Budget pushes for reforms in insurance, defence

The finance minister proposes to raise the foreign direct investment limit in insurance and defence manufacturing from 26% to 49%

Finance minister Arun Jaitley outside the Parliament on Thursday. Photo: Pradeep Gaur/Mint
Finance minister Arun Jaitley outside the Parliament on Thursday. Photo: Pradeep Gaur/Mint

New Delhi: Finance minister Arun Jaitley has pushed for speedy reforms in defence, insurance and housing, while making it clear that his focus will be to spur demand in the short term and incentivize companies to invest in the long term.

Jaitley’s budget proposed to raise the foreign direct investment (FDI) limit in insurance and defence manufacturing from 26% to 49%. Management and control will remain Indian, and the investments will be routed through the Foreign Investment Promotion Board (FIPB).

“Foreign direct investment in several sectors is an additionality of resource which helps in promoting domestic manufacture and job creation. India today needs a boost for job creation. Our manufacturing sector in particular needs a push for job creation,” Jaitley said in his budget speech.

Higher FDI has been a long-pending demand of insurers. To be sure, the 49% cap is a composite cap and can include portfolio investment as well, subject to regulation by the capital market regulator.

Jaitley, in a post-budget briefing, said he prefers the hike in the insurance cap to come without conditions, implying the government does not favour a capping of voting rights of foreign investors when the FDI limit is hiked.

A final decision on the insurance FDI cap will be taken when the insurance amendment Bill is introduced in Parliament.

Insurance industry officials welcomed the hike in FDI cap as it will help meet the capital requirements of the rapidly expanding insurance sector and encourage new foreign entrants in insurance.

“This 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,” said Shashwat Sharma, partner, KPMG in India.

Jaitley also kept the needs of the growing middle class in mind when looking at housing.

To encourage development of smart cities, the threshold for FDI was lowered from 50,000 sq. m to 20,000 sq. m, and from $10 million to $5 million respectively with a three-year post-completion lock-in, he said.

To further encourage this, projects that commit at least 30% of the total project cost for low-cost affordable housing were exempted from minimum built-up area and capitalization requirements, with the condition of a three-year lock-in.

Jaitley also set out a framework for real estate investment trusts (REIT), which would enable the flow of investment in real estate and infrastructure sectors.

The budget proposed to allow manufacturing units to sell products through retail outlets, including e-commerce platforms, without any additional approval.

Jaitley also made it clear that he aims to push tax reforms, with speedy resolution by the year end of all issues around a planned goods and services tax, which aims to economically unify the country and allow manufacturers to sell more easily across states.

Analysts had mixed reactions to the reforms.

Dhiraj Mathur, leader, aerospace and defence, at PwC India, said the defence FDI cap hike “does not make any material change and may not be enough incentive for foreign firms to bring in investments and proprietary technology” as the control remains with Indians. “However, on a more positive note, allowing investment by FIIs (foreign institutional investors) is a pragmatic step which will remove uncertainty and provide added flexibility and opportunities for raising finances to listed Indian companies.”

Another analyst said it could make decisions arbitrary.

“The condition that (there will be) full Indian management and control through FIPB route in both sectors could prove a major dampener. Why not permit majority foreign ownership with adequate safeguards? The condition will more likely lead to situations like the Jet Airways (India) Ltd-Etihad situation, where the government and regulators will sit on judgement over the rights of the joint venture partners,” said Ramesh Vaidyanathan, managing partner, Advaya Legal.

More From Livemint