The domestic insurance industry, which was eagerly awaiting Finance Minister Nirmala Sitharaman to raise the foreign direct investment (FDI) in the sector from 49 per cent to 74 per cent in her Budget 2020-21, is clearly disappointed as the government failed to make the much-awaited announcement. The Centre had last year allowed 100 per cent FDI in insurance intermediaries like broking firms and third party administrators, as a precursor to the hike in FDI to 74 per cent in the entire sector.
Insurance sector sources expressed surprise that higher FDI in the sector didn’t find any mention in the Budget, as the Centre had been working on the proposal for the same for six to eight months. “The timing for such a move was quite ripe as not only the government wants larger FDI inflow into the country, the private sector insurance industry is also badly in need for capital to maintain growth,” said an official.
Life Insurance Council, in its pre-Budget survey, had found that all life insurance players favoured higher FDI at 74 per cent and some even wanted 100 per cent. Earlier, a government document prepared had indicated about the directions the Centre may be heading for. For the insurance sector, the document proposed that investment of up to 74 per cent should be allowed with necessary government approvals, above the current 49 per cent limit that is allowed without approval under a so-called automatic route.
The move would have come as a boost to two dozens of foreign companies such as Germany’s Allianz, Italy’s Generali Group, France’s AXA and US insurer MetLife Inc, which already are already operating joint ventures in India. Explaining the rationale, the document said the private banking sector was “financially more sensitive” but allowed up to 74 per cent foreign investment, and so limits for insurance sector should be relaxed to provide parity.
An Assocham report had said the Indian insurance industry is expected to grow to $280 billion by FY19-20. An rise in FDI limit would mean an inflow of funds from existing foreign JV partners and entry of new players.
Insurance is a capital-intensive sector. When the insurance FDI rose in 2015, there was an expectation that almost Rs 60,000 crore would flow into the sector. However, the actual flows were less than half that number. India’s move corresponds well with the deregulatory measures some other countries in APAC have undertaken, particularly in easing restrictions on foreign ownership of domestic insurance companies. China had indicated in July 2019 that it will permit foreign firms.
Meanwhile, the Budget has two proposals that can potentially affect the growth and profitability of life insurance firms. One is the withdrawal of Section 80C deduction for assessees who opt for the new tax regime and the other is withdrawal of dividend distribution tax (DDT) and transferring the tax liability of dividend income to investors. “While the former one will impact new business volumes, we expect the impact to be limited due to relatively reducing relevance the 80C deduction. Withdrawal of DDT will increase the tax liability of life insurance companies, though the same may be partially managed by setting off dividend paid to its shareholders,” said a Kotak Research report.
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