Impact of Increase in FDI Limit on Insurance Sector in Union Budget 2021-22

Undoubtedly, the Union budget 2021 was challenging and special for various reasons. It was special because the honourable Finance Minister Smt. Nirmala Sitharaman presented the budget digitally and was the first budget after the COVID lockdown. It was also challenging because there were soaring expectations from the government to rejuvenate the moribund economy induced by covid-19 and consequent lockdown. The Union Budget 2021-2022 laid stress on six core issues- 1- Health and Well-being; 2- Physical and Financial Capital; 3- Revitalizing Human Capital; 4- Research and Innovation; 5- Infrastructure development of the country; 6- Minimum Government and Maximum Governance.

In the Union Budget 2021-2022, Smt. Nirmala Sitharaman allocated Rs. 2,23,846 crores for health, Rs 1.18 lakh crore for road and infrastructure, Rs 1,10,055 crore for Railways, Rs 3 lakh crore for power, and set the divestment target for FY22 at Rs 1.75 lakh crore, among other things. To uplift the Indian Economy, the Government of India is relaxing FDI policies and in the matter of foreign direct investment, India is one of the most favourite nations in the world. According to the United Nations Conference on Trade and Development, India performed 13% better in 2020 compared to 2019, made it the only major economies in the world to record an increase in FDI in the pandemic-battered year.

In the Union Budget 2021-22, the Government of India increased FDI limit in insurance sector from 49% to 74%, which allowed foreign ownership and control with safeguard. According to the amendment in insurance sector, the majority of directors on board and key management person will be resident Indians, at least 50% will be independent directors, and a specific percentage of profits will be retained as a general reserve.

How Increased FDI Limit From 49% to 74% Will Impact the Insurance Sector?

Undoubtedly, Foreign Direct Investment is very beneficial in economic growth of the country and works as a catalyst in the growth of the nations. This increased FDI limit from 49% to 74% in the insurance sector will reinvigorate the insurance sector of the nation. In a densely populated country like India, this FDI hike will not only enhance the potential of insurance companies but also enable them to recruit dexterous manpower, use cutting-edge technology, and ensure agility in their business operations. Notable thing is that insurance is the only sector where people take interest in long-term investment, therefore this FDI hike will assuredly bring efficacious outcomes.

• This will strengthen the insurance sector: This FDI hike will unlock more avenues for insurance sectors to receive foreign capital, which will assuredly strengthen this sector. The more capital will inflow in the insurance sector, the more insurance companies will utilize their resources efficiently. Resultant insurance penetration will increase, at present which is quite low; today life insurance penetration in the country is 3.6% of the GDP while its global average of 7.13%.
• FDI hike will rejuvenate the insurance sector: The FDI hike will breathe new life in moribund insurance companies, which are now facing considerable loss. When big foreign insurance companies will collaborate with Indian companies, these insurance firms will get voluminous amounts, according to their business expertise.
• Employment creation: Increase in the FDI limit from 49% to 74% will assuredly help insurance companies to create more employment opportunities. Besides, this FDI hike will enable insurance companies to raise more funds to ensure their solvency is maintained in line with growing business needs.
• Positive impact on economy: FDI hike from 49% to 74% will certainly fuel the Indian economy. Massive foreign investment will enable insurance companies to perform better in the market that will put a profound positive impact on the Indian Economy. Increase in the FDI in insurance sector will stimulate more foreign capital inflow into the Indian economy that will strengthen the Indian rupee and enhance its value in the international market. Thereby, there will be decrease in the Rupee to Dollar rate of exchange.

In 2015 the Government of India decided to increase FDI in the insurance sector from 26% to 49%. And this outbreak of COVID-19 has shown that further penetration of insurance is needed, and for this there is the requirement of huge capital, which can only possible after further liberalization of the insurance sector for foreign investors. Therefore, this increased FDI will assuredly metamorphism the existing insurance industry of the country.

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