"The insurance sector is investment starved. Several segments of insurance sector need expansion. The composite cap of the insurance sector is proposed to be increased to 49 per cent from the current level of 26 per cent with full management and control through the FIPB route," he said while presenting the Budget for 2014-15.
The move would help insurance firms to get much needed capital from overseas partners.
The proposal to raise FDI cap has been pending since 2008 when the previous UPA government came up with Insurance Laws (Amendment) Bill to hike foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent.
He said the government will take up the Bill soon.
On defence sector, Jaitley said the composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route.
Currently, the government permits 26 per cent FDI in defence manufacturing.
"India today is a largest buyer of defence equipment in the world. Our domestic manufacturing capabilities are still at a nascent stage.
"We are buying substantial part of our defence requirements directly from foreign players, companies controlled by foreign governments and foreign private parties are supplying our defence requirements to us and at a considerable outflow of foreign exchange," he added.
Further to encourage development of smart cities which will also provide habitation for the new middle class, the Finance Minister announced that the requirement of the built up area and capital conditions for FDI is being reduced from 50,000 sq m to 20,000 sq m and from USD 10 million to USD 5 million respectively with a three years post completion lock in.
"To further encourage these projects, which commit at least 30 per cent of the total project cost for low cost affordable housing, (they) will be exempted from the minimum built up area and capitalisation requirements with conditions of 3 years lock in," Jaitley said.
He said FDI in manufacturing sector is under automatic route.
"The manufacturing units will be allowed to sell its products through retail including e-commerce platforms without any additional approval," he added.
Further, he said the existing mid-sized cities would be modernised to develop smart cities and satellite towns of larger cities.
"To provide the necessary focus to this critical activity, I have provided a sum of Rs 7,060 crore in the current fiscal," he added.
The minister said as the fruits of the development reach an increasingly large number of people, the pace of migration from rural areas to the cities is increasing.
He said a new middle class is emerging with aspirations of better living standards and "unless new cities are developed to accommodate the burgeoning number of people, existing cities would become unlivable".
Reacting to the proposal, Deepak Mittal, MD & CEO, Edelweiss Tokio Life Insurance, said: "Raising FDI limits to 49% in Insurance sector is a long awaited welcome step, from the point of view of three interested parties the Insurance industry, International investors and the Indian citizen ultimately the Indian economy... For greater impact, the increase in limit should not be with any riders attached. Growth of insurance will also have the spillover benefit of increasing investments in Government Debt and Infrastructure."
Shashwat Sharma, Partner, KPMG India, said, "The new measure should provide impetus for spurring growth of the insurance industry and enable foreign players to bring in capital required for growing distribution, product suite and strengthening the risk framework. This move may enable existing players to expand their reach in tier-II and tier-III cities."