
is often linked with induction of new technology and products. The private insurance
companies have nothing to offer in this respect. In the insurance sector, there is
no technology needed to be brought in from other countries, leave alone high
technology. The mortality rates and other principles of insurance are based on the
Indian conditions, because the policyholders are from this country. The products of
LIC are being renamed by the private insurance companies and are sold as
their own products. Hence, foreign expertise is also not involved in this sector.
So there is no justification even on this count. It was also argued that competition will
expand market and the foreign insurers will bring better products. This has simply
not happened. The size of the market has remained by and large the same and
from this market the private companies are picking up the creamy sections in
the metros seriously eroding the ability of public sector to cross subsidizes its
products in the rural areas.
FLOW OF FUNDS FOR INFRASTRUCTURE A MYTH:
Life insurance is all about mobilising the savings for long term investment in social
and infrastructure sectors. It was also argued that opening up of insurance market
would enable huge flow of funds into infrastructure. The record of private companies
on this is dismal. More than fifty percent of the policies they sell are unit-linked
insurance where the decision on investment of savings element in insurance
is taken by the policyholders. In fact as per a press report, ninety five percent of
policies sold by Birla Sun Life and over 80 percent of policies sold by ICICI
Prudential were unit-linked policies during 2006-07. Under these schemes, nearly 50
percent of the funds are invested in equities thus limiting the fund availability for
infrastructural investments. As against this, the LIC has invested Rs.40, 000
crores as at 31.3.2007 in power generation, road transport, water supply,
housing and other social sector activities.
The Law Commission of India released a consultation paper on 16th June 2003 on
the revision of the Insurance Act, 1938. The consultation paper proposes a suitable
amendment to Section of 27C of Insurance Act allowing insurers especially carrying
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
on general insurance business to invest funds outside India. So, once the law is
amended to allow insurers to invest funds abroad, the exports that these
private companies would generate, would be the export of savings of the
people.
Raising the FDI cap also does not seem justifiable as far as channelizing savings
into investments are concerned. The life insurance sector invested a total of Rs.
31335.89 crores in the infrastructure sector in 2006-07. Out of this the contribution of
the LIC was Rs. 30998.16 crores, which was 98.92 per cent of the total investment in
infrastructure by the entire life insurance sector. The figures provided by the IRDA
Reports further suggest that the share of the public sector life and non-life insurance
companies in investment in infrastructure is greater than their market share. Despite
the FDI cap being set at 26%, the investment from the insurance sector to the
infrastructure sector was predominantly from the public sector companies.
Therefore, the argument that raising the FDI cap in the insurance sector would
help in mobilizing resources for infrastructure does not hold.
It is also worth mentioning that the only insurance company involved in insuring
Indian exports is the Export Credit Guarantee Corporation of India, which provides
insurance cover to export credit. The ECGC has been in existence since 1957. It is
functioning under the United India Insurance Co. No private player with foreign
partnership has ventured into this area. Moreover, the LIC and other public sector
units are the only ones to undertake overseas operations, as reported by the Annual
Reports of the IRDA. Foreign participation has also not helped in marketing
Indian insurance products abroad.
CONCLUSION:
Governments of the advanced countries like the U.S. continue to apply pressure on
developing countries to open up their insurance sectors. China, for instance was
pressurized to open up its insurance sector, in return of its entry into the WTO.
However, the unilateral move to further liberalize the insurance sector in India is
unjustifiable. Events over the decade of the 1990s have borne out the fact that
financial liberalisation does not contribute positively to investment and economic
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FOREIGN DIRECT INVESTMENT IN INDIAN INSURANCE
growth. Countries which enthusiastically opened up their financial sectors in
order to attract capital inflows often experienced enhanced volatility in their
financial markets and speculative attacks on their currency.
Further opening up of the insurance sector to foreign capital, which serves as
a vital financial intermediary of the national economy, is therefore not
warranted.
CONCLUSION:
As evidenced by analysis and data the concept and material significance of FDI has
evolved from the shadows of shallow understanding to a proud show of force. The
government while serious in its efforts to induce growth in the economy and country
started with foreign investment in a haphazard manner. While it is accepted that the
government was under compulsion to liberalize cautiously, the understanding of
foreign investment was lacking. A sectoral analysis reveals that while FDI shows a
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gradual increase and has become a staple for success for India, the progress is
hollow. FDI has become a game of numbers where the justification for growth and
progress is the money that flows in and not the specific problems plaguing the
sectors like insurance.
On present projections, FDI flows are likely to remain only a small fraction of gross
capital formation in the Indian Insurance sector (only 26% FDI is allowed). Hence,
their potential contribution is not likely to be quantitative but qualitative. Foreign
investment is likely to be not an engine of growth but a catalyst for growth. If so, the
quality of foreign investments than quantity that enters the country matters. Some
insurance companies invest in India to benefit from better availability of human
resources, including the growing practices of outsourcing and off-shoring. Others are
attracted by the large market and the potential profits in that. Ideally, India would like
to attract efficiency-seeking FDI and exclude profit-seeking FDI, though from
practical or regulatory points of view, it is not easy to distinguish between the two
types of FDI.
FDI is a major source of technology transfer in a developing country like India.
Besides this, it has given boost to various developments in insurance sector. It has
created employment and increases competition in market. It has helped country
grow potentially and at a faster pace. India Insurance has observed the positive
effects of FDIs in the recent times. Major concerns are the policies which will help in
attracting more penetration in rural markets. Hence India should keep in mind all the
pros and cons of FDIs while deciding the policies, which will end up in country’s
future growth.
It is hard to deny that Indian industry needs fresh investment but the hope that
openness to FDI alone can achieve this is misplaced. With FDI accounting for only a
small fraction of gross capital formation in Indian Insurance, its direct contribution to
the growth rate be marginal in the near future. In the Indian context, growth-led FDI
is more likely than FDI-led growth. To that extent, foreign capital is neither necessary
nor sufficient for growth in India. Greater openness to foreign capital (there is a
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proposal to raise FDI cap from 26 to 49%) may be desirable but it does not
guarantee penetration into unexplored areas left by public insurers.
Thus the impact of liberalization and Foreign Direct Investment on the Indian
insurance sector and general economy presents a mixed picture. All of the key
players in insurance have tremendous responsibility to balance the varying priorities,
to enable a sustainable future. Foreign insurers should grasp this opportunity to
achieve best practices as a win-win situation for all concerned.