NEW DELHI, May 11 (Reuters) - India has put on hold a proposal pending for years to raise the limit on foreign direct investment in insurance firms, possibly until after the 2014 elections, dashing the hopes of foreign insurers to spread their wings in a promising emerging market.
Domestic and foreign insurers, which have invested billions of dollars in India over the last decade, have been lobbying the government for years to raise the FDI limit to 49 percent from 26 percent.
The cabinet on Thursday deferred a decision on the insurance amendment bill, underlining the difficulty Prime Minister Manmohan Singh's beleaguered government faces driving reforms that are sorely needed to shore up weakening economic growth.
Several reform steps have been blocked by partners in Singh's coalition government, most notably the regional Trinamool Congress party, which is now standing in the way of the insurance bill as well as a plan to allow foreign airlines to take stakes of up to 49 percent in domestic carriers.
"There is no question of supporting the government on 49 percent FDI limit in insurance sector," a lawmaker belonging to Trinamool said, declining to be named.
As well as proposing a rise in the limit on FDI, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market.
"Our stand is clear: unless the FDI cap is kept at 26 percent for the insurance sector, the government should not expect our support for the bill," former finance minister and opposition leader Yashwant Sinha told Reuters.
A lawmaker in Singh's Congress party conceded that the proposal to increase the FDI limit for foreign insurers may now be shelved until after the elections due in two years.
Finance Minister Pranab Mukherjee had promised to push through three critical finance-sector reforms, including the insurance bill and one on pensions, during the current or next session of parliament. Unless he can win over allies and opposition parties, however, they will remain on hold.
A parliamentary standing committee headed by Sinha has asked the government to cap FDI in the pension sector at 26 percent, confounding the government's plans to raise the limit in tandem with an opening up of the insurance sector.
Insurance reform is widely seen as crucial because, according to Insurance Regulatory and Development Authority (IRDA) estimates, the sector needs a capital infusion of over $12 billion over the next five years.
India has 24 life insurance companies and an equal number of general insurance companies that include subsidiaries of HDFC , Metlife and Aviva.
"The insurance sector is going through a very tough time and the inability of foreign players to bring in money will add to the pressure," said an investment banker with a leading European bank, who declined to be named as he was not authorised to speak to the media.