After the bruising general election, India’s new government got down to the business of preparing the Union Budget. Much was expected of the Narendra Modi regime, which projected a pro-business, pro-reform image throughout the campaign. While reactions to the Budget were mixed, it did include two important policy changes. Investment norms for insurance and defence manufacturing were changed to attract more foreign players. Both sectors have been touchy topics, with battlelines drawn between those for liberalised investment norms and those in favour of a more conservative approach. It’s clear that a long, hard road lies ahead on the economic front and that these are the first steps of a fledgling government of which much is expected. There will be other, tougher decisions to make – reducing subsidies, a simpler tax regime that protects states’ interests and a land acquisition policy that will spur industrial growth while conserving land-owners’ interests, to name just a few. With this edition, MSLGROUP’s Public Affairs Round-up takes on a new look and structure too. Now onwards, PAR will be a quarterly. It will have more detailed analyses and content than its earlier avatar, and will incorporate commentary and data that is more relevant to you. MSLGROUP’s insights team will play the role of an observer of the Indian economic and policy environment, and will provide analyses that we hope will benefit you.

1. Public A Round-up1
inside
03 How FDI will impact
India’s insurance sector
07 India’s big move
on defence 09 Back of the Book
05
September 2014 | Vol 2 | Issue 3
FDI49%
Insurance
Defence
A paradigm shift In insurance?

2. Public A Round-up2
Viewpoint
The new new thing
It seems like a time for new beginnings. After a bruising
election fought in the heat and dust of the Indian
summer, a new government headed by Narendra Modi
was sworn in. The scale of victory was new too – a clear
majority, which the lower house of Parliament has not
witnessed for a generation. The huge number of first-time
voters enrolled – 120 million – was a first too, and their
new way of thinking and expectations played a role in the
end result.
It seems only right, then, for MSLGROUP’s Public Affairs
Round-up (PAR) to evolve a new look and structure too.
This edition onwards, PAR will be a quarterly. It will have
more detailed analyses and content than its earlier avatar,
and will incorporate commentary and data that is more
relevant to you.
In this edition, we look at the far-reaching implications of
the change in foreign direct investment (FDI) norms for
insurance and defence manufacturing. Both sectors have
been touchy topics, with battlelines drawn between those
for liberalised investment norms and those in favour of a
more conservative approach.
In both cases, critics have alleged a danger to India’s
interests – especially in the defence sector. Those
who disagree with them point out that India’s massive
defence imports are a drag on the economy and leave
the country dependent on foreign players. There are
enough safeguards, they say, built into the law to keep
unscrupulous players at bay and to ensure national
security.
Whatever the merits of each argument, it’s clear that a
long, hard road lies ahead on the economic front and
these are the first steps of a fledgling government of
which much is expected. There will be other, tougher
decisions to make – reducing subsidies, a simpler
tax regime that protects states’ interests and a land
acquisition policy that will spur industrial growth while
conserving land-owners’ interests, to name just a few.
MSLGROUP’s insights team will play the role of an
observer of the Indian economic and policy environment,
and will provide analyses that we hope will benefit you
and your business.
As always, we look forward to your feedback.
Ashraf Engineer,
Vice-President – Content & Insights, MSLGROUP, India
ashraf.engineer@mslgroup.com
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communications and engagement company.
We advise clients on all aspects of their multi-
stakeholder communication strategies. Our
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combined includes 14 offices across 8
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with 220+ clients, national and global.

