HOW CAN INDIA AVOID PITFALLS OF GLOBALISATIONS?

A Report by the Special Subject Group 

Shri Rahul Bajaj (Convenor)
Shri Sanjeev Goenka

'Bold leadership, purposeful cooperation and compassion are essential ingredients if today's fragmented global economy is to give way to a century of peace and prosperity. In their absence, and if history is any guide, all will suffer'

- Trade & Development Report '99, UNCTAD

PREFACE

In a meeting of the Prime Minister's Council on Trade and Investment, held on 11 December 1999, it was decided to constitute eight Special Subject Groups on issues that needed appropriate strategies for development (see GOI Notification No. 260/3/C/3/99-E&S1 dated 14 December, 1999). 'How can India Avoid the Pitfalls of Globalisation?' was one of the eight subjects on which a Group consisting of the undersigned Members of the Prime Minister's Council, was constituted 'to consider and recommend implementable action plans on the subject.

The Group has looked into the subject with great detail and considered all such aspects that have relevance to the question raised before it. The basic premise that the Group has worked on is that India has to emerge as an economic super-power in the foreseable future and establish the entity of its own economy in a rapidly globalising world economy. This is why India must avoid the pitfalls of globalisation, while pursuing globalisation of its economy. India must ride the crest of globalisation wave, not get drawn into the vortex of its whirlpool. Lot of things need to be done. There is need for a comprehensive and integrated approach. This is the context as well as the content of the Report, which we have pleasure to present before the Prime Minister's Council. The Group would be happy to see its recommendations considered, accepted and implemented.

CONTENTS

Executive summary

Like almost every country, India too has welcomed globalisation as a development paradigm.

With its entrepreneurial talents, skilled manpower, huge stock of scientific, technical and managerial people, India is in a good position to benefit from globalisation.

However, the globalisation process needs to be managed and monitored. Globalisation, by itself, does not bring about growth and development.

Further, drawing lessons from the South East Asian crisis, there is the question of economic stability and security in a globalising integrated world economy. Economic security should receive due attention in the policy making process.

Though on a higher growth path, the Indian economy is currently at a critical stage of development, where there is growth without adequate employment opportunities.

The Group takes particular note of the high incidence of poverty, which is a serious aspect of the globalising Indian economy. Stark inequalities can be a recipe for socio-political and economic de-stabilisation in a globalising economy.

The Group is also concerned that while inequalities between the developed and the developing countries has increased during the last decade, the latter are being denied necessary growth opportunities.

The Group recognises that the industrial economy is passing through a trying phase of transition, and is concerned about the high incidence of industrial sickness and joblessness amidst huge backlog of unemployeds.

There are several other concerns e.g. (i) poor performance of agriculture, (ii) decline in domestic savings; (iii) large fiscal deficit; (iv) weakness of the financial system on account of large NPAs and bad loans; (v) inadequate export earnings; (vi) poor infrastructure; (vii) high cost of capital etc. to mention a few.

So far as capital market is concerned, the Group notes that there is large dependence on the FIIs and cautions against germination of 'financial panic' and subsequent flight of capital.

The economic reform continues to remain focused on facilitating foreign investment and trade liberalisation, and still lacks its focus on the imperative of re-structuring and competitiveness building of the indigenous industry.

The basic objectives behind liberalisation of FDI policy have not been achieved so far. Foreign companies are gaining control of the domestic market at a relatively lower cost but without developing significant stake in the economy.

This process is now likely to be further facilitated as India fulfills its obligations as a member of the World Trade Organisation (WTO). Our objective has to be globalisation of the economy and not just globalisation of the domestic market.

The WTO has many implications for the Indian economy, and particularly the Indian industry. Some of the issues that are now sought to be included in the WTO should be of real concern for us. These are Trade and Investment, Trade and Competition Policy, Trade and Environment, and Trade and Labour Standards, among others.

The economy, in the opinion of the Group, is highly vulnerable to the forces of globalisation at this juncture. The imperatives to avoid possible pitfalls of globalisation as identified by the Group are:

Strong and expanding domestic economy, and thus enlargement of the domestic market. Sustained high growth is essential.

Completion of domestic economic reform and freeing the economy from all the schakles that are obstructing the enterprising spirit of the people e.g. agricultural reform, de-centralisation, administrative, legal and institutional reforms and reforms of the labour laws.

Macro-economic stability and elimination of revenue deficit ¾ reduction of government borrowing.

Focus on three things: Disinvestment, privatisation and commercialisation of assets, mainly to retire public debt.

Re-structuring of the banking sector.

Due attention to the issue of bankruptcy of industrial companies.

Preparing for world-wide liberalisation of trade in financial services, that is in the offing, by way of strengthening of the financial sector through liberalisation.

Focus on increasing domestic savings along with competitive interest rate regime.

Empowerment of the regulatory authorities.

Broad-basing the capital market and attracting more Indian investors (institutional as well as individual). Safeguards against 'financial panics' by strengthening the SEBI.

Full capital account convertibility is important but has to wait for fiscal consolidation and strengthening of the financial system.

Efficient and corruption-free governance at all levels.

High quality of economic and legal institutions, along with establishment of effective regulatory authorities, wherever it does not exist.

Formulating a new Industries Promotion & Development Act and a National Competition Policy for a level playing field for indigenous industry.

Developing an appropriate WTO strategy.

HOW CAN INDIA AVOID PITFALLS OF GLOBALISATION?

A Report by the Special Subject Group 

"As the 20^th Century comes to an end, the world economy is deeply divided and unstable. The failure to achieve faster growth that could narrow the gap between the rich and the poor must be regarded as a defeat for the entire international community" Trade & Development Report, 1999 UNCTAD

I. Introduction

At the dawn of the new millennium the world economy is very much in the grip of globalisation. We are headed for an inescapable borderless global economy that holds out threats as well as opportunities. Revolution in information, media and communications technologies, internet services, foreign direct investment, new manufacturing technologies, drastic policy shift in the developing countries in favour of market economies through liberalisation of trade and investment regimes, etc. have been driving the forces of globalisation since the 90s. It is the destiny of the world economy in the 21^st century.

Establishment of the World Trade Organisation (WTO) in 1995 is yet another landmark development in the world economy and the multilateral trading systems. It has further reinforced and accelerated the pace of globalisation. The forces of globalisation have brought about significant growth in world-wide trade, investment flows and capital transactions and cross-border movement of people. Currently, about $2 trillion is exchanged each day in the world currency market, while 20% of the goods and services produced are traded in the global market. In 1999, FDI outflow had exceeded $820 billion.

