#dnaEdit: Chasing FDI

The ruling BJP and Congress, the main Opposition party, joined hands in the Rajya Sabha to push through the Insurance (Amendment) Law 2015 in the Rajya Sabha on Thursday. The main objective of the new bill is to raise the foreign direct investment (FDI) component from 26 per cent to 49 per cent. But the process of passing the bill was marred by many procedural hiccups. The BJP had introduced the bill in the Lok Sabha to replace the ordinance which it had issued in undue haste in December, 2014. Turning down the opposition’s demand to refer the bill to the standing committee, the government — relying on its undisputed majority in the Lower House — pushed through the bill.

Meanwhile, in the Winter Session, an insurance bill with amendments was referred to a select committee of the House. The question that many members raised was about the status of the earlier bill referred to the House committee and its report. The government said that it had incorporated the recommendations of the select committee. Rajya Sabha vice chairman PJ Kurien gave the ruling that there is nothing in the Constitution or in the Rule Book which prevented the government from bringing a bill before the Rajya Sabha which has been passed by the other House. He was silent about the earlier bill and the House committee report.

Clearly, the insurance bill was rammed through the House in great hurry. This was made possible because the Congress was willing to go along with the government. The BJP, while in opposition, did not allow the bill to go through. It argued then that it was not happy with the details, though it agreed with raising the limits of FDI. One of the amendments it had introduced in the bill in the last session was to allow the foreign institutional investors (FII) to come in as well. It is a well-known fact that the FIIs have the freedom to withdraw whenever they like, and economists are agreed that FDI is for the longer term, and between the FDI and the FII, the former is to be preferred.

According to the Insurance Regulatory Development Authority (IRDA) projections, if the GDP grows at a modest seven per cent per annum, then the insurance penetration in the country would increase from 3.17 per cent at present to six per cent. This implied that the capital needed for this was Rs44, 500 crore. FDI at 49 per cent would bring in Rs21,805 crore. The argument is simple: the target of Rs44,500 crore cannot be met without the foreign fund infusion of Rs21,805 crore.

It is clear that growth in insurance sector is linked to general growth. There is also the assumption that the required FDI will flow in. This expectation is based on the perception that foreign investors are waiting to jump into the insurance sector. At the moment it remains an article of faith. The debate is not any more about whether foreign investors should come in. It is about whether they are coming in a big way and whether they are making a critical difference to the economic growth. The view of the economists on this issue is that ever since the economic reforms of 1991, the importance of FDI has been exaggerated, and that in these years it hovered between seven per cent and eight per cent of the GDP.