3. Public A Round-up3
Focus
One of the biggest challenges before the insurance
sector is that it deals in products that rely on ‘push’ rather
than ‘pull’. Insurers are engaged in a constant struggle to
make products meaningful to customers. The sluggish
economy and slow policy movement of the past few years
haven’t helped matters and incremental asset creation
has taken a backseat.
As per Insurance Regulatory and Development Authority
(IRDA) figures, life insurance premium income for
FY 2012-13 remained flat at Rs 2,87,202 crore
($52.78 billion) over FY 2011-12, whereas non-life
insurance recorded 19.10% growth in premiums to Rs
62,972.8 ($11.57 billion) crore from Rs 52,875.80 crore
($10.33 billion) during the same period. India is a price-
sensitive market and growing competition has pushed
premium rates down, compelling insurance companies to
work on marginal expense ratios.
The extent of development – or the lack of it – in Indian
insurance is clear from the measure of penetration and
density. A study by Swiss Re, a reinsurance company
based in Zurich, said the estimated Insurance penetration
level (life and non-life) in India was 3.9% in 2013 –
abysmally lower than most other Asian countries. Even
the density level – at $52 (Rs 2,829) – is very low.
(Insurance density level is measured as the ratio of
insurance premium – in dollars – to total population. It
indicates the average per capita spend on insurance.)
Therefore, there was much at stake for insurance in the
Union Budget 2014-15. To pump life into the sector,
Finance Minister Arun Jaitley proposed to raise the
foreign direct investment (FDI) limit in insurance to 49%
from the current cap of 26%. It came with a predictable
rider – management and control remaining with the
Indian partner.
Also, the additional Rs 50,000 rise in exemption limit
for income-tax for individuals would channelise more
household savings into life insurance premium.
How FDI will impact
India’s insurance sector
Nirav Khatri,
manager – research and insights,
MSLGROUP in India
As per Insurance Regulatory and Development Authority (IRDA) figures, life insurance
premium income for FY 2012-13 remained flat at Rs 2,87,202 crore ($52.78 billion) over
FY 2011-12, whereas non-life insurance recorded 19.10% growth in premiums to Rs 62,972.8
($11.57 billion) crore from Rs 52,875.80 crore ($10.33 billion) during the same period.
Photo by veooz.com

4. Public A Round-up4
Welcome move
The Insurance Laws (Amendment) Bill is in a state of
logjam and needs to be passed by the Rajya Sabha.
At the time of writing, it was approved by the Cabinet
and is expected to be taken up soon. Indian insurance
firms, strapped for capital, have applauded the move
for incremental FDI. An additional benefit is that the
insurance regulator will be empowered to set more rules
and impose larger penalties – a strong deterrent to mis-
selling.
Deepak Mittal, MD and CEO of Edelweiss Tokio Life
Insurance, told ‘Business Today’ magazine: “Increasing
the limit promises immediate FDI inflow. However, for
greater impact, the increase in the cap should not have
had riders attached.” A ‘Times of India report’ said that
as much as Rs 120,000 crore ($20 billion) in FDI for
insurance could flow into India over the next three to five
years. Scotland’s Standard Life, France’s AXA Group and
Allianz, UK’s Lombard and Italy’s Generali are among the
players eyeing India.
The global advantage
The collaborative efforts of foreign partnerships will
result in product innovation, improved distribution
through the leveraging of technology and it will augment
operational efficiency to improve penetration and density
levels.
Foreign capital brings with it strategic expertise gained
from global experiences. For Indian players, this is
necessary to scale up the business through technology
initiatives and client servicing tools.
Product innovation is critical to improve customer
acquisition by developing distinguishing and sustainable
propositions. Differentiation is necessary to ensure
effective customer value proposition.
Globally, insurers have designed innovative products for
different demographics, including ‘pay as you drive’ for
motor insurance and ‘co-payment claim products’ for
health insurance. ‘Pay-as you-drive’ premiums are aligned
with driving behaviour using mobile-based telematics
applications installed inside the car recording real-time
data, and are a huge success abroad. Through their
expertise, foreign players can design niche insurance
products catering to an array of segments in India.
One of the most significant aspects of raising the FDI limit
is that it will facilitate fresh investment to leverage new
technology to improve distribution through new delivery
channels. The internet is changing buying patterns across
the entire purchase cycle for policy holders. A joint
study by global management consulting firm Boston
Consulting Group (BCG) and Google India revealed that
as many three-fourths of policies sold by 2020 would be
influenced by digital channels.