Through gradual dismantling of economic boundaries, 'globalisation is ushering in a new era of relationship between nations, economies and people' ¾ bringing them ever closer to each other. Globalisation as a process is 'integrating not just economies but culture, technology and governance'. There can be little doubt that globalisation has the potential of opening up 'many opportunities for millions of people around the world'. It has already unfolded before us many new opportunities ¾ new markets, new tools of doing business, new actors and new rules.

Globalisation ¾ Objective of India's Economic Reform

Global markets, global technology, global ideas and global solidarity can enrich the lives of people everywhere, greatly expanding their choices.

Human Development Report '99

Like every country, India too has welcomed globalisation. One of the primary objectives of economic reform is successful globalisation of the Indian economy, that should make India a global economic power. This implies that we integrate our economy with the world economy, so as to be able to take advantage of the world-wide developments in technology, capital flows, knowledge etc.

The new development paradigm, based on liberalisation of the economy and its globalisation, is appropriate for us not just because the old paradigm had failed to usher in growth and development, but because the country, with its entrepreneurial talents, skilled manpower, huge stock of scientific, technical and managerial people, is in a very good position to benefit from globalisation. Further, as a nation we should no longer remain isolated from developments in the rest of the world. The nation has paid a heavy price for closing its economy for about 50 years. India has to catch up fast in almost every field, if she has to emerge as a major economic power.

In this context, there is need to accelerate the pace of globalisation of our economy, by accelerating the pace of economic reform. The Indian economy, with its inherent resilience, is now well poised for accelerated economic reform. The economy is changing gears, from low / medium growth to high growth, from traditional industries to new dynamic sectors, and the domestic market is changing rapidly towards an open and competitive paradigm. With ten years of liberalisation, competition is having its sway over the economy.

III. Need For Managing Globalisation

People everywhere are becoming connected ¾ affected by events in far corners of the world

(Human Development Report '99)

However, it is now also widely recognised that globalisation process needs to be managed and monitored. Globalisation, by itself, does not bring about growth and development. It is only a means that needs to be harnessed and directed. Also, for its benefits to be fully derived, the globalisation process needs a set of supplementary initiatives in order to create conducive environment for flourishing of growth amidst competition. In other words, globalisation per se is not enough.

Further, there is the question of economic stability and security in a globalising integrated world economy. The S-E Asian crisis is indicative of how, in the absence of effective management, surveillance and monitoring, globalisation may have many pitfalls with serious repercussions on the economy that is intended to be globalised or undergoing the process of globalisation. While welcoming globalisation, the Group feels that in the Indian context there is all the more need for effective monitoring of the forces of globalisation and safeguarding the interests of economic security of the people.

There are two aspects to take note of in this context. First, pitfalls may occur internally within the economy, following largely from lack of effective management and monitoring of the macro-economic parameters, structural weakness and drawbacks and activation of the market forces subsequent to liberalisation of the economy. Second, pitfalls may also occur in some other globalising economy(ies) and may have wider global impact (as in the case of the Asian crisis of 1997-98). This is, of course, purely exogenous and cannot be helped very much, though every globalising economy needs to be on guard, especially, when it comes to liberalisation of the external economy, namely liberal capital account convertibility. Our concern here is about both the aspects.

IV. State of the Economy : Some Concerns

Though on a higher growth path, the Indian economy is currently at a critical stage of development. It is true that it has been able to withstand the upheavals of the world economy following the Asian, and subsequently global, financial crisis of the late 90s, and did not suffer much loss of growth. Also, overall GDP growth during the 90s has been around 6.1 percent, above the average of 5.6% during the 80s.

While the economy is on the upward move, it does not, however, necessarily follow that the fundamentals are sound and stable. For the purpose of the question that we are addressing (How can India avoid the pitfalls of globalisation?) it is necessary that we take a realistic view of our economic performance. If pitfalls are to be avoided, one should always take an objective view of the economy, and be concerned about its shortcomings, as otherwise one tends to ignore the shortcomings and the signals. This is the first lesson one draws from the crisis in the South-East Asia. The Group takes particular note of the high incidence of poverty, even as the Indian economy is on the path of globalisation, and observes as follows.

So far, globalisation has not made any positive impact on the incidence of poverty. The percentage of people below the poverty line (BPL) was as high as 36% (49% in rural areas) in 1993-94. There has been 'no clear positive trends in poverty reduction' in the recent years (Economic Survey 1999-00).

The BPL people are really the people living hardly with any means of subsistence and are below subsistence level. Considering that there is a large percentage of people living virtually on the edge of subsistence, the country has about half of its population living either on the edge of, or below, the subsistence level. According to World Development Report (1999-00), in 1994 India had 47% of population living on less than $1per capita /day. Not surprisingly, India has 132^nd rank in the human development index.

Looking at the pattern of distribution of income, it is observed (from WDR'99) that while top 20% of the population accounted for 39.3% of income, the bottom 20% had a share of only 9.2%. The table below shows that in 1998, 60% of the population had per capita income below the national average of $ 430. It may be even 70%, if one takes into consideration the fact of inequality within the fourth 20% of the population. ^@

India : A Picture of Income Distribution 1998

Source : Prepared from World Development Report, 1999-00

In the opinion of the Group, this is a very serious aspect of the globalising Indian economy for a number of reasons, but primarily one has to note that in such a situation the current phase of globalisation which is devoid of any concern for equity or justice will further widen the 'poverty gaps' in particular and the disparities in general. Given the democratic setting of our country, not only that globalisation will not be sustainable, it may even be a recipe for socio-political and economic destabilisation. This also poses serious challenges before the government and the policy makers alike. What is significant to note is that such stark inequalities provide excellent breeding ground for pitfalls and lapses. It is not difficult to understand this.

Keeping in view the large incidence of poverty, the growth of the economy (at 6.1% average annual) cannot be considered satisfactory. Also, it is being driven by the growing prosperity of the middle class, whose size is not more than 200 million. While we can be reasonably proud of the relatively large middle class, the Group is of the view that we need to have enough depth of the growth. India cannot claim the status of an economic super-power by showcasing its 'Middle class'. This status can be achieved only by removing poverty with broad-based growth.

A primary concern, in this context, is the performance of our agriculture, that is source of livelihood for 70% of our population. Growth of this sector has not been adequate and failed to lift half of the rural population from below the poverty line. If we take land as a capital asset for the rural people, per capita arable land has declined from 0.24 hectare in 1979-81 to 0.17 hectare in 1994-96. Productivity of the workforce (value added / agricultural worker) has increased somewhat during this period, from $253 to $343 (in terms of 1985 dollars), but this is among the lowest among the developing countries and lower than the average of $380 in South Asia and $ 2272 in Europe and Central Asian Countries.

