When any nation progresses or say prosper, it is reflected by the pace of its sustained growth and development. In order to grow and develop economically, investments provides the base and pre-requisite. A nation’s foreign exchange reserves, exports, government’s revenue, financial position, available supply of domestic savings, do contribute to nation development but apart from above factors, magnitude and quality of foreign investment is necessary for the wellbeing of a country.
Developed nations, across the whole globe, consider FDI as the safest type of international capital flows out of all the available sources of external finance available to them. During 1990s, FDI inflows rose faster than almost all other indicators of economic activity worldwide. Developing nations like India looks FDI as a source of filling the savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps. There are several factors as to why FDI should be considered as an instrument of international economic integration as it brings a package of assets including capital, technology, managerial skills and capacity and access to foreign markets.
Taking into accounts the above factors, government of India decided to increase the FDI cap in the insurance sector as well as in the Defence Sector, taking the threshold to 49% in both the sectors. The above step was taken during the monsoon session of the parliament, when the new government in power announced the Finance budget for the year 2013-14. In this paper the author will analyse how the advantages and disadvantages of the above step taken will ultimately affect the Indian Economy.
WHAT IS FOREIGN DIRECT INVESTMENT?
Foreign Direct Investment, generally speaking, refers to the capital inflows from abroad that invest in the production capacity of the economy and are “usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors.
FDI inflows generally helps the developing countries to have a effective, broad and transparent policy environment for investment issues as well as, builds human and institutional capacities to execute the same. Insurance and Defence sector is of considerable importance to every developing economy.
FDI IN INSURANCE SECTOR:
FDI in insurance sector inculcates the savings habit, which in turn generates long-term investible funds for infrastructure building. In India, insurance sector is one of the most vial sectors as it ensures constant inflow of funds – the payout is staggered and contingency related – thereby making it readily available for investment on infrastructure building. Insurance Sector contribute to GDP, is quite insignificant. Insurance Sector, in India , 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. When it was done, many private companies are now into the insurance business. But now the new government in 2014, through The Insurance Laws (Amendment) Bill aims to raise the ceiling on foreign direct investment (FDI) in insurance to 49 per cent from the current 26 per cent limit. This will mark the new beginning in the insurance sector and will bring a lot of capital inflows in the Indian economy.
EFFECTS ON INDIAN ECONOMY:
Following will be the effect of the increase in the threshold in the Indian economy:
- Firstly, through this Insurance Laws (Amendment) Bill, a rise to 49% will be a composite cap – which means that foreign capital can flow in either as direct investment or via the portfolio route, or as a combination of both. So foreign investors can either directly buy equity from the company or can buy shares on the stock market.
- Secondly, it will lead to hike foreign holding in insurance joint ventures to 49 per cent which means that there will lot of foreign player coming to Indian market for direct investment.
- Thirdly, the laws will also provide for insurance companies to list on stock exchanges, which in turn will lead to barring public sector insurance companies, all other insurance companies will potentially benefit from a higher FDI cap. So there might be a possibility that public sector undertakings will face huge competition from the private sector undertakings.
- Fourthly, there was huge cry in the Indian market that through this increase there will be a situation wherein the Indian entities might lose control but the bill provides that management must remain with India companies and the companies will have to go for approval of the Foreign Investment Promotion Board (FIPB) will be needed on any investment over 26 per cent.
- Fifthly there will be a huge inflow of money once the bill will be cleared in the parliament, which will in turn, infuse a higher foreign direct investment limit in insurance which could result in inflows of Rs. 40,000 crore to Rs. 60,000 crore over time, and immediate inflows of around Rs. 20,000 crore.
- Sixthly the increase in the Cap will help to increase Infra Investment with the help of private players or the foreign entities, in the Indian Market.
- Seventhly, with the increase in the cap, there will be enough chances to bring in new technologies and products in the insurance market, which was not available during the cap of 26%. Public Sector Undertakings were unable to provide enough chances to its customers to invest in their various policies. But now due to increase in the cap, the private entities will definitely provide new policies which will in turn bring lead to opening up the Insurance sector.
FDI IN DEFENCE SECTOR & ITS EFFECT:
Production of the Indian defence product was entirely lying up in the government hands. The Defence sector was totally restricted for the private players to enter, until the defence industry in India was thrown open to the private sector in May 2001. However, the policy of increasing the FDI to 26% has failed to attract any substantive FDI in the defence Sector. With the increase in the cap to 49%, there will following changes in the Indian Economy which are as follows:
- Firstly, there will be increase in the substantive economic advantages such as the increased flow of funds from a foreign source, greater FDI leads to more employment opportunities for the local population which in turn will lead to taxes and other revenues will flow back to the local economy.
- Secondly, with the increase in cap, private players such as companies from USA, China, U.K., etc., will be attracted in the Indian economy as now they can have share in the Indian defence Companies.
- Thirdly, it will add to the technologies to the Indian defence sector as it will have more of foreign players. Transfer of technology will be an important factor in the defence area.
- Fourthly, the management of the Indian Company will definitely lie towards the Government as there was an apprehension that there can be threat to the national security.
Increase in cap in Insurance & Defence Sector will definitely boost up the Indian Economy due to enlarge scope of foreign players in the Indian Market. This will also help in increasing the employment level in India. The Indian market will certainly recover from the poverty and other social difficulties due to infusion of funds from the foreign countries. Insurance Sector will definitely improve and it will help Indian population at large. Other players in the market will get the level playing field across the whole India when it comes to Insurance and defence sector because as of now only government companies are having monopoly in the above mentioned sector.
There will definitely be increase of cash flows from the private players which will lead to development of Infrastructure and other important sectors. If tomorrow pension bill is passed in the Indian Parliament, then FDI in the pension funds will also be raised to 49%. At last, the end beneficiary of this amendment will be common men because due to more players in the market there is bound to have competition leading to competitive quotes, improved services and settlement ratio.
About the Author