5. Public A Round-up5
Year Life (Rs crore) Growth (%) Non-life (Rs crore) Growth (%)
2008-09 221,785.47 10.15 30,351.83 9.08
2009-10 265,447.25 19.69 34,620.45 14.06
2010-11 291,638.64 9.87 42,576.47 22.98
2011-12 287,072.11 -1.57% 52,875.80 24.19
2012-13 287,202.49 0.05 62,972.80 19.10
Total premiums
Source: IRDA Annual Report
Segmentation
Source: IRDA Annual Report
Category Premiums (Rs crore) Share (%)
Life 287,202.49 82.02
Fire 6,658.91 1.90
Marine 3,029.15 0.87
Health 13,974.67 3.99
Motor 29,629.80 8.46
Others 9,680.29 2.76
Total 350,175.31 100
Speaking to ‘The Economic Times’, Alpesh Shah, senior
partner and director at BCG India, said: “Digital adoption
could result in potential savings of 15%-20% of total costs
in the case of life insurance and 20%-30% in the case of
non-life.”
UK’s motor insurance industry is an example of how
the internet can transform the sector as the share of
premiums accounted for by online sales rise. Innovations
in distribution also make insurance viable for the low-
income segment, which is currently under served. It’s a
matter of time before breakthroughs in technology will
enable buyers to access all their insurance requirements
through remote digital devices.
Technology first
It is absolutely necessary to optimise business operations
to stay competitive and increase efficiency, especially
when the macro environment is challenging. It’s
important for the industry to invest not just in expansion
and distribution, but also in client servicing and
processing.
Markets like India need holistic and sustainable solutions
that are customer-driven, end-to-end and support
innovation. Automating insurance processing claims can
result in substantial cost savings as it is labour-intensive.
Insurers can also embrace the use of smart cards for
enrollments, paperless insurance policies and straight-
through underwriting processes to streamline operations
to serve low-income customers and improve bottomlines.
Finally, these activities should be well supported by
analytical tools that enable measurement of outcomes.
According to a study by Gartner, Indian insurance
companies will spend Rs 12,100 crore on IT products
and services in 2014, an increase of 12% over 2013. Derry
Finkeldey, principal analyst at Gartner, was quoted in
its press release as saying: “Insurers in India are getting
serious about their core insurance processes, especially
where they help increase insurer penetration of the
market.”
With this major reform, the stage is set for a paradigm
shift in insurance. It’s up to the industry now to respond.

6. Public A Round-up6
Country Total Life Non-life
Taiwan 3,886 3,204 682
Hong Kong+ 5,002 4,445 557
South Korea ** 2,895 1,816 1,079
Japan** 4,207 3,346 861
Singapore ** 3,251 2,388 863
Thailand ** 310 214 96
Malaysia ** 518 341 176
India * 52 41 11
China + 201 110 91
Insurance Density
Insurance Density (in US $) - Asia (2013)
+ provisional *Estimated **Estimated US value. (Insurance density level is measured as the
ratio of insurance premium – in dollars – to total population. It indicates the
average per capita spend on insurance.)
Country Total (%) Life (%) Non-life (%)
Taiwan 17.6 14.5 3.1
Hong Kong+ 13.2 11.7 1.5
South Korea ** 11.9 7.5 4.4
Japan** 11.1 8.8 2.3
Singapore ** 5.9 4.4 1.6
Thailand ** 5.5 3.8 1.7
Malaysia ** 4.8 3.2 1.7
India * 3.9 3.1 0.8
China + 3 1.6 1.4
Insurance penetration
+ provisional *Estimated **Estimated US value
Source Swiss Re, Sigma 3/2014
Implications
of FDI
FDI cap hiked from
26% to 49%
Management
control with
Indian partner
Regulator to be more powerful;
focus on
mis-selling
Firms' premium
incomes will rise
Low-income
segments will be
reached out to
Rs 120,000 crore
($20 billion) may flow
into the country as FDI in insurance
over 3 to 5 years
New technology
paradigm that will
change the way
consumers are sold
to and serviced
Innovative,
niche products
for consumers
Greater
insurance
penetration
Considerable
political opposition
to the move. That will
take some dealing with
What the new rules s
ay
W
hat this means
Foreign
cos eyeing larger
indianpie
A paradigm shift In insurance?

7. Public A Round-up7
Viewfinder
India’s big move on defence
India – the world’s largest arms importer – spent close
to $6 billion (Rs 36,000 crore) on weapons imports last
year. Before the Union Budget 2014-15, The Narendra
Modi government announced its intention to modernise
the Soviet-era weaponry – Russia is a major supplier – by
liberalising the defence sector through the foreign direct
investment (FDI) route. The objective, clearly, is to scale
up India’s domestic defence manufacturing base and
increase preparedness, especially at a time when China
has bolstered its military efforts by pursuing its ‘string of
pearls strategy’ to encircle India.
India has allowed 26% FDI in defence projects since 2001,
without committing to technology transfer. This kept
away many overseas investors. Since then, India has had
negligible FDI in defence.
In his maiden Budget speech, Finance Minister Arun
Jaitley raised the composite cap from the earlier 26% to
49% with full Indian management and control through
the Foreign Investment Promotion Board route. The new
limit approved by the Cabinet provides a greater incentive
for licensed manufacturing, but is not high enough
for overseas investors to get managerial control over
elements such as intellectual property.
Though the industry lauded the policy, there needs to
be greater clarity on technology transfer. Critics said
that no foreign investor would part with closely-guarded
technology unless there is adequate control over the
enterprise and an assurance of sufficient autonomy with
regards to capacity enhancement and access to markets.
Only then would the investment be viable.
While the FDI limit would be automatically agreed to if
it is within 49%, it is the government’s policy to allow a
higher limit – even up to 100% – provided state-of-the-art
technology transfer is offered. The proposals would be
considered on a case-to-case basis.
Security analysts have raised concerns over managerial
control by overseas partners if their investment exceeds
49%. Some have demanded that India reserve the right to
take over a facility during operational emergencies. Most
nations include such an enabling provision. Further, India
can incorporate security clauses in the licence to ensure
against unscrupulous entrepreneurs.
Rakesh Sood, a former ambassador and the prime
minister’s special envoy for disarmament and non-
proliferation till May 2014, told ‘The Hindu’ newspaper:
“Merely liberalising FDI will not help. What is needed is an
Photo by plus.google.com