Performance of the industrial sector too gives rise to several concerns, notwithstanding the current recovery. The expected growth of 7-7.5% in 1999-00 (against 3.8% in 1998-99) is a distinct recovery, but far less than the pre-recession peak growth of near 13% in 1995-96, and average growth of 7.8% during the 80s. Many of the traditional sectors, providing the basic foundation of our industrial economy, are languishing, creating in the process a wide chasm between the old economy and the new economy.

The Group recognises that the industrial economy is passing through an inescapable phase of transition, which may be both long-drawn and costly. However, one cannot help expressing concern about the high incidence of industrial sickness, especially among the small and medium scale units. How will Indian industry cope with the challenges of liberalisation, which is focused on promoting external competition? While the challenges of re-adjustment are mounting, the incidence of industrial sickness and joblessness is growing. According to Economic Survey 1999-2000 'as on 31^st March 1998 there were 224,012 sick / weak units' and total bank credit locked in such units was Rs.15,682 crore.

As the industry is undergoing transition and restructuring in the face of globalisation, it is compelled to rationalise the employed workforce, giving rise to the problem of joblessness, when the need is to create more job opportunities. There is the onerous task of providing employment opportunities not for the additions to the labour force and the backlog of unemployeds but also those have been losing their jobs on account of challenges of competition. The Group is aware of the employment generating opportunities that may accrue from liberalisation of the economy, but notes with concern that so far the situation has continued to remain grim. Between 1991 and 1998 overall employment growth in the organised sector had varied between 0.21 and 1.51 percent. Obviously, the backlog has increased significantly.

Services sector is really what is driving the present growth, average annual growth in value addition being 7.9% during 1990-98 when industrial growth was just 4.9%. This is tilting the balance of the economic structure in favour of the services sector. But, as everyone will admit, much of it is not real growth, especially as it does not reflect growth in productivity. Continued high growth in this sector (mainly through rise in salaries) can further distort the income inequality.

Growth in Indian Economy : Better Performance?

Source : World Development Report, 1999 / 2000, World Bank

Overall, the Economic Survey 1999-2000 highlights several areas of concern about some trends in the Indian economy, namely (i) sharp decline in domestic savings ratio, and the investment ratio (due to slower rate of capital formulation), (ii) sharp decline in average annual growth in agricultural production (1.6% during 90s from 3.8% during the 80s) and (iii) deteriorating state of infrastructure, with no major impact of liberalisation in sight in this sector even after ten years of economic reform.

Declining domestic savings ratio in a globalising economy is not at all a comfortable situation. It increases the risk of excessive dependence on foreign capital and tends to increase external short-term debt. Stagnant, or declining, investment ratio, similarly, is a pointer to the fact that we are neglecting the imperative of capital formulation for the future. This may also increase the vulnerability of our existing capital assets that may be easy targets for takeovers, hostile or friendly. It also highlights, to some extent, a grim reality awaiting the economy. Liberalisation has not brought enough FDI as yet.

So far as macro-economic scenario is concerned, an area of serious concern in the context of globalisation is the difficult fiscal deficit of the Centre as well as the States. The fiscal deficit (Centre and States) stands at nearly 10% of GDP, which is alarmingly high and unsustainable. Fiscal deficit ratio is one of the several critical macro-economic parameters that the global investors keep on their watch list.

Low / manageable level of fiscal deficit generates confidence, where as critically high level of fiscal deficit may create a situation of financial panic. In this context, the Group is particularly concerned that populism continues to prevail and influence economic decisions. Further, the macro-economic situation of most of the States is steadily deteriorating, due to unwillingness of the States to undertake the necessary reforms.

Another areas of concern is the state of the financial, especially banking, sector. The high incidence of non-performing assets and bad loans in this sector call for urgent reforms, which is, however, fraught with many hurdles. Sickness in the banking sector is stalling several critical moves such as lowering of interest rates, de-regulation of credit policy and even capital account convertibility that are necessary for competitiveness of the economy.

On the positive side, several encouraging developments have taken place since the launching of liberalisation. There is a renewed confidence and hope in the economy. There is confidence that the economy can grow at the sustainable rate of 8% a year, which can take us to a poverty-free economy by the middle of the next decade, and by 2020 India can be the fourth largest economy with a per capita of $1500 or so (in terms of today's dollar). Without throwing cold water on this optimism, the Group would like to point out that unless economic reform is deepened and focused on domestic economy we may be headed for a situation of growth amidst large scale poverty.

On the rise are several Indian MNCs with expansionist ambitions in the emerging global economic order. The Indian companies are responding to the competitive environment by way of re-structuring and re-focusing their business. The large corporate sector is moving firmly on the learning curve. Many are on their way to become global players.

A unique development is India's entry into the knowledge age of the 21^st Century, which has been facilitated and encouraged by the liberalisation process. India's distinct comparative, as also competitive, advantages in the sphere of knowledge-based industries is globally acknowledged. With the emergence of new knowledge-based industries such as infotech industries, telecom, pharmaceuticals, biotechnology, net-based services etc, India's industrial structure is changing, unfolding vast opportunities for our enterprising and dynamic people. Liberalisation has already put many entrepreneurs into the limelight of the global corporate world. Alongside this, the Indian managers are set to capture the world of global managers, and run the global corporations.

On the macro-economic side, encouraging trends are visible on the price front, interest rate, capital market and the balance of payments. In spite of the large size of fiscal deficit, the government has succeeded in bringing the inflation rate down to a low level, and initiates a process of reduction in the interest rates. Significant steps have been initiated to augment the liquidity available with the banking system and enhance availability of credit.

The capital market is once again strong, with revival of the primary market. According to Economic Survey (1999-00) 'equity constituted 61% of total resources mobilised from the primary market during April-December 1999 against a much lower level of 18% during the corresponding period of 1998-99'. The secondary market had witnessed substantially bullish trend during the last year, and the same is continuing. All these are indicative of the return of confidence in the capital market.

The prevalence of a somewhat prolonged bearishness of the capital market before 1999 (especially of the primary market) had a positive effect on the capital market institutions, in the sense that a number of structural problems afflicting the capital market could be resolved by the regulatory body i.e. SEBI. Today, institutional and regulatory arrangements of the capital market are well-equipped to handle almost any eventuality. This was amply demonstrated by its ability to face impact of the Asian financial crisis. In the same context, we have also reasons to be happy about the ability of our central banking authority, which is widely appreciated.

