OECD Asks India to Loosen ‘Restrictive’ Rules in Insurance

Dec. 4 (Bloomberg) -- India must loosen foreign investment rules in insurance, banking and retail to create more jobs and accelerate economic growth, the Organization for Economic Cooperation and Development said.

The South Asian nation’s policies to attract overseas investors remain “restrictive in comparison with a majority of OECD countries,” the Paris-based organization said in a report titled “OECD Investment Policy Reviews: India.”

India limits New York Life Insurance Co. and other foreign insurers to a 26 percent stake in local companies and bars retailers including Wal-Mart Stores Inc. from opening outlets in the world’s second-most populous country. The OECD called for an improvement in the “investment environment” in India, which the World Bank places 133rd among 183 countries in a ranking based on the ease of doing business.

Indian Prime Minister Manmohan Singh told investors in New Delhi last month that the country had received foreign direct investment of $121 billion since 2001 and that it isn’t a “large number given the scale of our economy.” The flows were less than a quarter of the $566 billion that China attracted during the period.

“India may be able to better achieve its objectives through non-discriminatory policies rather than sectoral restrictions on foreign investment,” OECD Secretary-General Angel Gurria said in the report.

A plan to raise the foreign-direct-investment ceiling in insurance to 49 percent has been stuck in parliament for more than three years and is currently being debated by a group of all political parties.

Bank Access

In retail, local laws are aimed at protecting small shops in Asia’s third-largest economy. India permits overseas chains such as Wal-Mart to operate as wholesalers and sell groceries and other goods to businesses such as supermarkets, department stores and restaurants. They are barred them from opening stores or buying stakes in supermarket chains.

In banking, India’s central bank postponed in April a plan to review granting greater access for foreign lenders into the economy. The Reserve Bank of India regulates the entry of foreign banks and even limits expansion of their branches to 12 a year, the OECD said.

“Growth could be accelerated by the enhanced productivity from increased foreign investment,” the report said. “In banking, insurance and especially retail distribution, the influx of FDI could help raise incomes in the agriculture sector while increasing the choice and lowering living costs.”

Economic Growth

The OECD said that while growth and investment in India has been “impressive” since 1991, when Prime Minister Singh as finance minister opened the nation’s economy to foreign investors, income inequalities among states have increased.

India’s economic growth has averaged 8.5 percent each year since 2004 after expanding at a 6 percent pace during the 1990s. India’s investment rate has more than doubled to 35 percent of gross domestic product since 1991.

The OECD called upon poorer states in India to cut bureaucracy to attract more investment and spur growth.

“While the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level,” according to the report.

The OECD also called on India to improve the judiciary, whose capacity to handle cases such as those related to intellectual property rights “in a timely manner remains insufficient.”