The Indian government has decided to almost double the foreign investment limit in the insurance sector in an important piece of reform aimed at attracting more foreign funds to help revive the economy.

The cabinet yesterday raised the equity stake for foreign insurers from 26 per cent to 49 per cent, a move welcomed by industry bodies, which said it would inject capital in the US$60 billion sector.

Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said the move will attract "long-term capital for the sector, which can have multiplier effect on the economy, especially in meeting the huge infrastructure financing requirements".

The move, which had stalled during the term of the previous government, still needs parliamentary approval.

Prime minister Narendra Modi's ruling Bharatiya Janata Party (BJP) will also need to get support from other parties in the Upper House, where it does not have a majority, unlike its control of the Lower House.

But the cabinet's decision is being hailed as the forerunner of a set of big-bang reform initiatives planned by the two-month-old government.

It plans to lift economic growth to at least 7 per cent in the next three to four years, from just above 5 per cent now. Modi has also promised to open up the defence sector to foreign investment.

The insurance sector reform had been taken up by the previous Congress-led government but it could not push it through due to a lack of support in parliament.

Failure to open up the insurance sector was also one of the hitches in a free trade agreement India is negotiating with the European Union.

Yesterday's decision came about after Modi had moved forward cautiously on reforms since he was elected with a massive mandate in May.

The Prime minister had given the nod to policy continuity in many areas, from foreign policy to social schemes.

The insurance move is thus "a bold step", said Uttar Pradesh-based political analyst Sudhir Panwar.

Currently, most foreign insurers in India are unable to inject more funds because their local joint-venture partners are unwilling or unable to put in a big sum of money to ensure the equity stakes of the foreign partners stayed at 26 per cent.

The new deal will allow the foreign insurers to bring in funds from abroad to raise their holdings to 49 per cent.

India's insurance sector is underdeveloped with much of the population and businesses uninsured.

— By arrangement with The Straits Times/ANN