Liberalisation has greatly benefited the external sector. The balance of payments position is quite comfortable. The current account deficit is far from significant, and foreign exchange reserves are growing steadily. The current level is well above what we need for our developmental purposes. The exchange rate has remained steady. Equally encouraging is the decline in the size of external debt and the debt-servicing burden. All these should boost confidence of the foreign investors in the long-term prospect of the economy, and one can expect them to continue investing in India.

If there is a matter of concern, or discomfort, it is that our export earnings remain far from satisfactory. The estimated earning of $36 billion in 1999-00 would be almost equal to what it was in 1997-98. Thankfully, low import growth at the same time is what is holding the balance of trade from going worse. In this context, the Group is concerned over the higher prices of oil and India's increasing import dependence on crude oil. This holds the threat of a severe BOP crisis sometime in the near future, as higher growth will boost higher energy consumption.

Non-oil imports have not increased much due to subdued industrial growth and inadequate investment in infrastructure. But once industrial imports pick up the momentum, low export growth may result in steep increase in balance of trade deficit, putting upward pressure on our presently low current account deficit. Increasing the export growth, in the opinion of the Group, therefore, remains a major challenge to contend with. This is essential if we have to benefit from the process of globalisation.

V. A Reflection on Economic Reform

Overall, the economy presents a mixed picture. It is growing, but growth is not percolating downwards in due doses. The economy is set to clock higher growth, but poverty level too tends to remain at a high level. A new economy is emerging. Its high growth and competitiveness have been remarkable. But the traditional sectors are languishing by and large. Unemployment is increasing due to lack of growth in the 'traditional' economy, but new opportunities are emerging in the 'new' economy for highly skilled youth. All these call for a reflection on the process of economic reform.

Launched in 1991, economic reform has been focused on two broad objectives, namely (i) globalisation of the domestic economy and (ii) a shift from protected and controlled economy to an open competitive market economy for greater economic efficiency. However, since it was introduced in the face of a severe balance of payments crisis, it started with focus on liberalisation of trade and investment (primarily foreign investment) policies, capital market, fiscal policy etc.

In our view, in its present form, the economic reform continues to remain focused on facilitating foreign investment and liberalisation of trade. Policy liberalisation has been significant in this respect. The domestic market is exposed to external competition. However, the economic reform still lacks its focus on the imperative of re-structuring and competitiveness building of the indigenous industry, that continues to suffer from inherent disadvantages of high capital cost, poor infrastructure, irrational duty structure, strangulating labour laws, cumbersome procedures and numerous systemic inefficiencies.

It is not difficult to understand, therefore, why many traditional industries are losing in competition. The global outlook for traditional industries is also not encouraging, and global competition is tending to be increasingly unfair. Under globalisation, India's market for products of traditional industries are appearing to be an easy target. India has been compelled to remove quantitative restrictions much before we were inclined to do so on our own. This would pose serious hardships before our SMEs and traditional large industries.

So far as emerging industries are concerned, the Indian entrepreneurs have, however, been successful in accessing the emerging opportunities in the global economy. The liberalisation of government policy pertaining to external commercial borrowing, joint ventures abroad etc. and conducive global environment have all helped in encouraging the entrepreneurs to go global and exploit the opportunities in the global market. Entrepreneurs in the traditional sectors too are trying to re-structure business strategies within the limited opportunities unfolded for them by globalisation and liberalisation, but for them competing in the domestic market is far more crucial. The Group is of the view that economic reform is less concerned about building competitive abilities of the indigenous industry and ignores the imperative of a level playing field in the domestic market.

It is also important to note that liberalisation policy, with its thrust on FDI, has not helped us in a big way. The flow of FDI has been insignificant when compared to countries like China and those of South-east Asia and Latin America. In the immediate aftermath of liberalisation, many joint venture arrangements had taken place, but subsequently most of such operations broke down to form either majority or 100% foreign-controlled companies. The erstwhile FERA companies have upped their stakes to gain majority control, without contributing very much by way of new investment. Further, MNCs having joint ventures with the Indian companies are even keen to set up 100% subsidiaries to manufacture the same products.

The basic objectives behind liberalisation of FDI policy, namely access to latest technology, management skills, exports etc., have not been achieved so far. But in many sectors it has de-stabilised the indigenous enterprises and in certain high-tech sectors they (the foreign companies) have secured total control of the markets, even as they have brought little by way of investment. In other words, foreign companies are gaining control of the domestic market at a relatively lower cost and without developing significant stake in the economy.

This process is now likely to be further facilitated as India fulfills its obligations as a member of the world Trade Organisation (WTO). For instance, following removal of QRs many MNCs are likely to bring in products of their parent companies. Economic reform is not geared to meet the challenges that are ahead of the economy under the WTO regime of multilateral trading order.

Another significant bias of the current reform process is that it is heavily biased in favour of promotion of consumer welfare. The Group takes note of the fact that consumers' welfare has been long ignored under the protected regime and needs to be promoted. However, it is important in a large and diversified, but developing, economy that the interest of wealth creation through promotion of domestic industry is not ignored. Our objective has to be globalisation of the economy and not just globalisation of the domestic market. To achieve this goal, we need an effective competition policy with its thrust on total economic efficiency (in a dynamic sense) in which the interests of the consumers as well as the producers are maximised.

VI. WTO & Multilateral Obligations

The establishment of WTO in 1995, and its rule-based trading order, have many implications for the Indian economy, and particularly the Indian industry. As a member of WTO, we have to meet many obligations, introduce many policy changes and prepare the economy for more serious challenges in the years to come. To put it briefly, the implications of WTO are rapid globalisation and more challenges for the indigenous industry, agriculture, services sector, indigenous R&D initiatives etc.

One of the many objectives of WTO is to remove barriers to trade and facilitate greater market for all the Member States. It should mean more opportunities to access international markets for goods as well as services. In reality, however, the existing Agreements are particularly favourable for the developed countries, who will benefit immensely from opening of the markets of the developing countries. Some of the implications of the WTO Agreements for the Indian economy are as follows.

Under the Agreement on Trade Related Intellectual Properties (TRIPs), we have to provide 20 years product patent rights on all products (as against 14 years under the Indian Patents Act, 1970) including pharmaceuticals, agro-chemicals and food products. This can be a big blow to indigenous R&D initiatives in the country. The TRIPs Agreement can also prove to be a big hurdle in the way of accessing technology. It may be mentioned, India will have to fulfill all the TRIPs obligations by 2005.

