CABINET CLEARS PROPOSALS ON INSURANCE, PENSION (SECOND ROUND OF REFORMS)

CABINET CLEARS PROPOSALS ON INSURANCE, PENSION (SECOND ROUND OF REFORMS)

India's federal cabinet Thursday,4^th October,2012, cleared the proposals to amend the legislations governing insurance industry to hike foreign equity from 26 percent to 49 percent and on pension to allow up to 26 percent stake to overseas investors.A meeting of the cabinet, presided over by Prime Minister Manmohan Singh, also gave its nod for some crucial changes in the Companies Act in what is being called another major push to economic reforms in less than a month. Unmindful of the strong opposition from various quarters, including the Parliamentary Standing Committee on Finance, which had opposed any hike in foreign direct investment (FDI) limit in the insurance sector, the Union Cabinet, under the leadership of Prime Minister Manmohan Singh, on Thursday, approved to hike the FDI ceiling in the insurance sector to 49 per cent from the present 26 per cent.“The benefit of this amendment will go to private sector insurance companies, which require huge amount of capital and that capital will be facilitated with the increase in FDI to 49 per cent,’’ Finance Minister P. Chidambaram told reporters at a briefing after the Cabinet meeting.Mr. Chidambaram made it clear that state-run insurance companies would remain in the public sector domain.

With the Cabinet approving the proposal, the Insurance Laws (Amendment) Bill is likely to be taken up by Parliament for passage in the forthcoming Winter Session. The Parliamentary Standing Committee on Finance, headed by senior BJP leader Yashwant Sinha, had opposed any hike in the FDI limit in the insurance sector through a unanimous decision in May, asserting it would not be in the interest of the Indian economy. The Bill was introduced in Rajya Sabha in December, 2008.

The panel had agreed with the need to bring in comprehensive changes in the archaic laws governing the insurance sector. The insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999, (IRDA Act, 1999).This Act permitted foreign shareholding in insurance companies to the extent of 26 per cent with an aim to provide better insurance coverage and to augment the flow of long-term resources for financing infrastructure. The industry has been demanding for long to increase the FDI limit.The Union Cabinet also approved the 12th Five Year Plan (2012-17) document aimed at achieving annual average economic growth rate of 8.2 per cent, down from 9 per cent envisaged earlier in view of the slowdown in the global economic and poor economic growth and recovery.Talking to reporters after the Cabinet meeting, Finance Minister, P. Chidambaram said the Union Cabinet at its meeting headed by Prime Minister, Manmohan Singh discussed and approved the draft 12th Plan document. The document has already been approved by the full Planning Commission headed by Prime Minister Manmohan Singh on September 15.

The approved plan document will now be placed before the National Development Council (NDC), the apex decision making body, for the final approval. The NDC, headed by the Prime Minister with all Chief Ministers and Cabinet Ministers on board, is the final authority to grant approval to the Five Year policy document. In view of the ongoing global problems, the average annual growth target for the 12th Plan has been scaled down to 8.2 per cent from 9 per cent envisaged in the Approach Paper to the 12th Plan.During the 11th Plan (2007-12), India has recorded an average economic growth rate of 7.9 per cent. This, however, is lower than the 9 per cent targeted in 11th Plan. Besides other things, the 12th Plan seeks to achieve 4 per cent agriculture sector growth during 2012-17. The growth target for manufacturing sector has been pegged at 10 per cent. The total plan size has been estimated at Rs. 47.7 lakh crore, 135 per cent more that for the 11th Plan (2007-12).As regards to poverty alleviation, the Planning Commission aims to bring down the poverty ratio by 10 per cent. At present, 30 per cent of the population is below poverty line.

Giving a reform boost to commodity markets, the government also approved the FCRA Bill that seeks to provide more powers to sectoral regulator Forward Markets Commission (FMC) and allow a new category of products.“The Cabinet has approved the Forward Contract Regulation Act (Amendment) Bill. It will give more teeth to FMC. Farmers will also benefit,” Food Minister K.V. Thomas told .The Forward Contract Regulation Act (FCRA) Bill, considered vital for the development of futures trade, aims to provide financial autonomy to the regulator.FMC can become self-sufficient by collecting revenues in form of fees from exchanges after the passage of this Bill in Parliament, Mr. Thomas said.The retirement age of FMC Chairman and its members will go up to 65 years from 60 years, if Parliament passes the Bill. The number of members in FMC has also been proposed to increase from four to nine.

The Bill also seeks to facilitate entry of institutional investors and pave the way for introduction of new category of products, like Options.The Bill seeks to increase penalty on defaulters to Rs 50 lakh from the existing Rs 25 lakh.At present, the country has five national and 16 regional commodity exchanges. Recently, FMC had given its approval to the Universal Commodity Exchange to operate as a national bourse.

The cumulative turnover of the commodity exchanges is about Rs 80.30 lakh crore till September 15 of the current fiscal.The government gave green signal to foreign investment in pension funds and said the FDI limit could go up 49 per cent in line with cap in the insurance sector.Allowing FDI forms a part of the amendments to Pension Fund Regulatory and Development Authority (PFRDA) Bill, which was approved by the Union Cabinet.“The FDI limit in pension will follow FDI limit in insurance. If insurance bill passes with 49 per cent, pension will also be 49 per cent,” Finance Minister P Chidambaram told reporters.

The PFRDA Bill was introduced in the Lok Sabha in March 2011, following which the Standing Committee on Finance gave its recommendations in September last year.Chidambaram said the government has accepted five key recommendations of the standing committee.The Bill, which would allow part investment of the corpus in stock markets, is likely to be taken up for discussion and passage in the upcoming session of Parliament.The original Bill had no provisions pertaining to FDI.However, the Standing Committee on Finance, headed by senior BJP leader Yashwant Sinha, had suggested FDI in pension programmes but with a cap of 26 per cent.

The Bill had failed to get parliamentary approval in the previous term of UPA 1 government due to strong opposition from its then allies, the Left parties.In June 2012, the Cabinet had deferred a decision on the Bill following opposition from the Trinamool Congress.The Bill provides powers to the PFRDA to oversee multiple pension funds in the country and also paves way for being a full-time regulator for the sector.It also provides for establishment of a statutory authority to undertake promotional, developmental and regulato All these proposals, however, need parliament's approval to take effect.

Prof. John Kurakar