India’s Prime Minister Plans Executive Order to Allow More Foreign Investment

By and | December 24, 2014

Prime Minister Narendra Modi sought to pressure Indian lawmakers into approving two key economic policy changes a day after a parliament session ended without a vote on the bills.

Modi will use an executive order known as an ordinance to allow more foreign investment in the insurance sector and make coal mining more transparent. An ordinance is valid for six months and must be voted on during the next parliament session, which starts in late February.

The moves signal Modi’s intent to push ahead with measures to bolster Asia’s third-biggest economy even as the opposition seeks to block his agenda in the upper house. The insurance legislation had been pending since 2008 and was sought by U.S. policy makers ahead of President Barack Obama’s trip to New Delhi next month.

“The ordinance demonstrates the firm commitment and the determination of this government to reforms,” Finance Minister Arun Jaitley said at a briefing in New Delhi today. “This decision announces to the rest of the world, including investors, that this country can no longer wait, even if one of the houses of parliament waits indefinitely to take up its agenda.”

The move will permit companies including American International Group Inc. and Standard Life Plc to increase their stakes in local insurers to as high as 49 percent from the current 26 percent cap and expand in the world’s second-most populous country where insurance penetration is less than the global average. It also takes the government closer to ending a four-decade monopoly on mining and selling coal.

Will Wait

“Investors may not rush in with money to buy now as the ordinances are temporary measures,” Megha Vazkar, head of institutional dealing with Mumbai-based Maximus Securities Ltd., said by phone today. “We will wait for the final legislations to be passed by both houses before recommending specific stocks.”

Reliance Capital Ltd., which has partnered with Nippon Life Insurance Co. for an insurance venture, surged 3.8 percent, the most since Dec. 10, after the cabinet cleared the ordinance. Max India Ltd., the Indian partner of MS&AD Insurance Group Holdings Inc., Japan’s biggest casualty insurer, advanced 1.8 percent to its highest level since Dec. 15.

In the latest parliament session, the main opposition Congress Party tied up both houses for more than a week over demands that Modi address a plan by the Rashtriya Swayamsevak Sangh, a BJP-linked Hindu group, to convert more than 2,000 Muslims and Christians on Christmas day.

Tit-For-Tat

The coal bill wasn’t passed in the upper house, the only national legislative body Modi doesn’t control, while the insurance bill wasn’t tabled in either house.

Previous efforts by Modi’s predecessor Manmohan Singh to raise the investment cap were derailed by rival political parties, including Modi’s Bharatiya Janata Party and the Communists, who argued that it wasn’t in the best interest of the Indian insurance industry.

The Congress party, which originally introduced the legislation about six years ago, in a tit-for-tat role reversal scuppered an attempt by Modi to reintroduce the bill in August, more than two months after he became prime minister.

U.S. Trade Representative Michael Froman told reporters in New Delhi on Nov. 25 that there was a lot of interest in the draft insurance law. “We hope there’ll be further opening up in the future,” he said.

Obama is scheduled to visit India to be its chief guest at the Republic Day celebrations on Jan. 26. Just a few days before Modi last met Obama in Australia in November, the two countries reached a breakthrough agreement on food stock holdings, clearing the way for passage of the biggest trade deal in the World Trade Organization’s 19-year history.

Better insurance penetration and the premiums raised by companies can also help Modi, who needs funds to meet his goals to upgrade the nation’s roads, ports and other infrastructure. India’s insurance penetration, or premiums underwritten as a proportion of a country’s total economic output, is less than the global average of 6.5 percent.

–With assistance from Bibhudatta Pradhan, Natalie Obiko Pearson and Kartikay Mehrotra in New Delhi and George Smith Alexander, Santanu Chakraborty and Rajhkumar K Shaaw in Mumbai.

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