The Agreement on Trade Related Investment Measures (TRIMs) requires that no Member country can impose any trade-restricting measures / conditions while inviting/ permitting foreign investment e.g. requirements of indigenisation, dividend balancing etc. Compliance with this Agreement implies that some of the benefits accruing from foreign investment such as transfer of technology, skills, knowledge etc., scope for development of SMEs through sub-contracting, utilisation of domestic resources ( natural as well as otherwise) etc may no longer be expected. Foreign investment in such circumstances, is fraught with the risk of BOP crisis. Beginning January this year, the TRIMs Agreement has been applicable for India. In other words, India can no longer apply such investment measures as are incompatible with the TRIMs Agreement. (as specified in Articles 3 and 11 of the GATT 1994).

Under Article XVIII B of GATT 1994 India can no longer maintain quantitative restrictions (QRs), and it has been decided to remove all QRs by 1 April 2001. The items currently subjected to QRs (1429 in all)^@ are largely agricultural commodities, food products and a whole range of consumer goods. Removal of QRs are likely to have serious implications for the farmers and the SMEs, besides many large enterprises engaged in production of consumer goods. One will also have to see its impact on the flow of FDI into the country.

Even tariff protection is likely to decline substantially with the launching of a fresh round of negotiations on Agriculture and Industrial tariffs.

The subsidies provided to the exporters are mostly 'Actionable' under the Agreement on Subsidies and Countervailing Measures and have to be dismantled, and accordingly, are likely to have some de-stabilisation effects on export competitiveness. This may be a big threat to many small scale exporters, who in any case are not equipped to face the challenges of WTO.

On the other hand, since the establishment of WTO, many of our export products have been facing many non-tariff barriers. Agreement on Anti-Dumping is being frequently used by the developed countries to prevent competition. This Agreement leaves large scope for misuse and has been a major obstacle to market access. We will like to make particular mention of the impact of this Agreement on exports of iron & steel, chemical products, textiles etc.

In addition to this Agreement, there are Agreements that relate to technical barriers which are often used to put barriers to market access. It is also ironical that while we are made to comply with our obligations and face barriers, the developed countries maintain high peak tariffs for our exportable products. They are also loathe to integrate the MFA into the GATT process even as per the formula (which is backloaded in any case) mentioned in the ATC Agreement and as per time table.

After five years since its establishment, WTO is now seen to be more as a threat than an opportunity, so far as developing countries are concerned. Most of the WTO Agreements should, therefore, be reviewed for the purpose of necessary improvements and effective implementation. Ineffective implementation of some of the Agreements that are meant to benefit countries like India (e.g. Agreement on Agriculture, Agreement on Textiles, Special & Differential treatment etc.) is leading to denial of market access, and there is a legitimate concern over implementation. The developed countries are instead demanding a new Round of negotiation with a vastly expanded agenda.

Some of the issues that are now sought to be included in the WTO should be of real concern for us. These are Trade and Investment, Trade and Competition Policy, Trade and Environment, and Trade and Labour Standards, among others. These are meant primarily to remove all barriers to foreign investment (equity as well as portfolio) and erect more barriers in the way of accessing the markets of the developed countries. In other words, the on-going developments in WTO indicate that more serious challenges are waiting for us. While we have to open up our economy completely to foreign investors and suppliers, we may have to face increasing market access barriers.

VII. Vulnerability to Forces of Globalisation

In the backdrop of the scenario described above, through paragraphs 10-45, the Group feels that the economy is highly vulnerable to the forces of globalisation. Of particular concern are

High incidence of poverty and unemployment, with growth making no impact

Stark income inequality

Declining domestic savings ratio (particularly zero savings of the public sector)

Low rate of domestic capital formation

Large fiscal deficit, and financial sickness of the State-level economies

Sickness in the industrial sector

Uncompetitiveness of a majority of the indigenous companies

Weakness of the financial sector

Inefficient infrastructure

Rigid labour policies / laws.

High cost of domestically available capital (real interest rate has gone up significantly in the face of historically low rate of inflation)

Constraint to export growth, and impending threat of a large balance of trade, and hence current account deficit and increasing inequality between India and the developed world.

Growing dependence on foreign capital.

All these make the Indian economy a highly vulnerable one, as it is being rapidly drawn into the vortex of globalisation. There are many other factors as well, which are equally serious in implications. Mention can be made of systemic inefficiency resulting in large government expenditure, inability to take quick decisions, delays in implementation of crucial (especially infrastructure) projects, growing level of corruption in public life, etc. Successful globalisation, in the perception of the Group, requires efficient and effective governance. This is widely accepted, and hence the world-wide concern for quality of governance. The Human Development Report, 1999 observes:

"With stronger governance, the benefits of competitive markets can be preserved with clear rules and boundaries, and stronger action can be taken to meet the needs of human development"

Another 'imperative for successful globalisation, and containing the risks' of market failures, is high quality of economic and legal institutions. India is fortunate to have a large network of institutions, but they lack in efficiency and effectiveness. A market-oriented system of economy needs speedy response and action, and the institutions have to be geared up to meet the needs of a market economy. The Group feels that the need for institutional reform has not received the necessary attention in our reform process.

VIII. Lessons from Asian Crisis

In this context, the Group feels the need for a comparison of the current state of economic environment in India with that of some of the Asian economies before the crisis of 1997-98. Since the crisis had erupted in Thailand, one can begin with the pre-crisis scenario there. There are differences of opinion on the causes of the crisis, but there is no disagreement on what had happened.

Before the crisis, Thailand, and so also the major South-East Asian economies, had been enjoying a long period of high growth, and had sound macro-economic foundations with very high domestic savings ratio. As compared to this, India's GDP growth is hovering around 6% and the economy suffers from weaker macro-economic fundamentals. It is to be noted from the Asian crisis that an economy may be a victim of the forces of globalisation even as it is enjoying high growth and has sound fundamentals.

The collapse of the high-growth - Thai economy lay in its de-regulated banking sector, that had indulged itself in excessive bad lending. Secondly, there was over-investment in a particular sector (i.e. real estate) where the commercial banks had lent heavily. Collapse of prices in the real estate market had resulted in huge bad loans and losses. But collapse took place with the onset of financial panic in the immediate aftermath of devaluation of the Baht.

Devaluation of the currency had a logic. Thailand had a major problem ¾ large and growing current account deficit ¾ even as all macro-economic parameters were sound. Devaluation of the Chinese currency in 1994 had affected the competitiveness of Thai exports, resulting in slower export growth, while high GDP growth was maintaining import growth at a much higher level. In this context, devaluation of Baht was a logical step. But this, coupled with the crisis in the banking sector following crash of the property prices, had triggered a financial panic and subsequently large scale outflow of capital. The panic had soon engulfed the neighboring, high-growth, economies of Malaysia and Indonesia, and subsequently South Korea, where too there were high incidences of bad lending, and crony capitalism was at its worst.

