What the cabinet is likely to greenlight: Raising the cap on FDI in insurance from 26% to 49%, and allowing upto 26% in the pension sector.
Allowing more FDI in insurance will mean the government has ignored the advice of a parliamentary committee headed by BJP leader and former Finance Minister Yashwant Sinha.
The Left and Trinamool Congress chief Mamata Banerjee are opposed to FDI in both sectors.
On pension reforms, the BJP had earlier indicated that it may back the reform if the government fixes the limit on FDI in its legislation. This ensures that in future, if there is a move to increase the cap on FDI, Parliament's approval is necessary.
Or the government could choose to hike foreign investment in insurance from 26 per cent to 49 per cent by allowing the additional 23 per cent through foreign institutional investors, or FIIs. This means that a single foreign company will not hold the entire 49 per cent stake. While an individual company's stake could be capped at 26 per cent, a clutch of foreign investors can buy the remaining 23 per cent, taking the overall limit to 49 per cent.
If the amendments to the current guidelines are brought to Parliament, the government may be able to lean hard on allies for support. External partner Mulayam Singh Yadav who has 22 Lok Sabha MPs will play a crucial role in whether the reforms go through. In the Rajya Sabha, the government is in a minority, and that's where it could trip.
The proposals on FDI in insurance and pension were floated by Pranab Mukherjee when he was Finance Minister, and were sent to the Cabinet for approval in May this year, but the decision was deferred, underlining the difficulty the Centre faced in driving reforms. P Chidambaram took over as Finance Minister in July this year and immediately resurrected the move. He said on Wednesday in an interview to BBC, "I think we will return to 9 per cent growth once we address certain fundamental constraints and as we address these issues and our savings rates grow up, investment rate grows up to 37-38 per cent, we will return to 9 per cent growth rate."
Insurance reform is widely seen as crucial because credible estimates say the sector needs a capital infusion of over Rs. 62,000 crore or $ 12 billion over the next five years. Domestic and foreign insurers, who have invested much money in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 per cent from 26 per cent. Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market. Reinsurance is the insurance that is purchased by an insurance company to insure the assets that it is covering.
The Cabinet will also consider today the final draft of the Companies Bill 2011, which has been prepared after considering recommendations of the Standing Committee and comments from the finance and law ministries as well as the Planning Commission. As per the proposals, companies, subject to certain levels of profit, turnover or net worth, have to spend about 2 per cent of their average profit over three years towards Corporate Social Responsibility activities. Among others, the new Bill provides more powers to the Serious Fraud Investigation Office. The Cabinet is also likely to consider the Forward Contract Regulation Act (Amendment) Bill to empower commodity markets regulator Forward Markets Commission (FMC) with greater financial autonomy. It may also take up a proposal to set up a National Investment Board (NIB), to be headed by Prime Minister Manmohan Singh, for according fast-track clearances to infrastructure projects. The Cabinet is also expected to approve the 12th Plan and accord international status to five airports.
Only 20 days ago, on September 13, the Cabinet had approved the controversial proposal to allow 51 per cent FDI in multi-brand retail, besides relaxing FDI norms for civil aviation and broadcasting sector. Mamata Banerjee quit the UPA government of Manmohan Singh in protest a week later. That change in policy was enacted as an executive decision and did not need a vote in Parliament.
(With Inputs from Agencies)