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UPDATE 1-India's cabinet backs insurance, pension reform bills

Thursday, 4 Oct 2012 | 9:54 AM ET

(Adds market data, quotes and details)

By Manoj Kumar and Frank Jack Daniel

NEW DELHI, Oct 4 (Reuters) - India's cabinet approved bills on Thursday to attract foreign investment into insurance and pensions in the latest move by Prime Minister Manmohan Singh to restore confidence in the economy, but the reforms will face a tough fight in parliament.

The insurance bill would raise the cap on foreign ownership of insurance companies to 49 percent, Sports Minister Ajay Maken told reporters after the cabinet meeting at Singh's residence. the limit now is 26 percent.

He did not provide details on the bill regarding pension companies, currently blocked to foreign investment.

The steps followed big-ticket policies unveiled last month, including hiking diesel prices and inviting in foreign supermarkets, aimed at fending off a cash crunch and reviving growth, which has slowed to its slowest pace in nearly three years.

Those reforms helped drive up India's markets in recent weeks, and the latest moves added to the positive sentiment and could boost interest in a forthcoming sale of shares in state-owned companies.

"It is a signal of rationalising the banking, financial services and insurance sector, and is a welcome development. It will induce more confidence in India's economy and improve the investment climate," said Saugata Bhattacharya, an economist at Axis Bank in Mumbai.

Anticipation of the outcome of the cabinet meeting triggered gains in financial stocks such as State Bank of India and ICICI Bank, driving India's main BSE index to a 15-month high, while the NSE index hit 17-month highs.

Most of India's 24 insurance companies have lost money in the past decade, hit by restrictions on foreign holding and by regulatory changes.

TOUGH FIGHT

Singh faces a tough fight to win parliament's approval for more foreign investment in the economy, especially with two state elections looming and after an outcry over the decision to allow foreign supermarkets into the retail sector.

The pension and insurance bills have been proposed for nearly a decade. Unlike last month's measures, they need to be approved by parliament, where the coalition government is in a minority after its largest partner pulled out in anger at last month's reforms.

The cabinet also signed off on a shareholder-friendly bill to make corporate management more accountable, which would overturn a half-century old law.

Giving some hope to the government, the normally obstructive opposition Bharatiya Janata Party (BJP) said it was waiting for further details but was not totally opposed to the latest reforms.

India's economic growth rate was around 5.5 percent in the last two quarters, a far cry from the near double-digit rate of recent years. Global credit rating agencies have warned India could lose its investment grade rating because of unsustainable budget and current account deficits.

Last week a government panel, led by former finance secretary Vijay Kelkar, warned of a "fiscal precipice" if the government does not urgently slash fuel, food and fertilizer subsidies to curb a deficit that could hit 6.1 percent of gross domestic product this fiscal year.

The first set of reforms announced last month have boosted the rupee, which partly recovered from a sharp drop in value this year, but the central bank says more action is needed to save the budget and reduce inflation.

"The diesel price hike barely scratched the surface. The more important signal will be to act on the Kelkar committee recommendations and have a fiscal roadmap," said A Prasanna, chief economist at ICICI Securities Primary Dealership.

(With reporting by Nigam Prusty in NEW DELHI, Semeet Chatterjee, Shamik Paul and Subhadip Sircar in MUMBAI; editing by Jane Baird)

((frank.daniel@thomsonreuters.com)(+91 11 4178 1003)(Reuters Messaging: frank.daniel.thomsonreuters.com@reuters.net))

Keywords: INDIA ECONOMY/