The crisis that had ensued in these high growth, high savings, high-investment economies has many useful lessons and the severity of the impact highlights the need for prudent management of our economy. The following are some of the important lessons

High growth tends to hide many serious problems creeping in the system. It needs better monitoring and vigilance. High growth situation calls for better governance.

Unregulated forces of free market can spell a serious disaster even in a situation of high growth. Market forces need effective and transparent regulatory framework.

Quality of lending as well as investments are important factors to monitor in an environment of de-regulated financial sector, though de-regulation of this sector per se was not at fault.

High foreign exchange reserves, especially when it is due to short-term foreign capital, cannot be cause for satisfaction. Current account deficit is a critical parameter that needs to be kept under control.

High GDP growth and large investment growth can lead to a serious current account deficit in the absence of matching export growth.

In such a situation, pegged exchange rate can also have inherent threats. The South East Asian countries had pegged their currencies to the US dollar. Devaluation of Baht, as it was pegged to dollar, had led the speculators to suspect the real size of foreign exchange reserve and fuelled financial panic. Appropriate exchange rate policy, therefore, assumes critical importance. ''The ubiquitous feature of recent emerging market crisis is that the exchange rate defense, typically ending in a devaluation, has often been followed by a rapid and ferocious withdrawal of credit by foreign investors. It is the panic, not the devaluation itself, which leads to the acute damage to the emerging markets and to the creditors'. (The Asian Financial crisis : what happened and what is to be done, by Jeffrey D Sachs and Wing Thye Woo in the Asian Competitiveness Report, 1999).

Economy with high domestic savings should avoid excessive exposure to external debt, especially short-term, when domestic cost of capital prevails high. However, in a de-regulated free market economy, low-cost of foreign capital (even if short-term) tends to replace (usually high cost) domestic capital. In the crisis-hit economies of South-East Asia (and also in South Korea) domestic rate of interest was maintained at a much higher level, compared to international level. One of the reasons behind the bad lending by the domestic financial institutions and commercial banks was large discrepancy between domestic cost of capital and cost of foreign capital.

Finally, though capital account convertibility did not lead to the crisis, it did facilitate the flight of capital when the crisis broke out. While there is need for caution about introduction of capital account convertibility, an economy with capital account convertibility needs careful management.

The Indian economy today is very different from the pre-crisis situation of the South-east Asian economies. The factors that had led to the crisis in those economies do not exist in the Indian economy. However, it has its own potential risks. It is a much weaker economy open to globalisation and external competition. Health of the external economy is critically dependent on portfolio investment by the FIIs, though the extent of private short-term debt in total external debt is low and the size of external debt itself has declined in recent years. Perception and sentiments of the FIIs have significant impact on our capital market and the level of forex reserves.

Further, with more and more Indian companies going for external commercial borrowings and listings in the stock exchanges abroad, exposure to international financial crisis is growing. Any future stock market crisis anywhere in the world economy, and especially in the US, may have much greater impact on our stock market.

Unlike in the south-east Asian countries, the foreign investors have not built much long-term stakes in the Indian economy. Flow of FDI has been minimal, compared to China and the emerging market economies. Uncompetitiveness of the domestic enterprises and liberal trade policy, with restricted export opportunities, hold the threat of a large current account deficit as GDP growth picks up. We must have sufficiently high export growth in order to finance imports at higher levels.

In this context, the Group feels an urgent need for developing a suitable strategy for globalisation of the Indian economy, a strategy that can make it a strong and competitive global economic power by avoiding the possible pitfalls on the way.

IX. Strategy for Globalisation without Pitfalls

In the opinion of the Group, high growth is necessary for the Indian economy to be seen as an emerging economic power. We need to keep the international investors and global corporations attracted towards our economy, and ensure that they build long-term stakes. However, high growth per se is not enough, nor is it sufficient for a large and diverse economy. Growth has to be broad-based and deep. It is only then that the potential of the domestic economy can be fully realised.

The Group feels that the domestic market should be the biggest strength of the Indian economy. While India can be reasonably proud of its growing middle class, it should focus on total and comprehensive development of its one billion strong market. Strong and expanding domestic economy, in breadth as well as depth, is the biggest insurance against any pitfalls of globalisation.

Focus on Domestic Reform

With this in mind, the Group recommends that the proposed second generation reforms may be focused on completing the reform of the domestic economy and free it from all the shackles that are obstructing the enterprising spirit of the people. In other words, internal reform should receive topmost priority. The task is both gigantic and complex, and calls for a systematic approach with right sequencing.

There are, however, certain measures which, if undertaken earnestly, can create self-propelling momentum for change. The Group recommends that agricultural reform, de-centralisation, administrative, legal and institutional reforms and labour law reforms should be given utmost priority for eradication of poverty, employment generation and, above all, growth from the bottom. Further, reforms must also percolate to the State and local levels of governance.

India needs to focus on creating suitable environment for growth and creativity within the country to retain the talented youth, so that they are not easily lured abroad by the MNCs. The Group recommends that a national level Task Force may be set up to recommend a strategy to create clusters of globally competitive enterprises where our youth can take the lead. India is tending to be a country that breeds globally competitive talents to work for the MNCs. This trend has to be reversed. India should be made the 'land of entrepreneurs'.

Improving Fiscal Situation

Fiscal and financial situation of the economy needs urgent attention. So far as fiscal situation is concerned, the Group recommends that the government should focus on elimination of revenue deficit, which essentially means that the government should live within its means. On the issue of fiscal management, the Group recommends that

Fiscal Responsibility Act be put in place, covering all levels of governance

Expenditure Commission, that has been set up, be given statutory power to monitor expenditure

Zero-based budgeting principle be strictly implemented

Government should wind up all such activities that can be off-loaded to private service providers and close avoidable departments / undertakings. However, an effective safety net needs to be provided to those whose employment may be affected.

The Group, however, recognises the positive developmental role of expenditure, and would like to highlight the critical importance of productive and wealth-creating expenditure, such as capital expenditure meant for development of infrastructure (social as well as economic). What is plaguing the system is excessive delays in clearance and implementation of projects. Resource is not the real problem. The problem is with inefficiencies that delay clearances of vital projects. The system has been a victim of a vicious cycle of delays and resource crunch : delays lead to cost overruns ¾ cost overruns leads to resource crunch ¾ resource crunch leads to further delay. And the cycle goes on. Net result is that viable projects become sick right at the inception. The Group recommends that the Ministry of Implementation be sufficiently empowered and entrusted with the responsibility to ensure timely implementation of all major projects (of Rs 100 crore and above) in the public sector.

