The finance ministry on Wednesday approved 49 per cent foreign direct investment (FDI) in the insurance and pension sector.
The current ceiling for FDI in this sector is 26 per cent.
The proposal was floated when Pranab Mukherjee was the finance minister, and was sent to the cabinet for approval in May, but the decision was deferred.
The Bill needs cabinet approval before it comes up in Parliament, where it will have to be approved.
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 per cent from 26 per cent.
The cabinet had in May deferred a decision on the insurance amendment Bill, underlining the difficulty the Centre faced for driving reforms that are sorely needed to shore up weakening economic growth.
Along with raising the FDI limit, the insurance amendment bill aims to strengthen regulation of the sector and allow foreign re-insurers to enter the Indian market.
A parliamentary standing committee headed by Bharatiya Janata Party's Yashwant Sinha had asked the government to cap FDI in the sector at 26 per cent, 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.
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