What is Foreign Direct Investment or FDI?
When a company takes controlling ownership in a business in a different country, it is known as foreign direct investment (FDI). By entering a new market via FDI, the foreign company can be directly engaged with the day-to-day business operations in the other country[2] .
Usually, FDI comes into being when a company sets up foreign business operations or acquires foreign business assets. Along with the money, these companies also bring with them their knowledge, skills and technology for transfer. FDI is a huge factor to set up stable and long-lasting relationships between world economies for global economic integration[3] .
FDI in India
Liberalisation of the Indian economy began in 1991 and has since attracted FDI inflows into the country. At present, India ranks number 1 in the greenfield FDI ranking and is part of the top 100 nations for ‘ease of doing business’.A country that receives a substantial amount of funds from foreign investors regularly has more chances to build a vibrant economy [4] .
In the case of India, FDI inflows have shot up by 20 times from 2000-2024. As per data given by the Department for Promotion of Industry and Internal Trade (DPIIT), cumulative FDI inflow for India is at US$ 1.03 trillion between April 2000-September 2024. This can be attributed to the government’s efforts at enhancing ease of doing business and reworking FDI norms. The total FDI inflow into India in the period from July 2024-September 2024 is $19.8 billion [5] .
How Does FDI work in India
There are two routes through which India processes FDI - Automatic and Government.
Automatic: The automatic route is for non-resident or Indian companies that are not obligated to need a prior permit from the Reserve Bank of India or Government for FDI. Sectors such as Agriculture, Automobile, Pharmaceuticals, Airports, among others operate in the ‘100% automatic route’ category.
Government: For companies coming via the government route, approval is compulsory. The firm will be required to file out an application via Foreign Investment Facilitation Portal, which is then forwarded to the relevant ministry to approve or reject the application. The concerned ministry consults with the Ministry of Commerce and Department for Promotion of Industry and Internal Trade (DPIIT) to decide if the application goes forward. Sectors which come under the ‘100% government route’ include banking and public sector and broadcasting content services [2] .
100% FDI in Insurance
In an effort to achieve the Insurance Regulatory and Development Authority of India's (IRDAI) goal of achieving "Insurance for All" by 2047, the Union budget 2025* has increased the FDI limit in insurance to 100%. This move will allow complete foreign ownership and is expected to garner more long-term capital and enhance insurance penetration in the country. The existing rules and conditions pertaining to foreign investment , Finance Minister Sitharaman clarified, will be reviewed and simplified. [6] .
Potential Benefits to Policyholders
Improved Products and Customer Service
By having more global entrants into the Indian insurance landscape, there is bound to be intense competition. When there are more players, it leaves more options for policyholders to choose from. This situation prompts players to offer better quality products to consumers. This also means that there will be more customer outreach helping in resolving the issue of low insurance penetration in India [7] .
Innovation and Technology
FDI inflow also means that foreign companies will be coming with their knowledge and technical prowess. There will be an exchange of technology and access to global best practices which will lead to advanced innovation that could lead to broader coverage in insurance products [8] .
Drive down costs
With more players in the fray, it can be expected that it will bring down policy costs and hence, make insurance affordable for many. It can also mean that there might be improvements in existing policy approval processes which means consumers can avail insurance in a more seamless way [8] .
Key Considerations
While allowing 100% FDI in insurance has been a long pending industry demand, it will come with its own set of challenges. There is a risk that local businesses could struggle to compete as larger corporations expand their presence in the market. [4] . However, the government has anticipated these concerns and IRDAI will be continuing to oversee the sector and ensure compliance with Indian laws. The focus of the move is to promote growth while ensuring interests of policyholders are met [7] .
Preparing for regulatory challenges will be crucial to ensure this liberalized announcement serves the purpose of growth. The government will also have to prepare for the spurt in business in the sector and develop an ideal physical and digital infrastructure to facilitate it. However, 100% FDI in the insurance sector is representative of the government’s vision to shift policy and transform the insurance landscape.
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