On the revenue side, the Group feels that there is huge untapped potential for generating a regular stream of non-tax revenue by the centre as well as the States. Among other things, there is a huge stock of idle assets that can be profitably put to commercial uses. The Group recommends that the government should seriously focus on three things : Disinvestment, privatisation and commercialisation of assets.

The Group appreciates the need for maximising tax revenue, especially since the tax revenue / GDP ratio is exceptionally low. But focus of the fiscal policy has to be on efficiency of the tax revenue collection, plugging of loopholes, rationalisation, simplification, better compliance, widening of tax net, etc., and not on higher tax incidence. The Group feels that raising the burden of taxes and duties can have negative effects in an environment of globalisation and encourage the forces of de-stabilisation. People as well investors tend to move from high-tax to low-tax destination. It encourages transfer pricing, under-invoicing, brain drain etc. The Group, therefore, recommends a shift in focus of the fiscal policy ¾ from higher tax burden to greater buoyancy of tax revenue in relation to GDP, through the measures suggested above.

The Financial Sector

So far as financial sector is concerned, the Group is of the view that re-structuring of the banking sector is a critical need, since the international investors tend to keep close watch on this sector. Most importantly, weak banking sector tends to keep the economy in a state of perpetual weakness. A major problem plaguing the banking sector is large stock of non-performing assets (NPAs). 'As on 31 March 1999, gross NPAs for public sector banks stood at 15.9% of gross advances' ^@

The Group is appreciative of various measures initiated by the government to tackle the problem. It is also heartening to note that gross NPAs as percentage of gross advances is on the decline. However, what is important is to prevent NPAs from rising in a competitive environment. Also, we have yet to address the basic causes that led to large accumulation of NPAs. The Group recommends as follows

Autonomy to commercial banks

Review lending policies -¾ especially the policy pertaining to priority sector lending -¾ so end cross-subsidisation

Review interest rate policy with thrust on reduction in spread

Rationalise workforce and focus on modernisation

Strengthen debt-recovery mechanism

In the context of the last suggestion it is also important that the issue of bankruptcy of industrial companies is given due attention. The Group recommends that some aspects of the findings and recommendations of the Kamath Committee on this issue (as annexed to this Report) be given due consideration for implementation, especially the following

Bankruptcy Restructuring Under SICA

SEBI Bailout Takeover

Debt Recovery Tribunals

Liquidation / Winding up

Workout Processes

Asset Reconstruction Companies

Labour Laws

The Group recommends that in tune with the global trend in mega mergers and consolidation and the emerging WTO regime, a consolidation exercise should be launched to create a few global-sized banks and they be encouraged to have global operations. While doing so, the Reserve Bank of India should be given total autonomy over regulation of banking operations.

Trade in financial services is likely to be gradually liberalised under the auspices of WTO. The Group suggests that the country should begin to prepare itself in full earnest for world-wide liberalisation of trade in financial services. Re-structuring of the banking sector assumes all the more importance in this context. However, we need to go beyond banking and promote a class of NBFCs with cutting-edge competitiveness, enlarge the debt market and encourage the institutional players. The Group would particularly recommend immediate liberalisation of the insurance sector, and measures to improve liquidity in the capital market by allowing more players to enter the market.

Domestic Savings and Real Rate of Interest

Declining domestic savings ratio is a matter of concern and the Group would recommend urgent measures to reverse the declining trend, and raise the ratio to 30% where it can be stabilised. Control on government expenditure is a critical necessity in this context.

A critical question in this context is about household sector savings. Competitiveness of the indigenous industry demands that real interest rates be brought down to international level. At the prevailing rate of inflation the real rate of interest is very high and makes indigenous industry very much uncompetitive. How to reduce the real rate of interest without affecting the interest of the fixed income group and viability of the banking sector is a critical issue that has to be addressed.

Recently, the government has made some moves to lower interest rates on small savings, but it is not possible to bring down interest rates on such savings substantially. Besides this, the banks too may not be willing to bring down the interest rates. Given this, a strategy has to be evolved to lower the real interest rates. In this context, the Group would reinforce the need for banking sector reform, as without this no viable solution to this intricate problem.

Capital Market

The capital market in India needs to be made broad-based and must attract more Indian investors (institutional as well as individual). This is necessary in view of the need to protect the market against the risk of a sudden flight of foreign capital. The Group recommends that domestic institutional investors like insurance companies, banks, post offices etc. may be encouraged to invest more in the corporate portfolios, and population of small individual investors should be encouraged to grow, with protection given to such investors.

Capital Account Convertibility

An important question under debate in the context of liberalisation of the external sector is whether India should go for full capital account convertibility ^@. Presently, we have current account convertibility and certain degree of convertibility on capital account, especially for the foreign investors and the NRIs. For the indigenous industry, the government has liberalised the guidelines for external commercial borrowings. Should India now go for full capital account convertibility?

Drawing from its survey of experiences of different countries, the Tarapore Committee on Capital Account Convertibility (CAC) has identified two basic pre-conditions for introduction of CAC, namely (i) fiscal consolidation and (ii) financial sector reforms. The Group had analysed in details the kind of measures undertaken by some of the countries that had introduced CAC. In the case of Netherlands, for instance, the Committee had observed "the promulgation of the Public Finance Act in 1989 and the Fiscal Responsibility Act in 1994 established transparency and accountability, financial delegation and a measure of fiscal performance". In this context, while acknowledging the need for capital account convertibility in view of rapid globalisation, we agree with the Tarapore Committee Recommendations " fiscal consolidation, a mandated inflation target and strengthening of the financial system should be regarded as a crucial pre-condition / signpost for capital account convertibility in India".

We particularly highlighting some of the specific recommendations of the Tarapore Committee that should be implemented at the earliest.

Institution of a Consolidated Sinking Fund for the public debt

Adherence of the projected track of fiscal consolidation

The Government should set up its own Office of Public Debt. The RBI should totally eschew from participating in the primary issues of government borrowing

A formal mandate be given to the RBI to contain inflation within a stipulated band, which should be in the range of 3-5%

The interest rate should be fully de-regulated and there should be total transparency to ensure that there are no formal or informal interest rate control

Drastic measures should be taken to reduce the level of NPAs ¾ weak banks should be converted into what are called "narrow banks" ¾ gross NPAs to be brought down to 5% and average effective CRR to 3%

Financial institutions should also be made to function with a targeted mandate to reduce the quantum of NPAs within a time bound programme

RBI should have a Monitoring Exchange Rate Band of (+)/(-) 5.0% around the neutral real effective exchange rate (REER) which should be published on a weekly basis with the same time lag as the publication of the reserves.

