Financial reforms for India

India's government is all set to initiate major reforms in the financial sector, covering insurance, banking and pensions. This could spur investments and add as much as 1.5% to the country's growth. That, in turn, would give the government the opportunity to address issues of welfare and distress.

The main reform in insurance is to raise the foreign direct investment cap from 26% to 49%. Finance Minister P Chidambaram had already proposed this FDI hike, but in backtracked because of total opposition to the idea from the Left. Once the cap is relaxed, more foreign money is expected to flow into India's coffers and helps to expand the insurance sector.

The government wishes also to create a statutory regulator for the pensions sector. The appointment of a regulator would break the monopoly of the Employees Provident Fund Organisation (EPFO), which takes care of both government and private sector funds currently. The regulator would permit new pension funds, which would operate in a transparent manner.

Pension funds can then compete for government or private sector money, offer advice on how to use it, and give companies and individuals options on how to invest their cash. Many companies are likely to turn to outside consultants in the private sector for advice.

The banking sector reforms allow the government's stake in public sector banks to come down below 50% and raise the current 1% cap on voting rights that applies to all other shareholders in state-owned banks.