Insurance investment norms may be eased: Chidambaram

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May 7: India’s government will try to win agreement from coalition allies to ease restrictions on foreign investments in insurance, banking and pensions in its final year in office, finance minister Palaniappan Chidambaram said.

“Financial sector reform is our unfinished agenda,” Chidambaram said in an interview in Madrid May 4. “We failed to convince our partners that sectors which are closed or partly closed be opened for domestic private and foreign investors.”

The four communist parties that support Prime Minister Manmohan Singh’s United Progressive Alliance have blocked plans to increase foreign ownership of insurers, now restricted to 26%, and remove a 10% cap on the voting rights of investors in local non-state banks such as HDFC Bank Ltd India’s pension business is not open to foreign investors.

Financial reforms, including development of a corporate bond market, pensions and insurance will spur investment and add as much as 1.5 percentage points to India’s economic growth, according Lehman Brothers LLC. 80% of the country’s 1.1 billion people have no insurance cover and 88% of the workforce doesn’t contribute to pension schemes, according to Leham Brothers.

India’s $912 billion economy, Asia’s third-largest, has expanded at a record average pace of 8.7% each year since 2003. Singh’s government, which is entering its fifth year in office this month, wants to accelerate the rate of growth to as much as 10% by 2012 to create new jobs and reduce poverty.

That will require greater financial muscle in banks to help fund local companies expand capacity and buy assets abroad. The combined assets of all Indian banks is less than the Industrial & Commercial Bank of China Ltd, China’s biggest lender.

Singh’s trade and investment panel recommended last month that India, which has over $300 billion of foreign exchange, the world’s sixth-largest, must consider using part of the money to create a fund that will help companies buy assets abroad.

“The only argument in favor of a sovereign wealth fund is that since we have huge reserves that yield modest returns, you could use part of that reserve to enhance your return,” Chidambaram said. “There are great risks in that strategy - how are you going to manage it? How are you going to be accountable to it? I don’t think it will come through anytime quickly.” That means India needs more foreign investment to increase the size of its financial services industry.