BREAKINGVIEWS - India's insurance reform sends strong signal

A man plays with his child against the backdrop of monsoon clouds on a beach in Mumbai July 23, 2010.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Andy Mukherjee

India's new finance minister is rekindling the country's love affair with investors. After years of policy inaction and a string of corruption scandals, New Delhi's decision to allow foreigners a bigger stake in its insurance and pension industries is another indicator of its determination to push through reforms.

- Granting overseas insurers the right to own as much as 49 percent of their local joint ventures, up from the present ceiling of 26 percent, may not attract many new entrants. But it will bring relief to companies that have entered India with capital-constrained local partners. Last month, the regulator allowed MetLife India to bring in a state-controlled bank as a new investor because of concerns about the solvency of its local business. That contortion was only required because the largest U.S. life insurer could not inject fresh equity without breaching the limit.

- The pension industry - until now completely closed to outsiders - will likely see more enthusiastic participation by foreign investors. But for India to attract a flood of new capital, regulation needs to become more stable. A spat between the stock-market regulator and the insurance watchdog has killed a popular equity-linked insurance product, undermining the industry's new sales. The economic slowdown isn't helping, either. Households' investment in life insurance grew a paltry 1.2 percent in the last financial year.

- Raising the foreign investment limit may yet turn out to be a hard slog, however. New Delhi's recent decisions to welcome foreigners in the retail and aviation industries don't require any changes to existing laws. But the latest reform will need the minority government to convince the main opposition party to abstain from voting against the proposal in parliament. The government will also have to persuade its smaller allies to vote in favor of liberalization.

- Trying to muster political support may distract New Delhi from other urgent tasks, such as amending the constitution to implement a much-delayed goods and services tax. But tax changes lack the headline-grabbing appeal of flinging open partially closed industries. Chidambaram knows what he's doing. Investors must hope he also knows how to do it.

CONTEXT NEWS

- The cabinet approved bills on October 4 to attract foreign investment into insurance and pension industries. (READ STORY here)

- The bills would allow foreign investors to increase their stakes in insurance companies and the pension sector to 49 percent, finance minister P. Chidambaram told reporters. Currently, foreign investors are barred from the pension business, and the cap for insurers is at 26 percent.

(Editing by Peter Thal Larsen and Katrina Hamlin)