Govt reviews FDI limits, may help defence, insurance sectors

NEW DELHI: The government is set to review foreign direct investment limits in sectors like defence, insurance and plantations and also examine processes that could be eased to streamline the system.

While most sectors have a liberal regime where automatic approvals are not needed, the Department of Promotion of Industry and Internal Trade is examining how defence investment norms can become more attractive as the government seeks to shift more manufacturing in the strategic sector to India. Current rules allow 100% FDI in the sector, wherever the entity’s entry results in access to modern technology or “other reasons to be recorded”.

The review comes at a time when India is witnessing stagnation in foreign direct investment flows.
Under the automatic route, foreign direct investment (FDI) of up to 74% is permitted, although there are some restrictions, including industrial licensing for certain sectors and small arms production, and additional clauses apply in this regard, which may be subject to review.

In the case of insurance, a controversial sector since it was opened to foreign players 25 years ago, FDI in a general or life insurance company is capped at 74%, while 100% FDI is allowed in insurance intermediaries. While general insurance companies become profitable within a few years, generating funds for reinvestment, life insurance remains a capital-intensive business, requiring Indian and foreign partners to pump in equity capital for six to seven years. The review comes even though there is ample competition in the sector and most life insurance companies are now profitable.

However, getting approval for insurance, as well as plantations, will not be easy, especially since the rationale for overhauling the system in the latter case is unclear, as 100% is allowed for tea, coffee, rubber and several other market segments.

Given the BJP’s stance on insurance when it was in opposition, the Congress and its allies from the INDIA bloc will not easily agree to a hike at a time when the government is unlikely to push through the controversial changes through legislation.

Officials said the aim of the review was to ensure the smooth flow of documents and ensure that timelines for inter-ministerial procedures were adhered to, which was not always the case, especially when security clearances were required.

The review comes at a time when India is seeking more investment and has seen FDI stagnate despite its proposal to woo investors with a “China Plus One” plan. The changes, if any, could be part of the budget announcements.