8. Public A Round-up8
Defence allocation
FDI in defence: pros and cons
All figures in Rs crore. Source: India Today
Defence budgets (2013)
Less reliance on foreign suppliers
Savings on foreign exchange
Boost for Indian industry, economy
Significant foreign investment
Greater self-reliance makes
geo-strategic sense
Cons
Without managerial control,
investors would be wary
Unclear guarantees on
intellectual property safeguards
Tremendous
political opposition
Risk of unscrupulous players and
damage to India's security set-up
Pros
Budgetary Allocation
2013-14
203,672
2014-15
(Interim Budget)
224,000
2014-15
(Union Budget)
229,000
2013-14
86,740
2014-15
(Interim Budget)
89,587.95
2014-15
(Union Budget)
94,587
Capital outlay
Source: India Today
613.9
Outlay (in $ billion)
US China Russia Japan India
119.5 69.5 56.9 39.2
appreciation of the characteristics of the defence industry
and coordination among the multiple stakeholders who
drive, and have often distorted the decision-making
process.”
Speaking to ‘The Economic Times’, Baba Kalyani, CMD
of Bharat Forge, said: “The finance minister’s intent
to reduce reliance on imports and streamline defence
procurement systems is very positive.”
Besides, indigenous facilities provide self-reliance and
a degree of assurance that imports don’t. Additionally,
indigenous manufacturing provides better life-cycle
support – including, critically, supply of spares.
It is important too that the armed forces, the ultimate
consumers of these goods, be allowed to share their
views during policy-making.

9. Public A Round-up9
Back
of the Book
Rs 39,00,000 crore ($650 billion)
Targeted size of the textile and apparel industry by
2024-25 as per a draft policy termed ‘Vision, Strategy
and Action Plan’ for textiles and apparels
7.5 crore
Number of new bank accounts the Indian government
hopes to enable by August 15, 2018, according to a draft
financial inclusion plan
200
Number of low-cost airports India plans to build in the
next 20 years to connect tiers 2 and 3 cities
65
Percentage of freight volume in India that moves on
roads at an average speed of 30-40 kmh
8,500 km
Extensions of national highways proposed to be
completed by 2014-15
22%
Statutory liquidity ratio for banks after it was lowered by
half a percentage point. The reduction in SLR will free
up about Rs 40,000 crore ($6.5 billion) in the banking
system
Rs 12,000 crore ($2 billion)
Proposed investment by American e-commerce giant
Amazon in India
100%
Foreign direct investment in railway infrastructure
projects permitted by the Union Cabinet
43,00,000
Number of claims settled by retirement fund manager
Employees Provident Fund Organisation since April
2014. It also updated 92% of the annual accounts due
for 2013-14. This has happened for the first time in the
past 30 years
Rs 297,000 crore ($49.5 billion)
India’s fiscal deficit for the first quarter of 2014-15 – that
is, 56.1% of the full-year target
34.35%
Improvement in total employment during the last eight years
to 12.77 crore, as per the Sixth Economic Census-2013
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In what way will FDI in defense constitute a
security risk, when all our weapons are made
abroad, anyway?
This BJP government is funny; they want FDI
in strategic Indian assets like Railways and
Defense, but want to skip multi-brand retail.
Paradox is that those who don’t wanna give us
technology want 100% FDI in Defense. & we are
offering 100% FDI b/c we want the technology.
Opposed to raising the FDI in insurance for ten
long years BJP does the mother of U turns &
declares black money can not be brought back!
Union cabinet proposes to raise FDI cap in
Insurance frm 26% to 49%. Good decision that
will provide a boost to overall financial sector.
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