Interest of Domestic Enterprises

The issue of competitiveness of domestic (indigenous) enterprises needs special attention. The second generation reforms should try to provide a level playing field and facilitate faster re-structuring of such enterprises. The Group notes with concern the possibility of growing incidence of industrial sickness under liberalisation. More challenges are ahead as quantitative restrictions are removed, tariffs are lowered, and FDI policy further liberalised. Soon there may be even more difficult challenges as cross-border mergers and acquisitions begin to knock our doors. The Group recommends that

The government should come out with an Industrial Restructuring Policy, as enunciated in the Annexure to this Report taken from the CII National Task Force on NPAs.

To reiterate, the government should give priority to revamping of labour laws for this purpose

Similarly, there is need to review, for modification and improvement, all such regulations that have a bearing on industrial growth, restructuring and competitivenss. A new Industries Promotion & Development Act may be introduced, with focus on providing a level playing field.

In the wake of removal of QRs, urgent imperative is to suitably strengthen the Tariff Commission and the Directorate of Safeguard Duties, besides strengthening the Anti-Dumping Cell.

Rationalisation and harmonisation of state-level taxes is equally important for the purpose of providing a level-playing field.

An appropriate competition law and efficient competition Authority (in place of MRTP Commission) should be established. The competition policy should have extra-territorial jurisdiction and its objective should be to promote economic efficiency by encouraging fair competition.

The government should re-think its policy for Small and Medium Enterprises (SMEs). The existing policy based on investment limit and reservation is detrimental to development of clusters of competitive SMEs. The Group recommends that the present policy be replaced by a policy sans reservation of production and define SMEs on the basis of employment. (Units employing 300 or less workers be called small scale units and those employing more than 300 / upto 500 be called medium scale units)

In the same context of threat from global competition, the issue of re-structuring of the PSUs is critical and needs urgent attention. Firstly, disinvestment / privatisation process needs to be hastened. Secondly, massive exercise for re-structuring has to be launched.

Institutional Reform

In view of the critical role of efficient institutions, the Group recommends that legal and administrative reforms be accorded topmost priority, and focus should be on simplification, flexibility and transparency. Further, efficient regulatory bodies with clearly defined responsibilities have to be put into operation at the earliest. The Group appreciates the initiatives that have been already taken, but would urge faster movement and total clarity on the role of the regulatory bodies.

Good Governance

Equally important is the need for good governance in an era of globalisation. Good governance is about transparency, delegation of authority by way of decentralisation and elimination of corruption at all levels of governance. The government should

Introduce IT-based administration at all levels,

Launch a vigorous drive against corruption and corrupt practices

Introduce, and effectively implement, a Right to Information Act.

WTO Strategy

The biggest challenge of globalisation that India would have to face is the challenges of WTO. By 2005, India will have to meet all her obligations arising from the existing Agreements. The new Round, whenever it begins, will have a vastly expanded agenda. India needs to develop an appropriate strategy. The Group recommends that

Action plans (jointly worked out by the government and Industry) be prepared for preparing the sectors that are likely to be affected most. Sector specific strategies need to be developed and implemented. Such strategies should identify the specific policies / procedures that need to be amended to make the industry competitive

Prepare a WTO-compatible export strategy (drawing on lessons from competing countries).

Develop a USTR-type outfit with authority to negotiate trade policy matters, and strengthen the Permanent Mission of India at the headquarters of WTO with sufficient number of technical experts.

In order to check unfair competition (a) strengthen the Anti-Dumping cell with adequate number of technical experts and (b) institute trigger mechanism for the purpose of using safeguard duty effectively.

Develop a team of experts who should be able to negotiate effectively and services of such experts should have reasonable stability

India should adopt a pro-active strategy keeping in view the country's long-term interest, and must be prepared for a quid pro quo. This calls for strengthening of WTO-related research activities. The Group, therefore, recommends a strong Trade Policy Research Wing within the Ministry of Commerce.

India must take a firm 'no' position on some of the issues before WTO for which the economy is not prepared. These are:

Trade and Investment (It should be ensured that the OECD Draft on Multilateral Agreement on Investment (MAI) is not pulled out from the shelf for reconsideration)

Trade and Competition Policy (we need a national competition policy first)

Trade and Environment, and

Trade and Labour Standards

The Group fully endorses the current position of the Government of India.

X. Concluding Remarks

In conclusion, the Group would like to emphasis that as a strategy to avoid pitfalls of globalisation the government must strongly focus on domestic economic reform to unleash the forces of growth and equity. Removal of poverty and unemployment is a critical necessity not just from the point of view of equity but also growth of the domestic market. Expanding domestic market is a big cushion and a safety net against the pitfalls of liberalisation.

The reform process must encompass all sectors of the domestic economy, with focus on building efficiency and competitiveness. Need for correcting the fiscal imbalances and the distortions caused by high fiscal deficit cannot be over-emphasised, and so is the need for financial sector reform. Unfortunately, it is in the area of basic and fundamental reforms that there are serious roadblocks. Political will and determination have to be mobilised to overcome the obstacles. What is also important in this context is good quality of governance.

The interest of growth and competitiveness of the indigenous industry cannot be sacrificed at the altar of globalisation. There is need for providing a level-playing field. Unfortunately, there is no easy answer to this problem. The difficulties are too many. In addition, there are several structural problems afflicting the economy. All these further highlight the need for deepening the reform process. At the same time, the course of liberalisation has to be carried through and the objective should be to let the foreign investors develop long-term stakes in the economy. Equally important, India needs a sound WTO strategy.

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ANNEXURE

EXCERPTS FROM CII NATIONAL TASK FORCE ON NON-PERFORMING ASSETS (K V KAMATH COMMITTEE, DEC, 1999)

The NPA problem needs to be tackled at two interdependent levels: policies and procedures to rapidly reduce the current stock of non-performing assets, and reforms that are needed to prevent future flows. These solutions involve reform of laws, procedures and policies,………

Reforming Bankruptcy Restructuring

The definition of bankruptcy must be altered to debt default, and should coincide with that of an NPA. That will create a transparent definition, allow for getting to grips with the problem at an early stage, and restore symmetry between borrowers and lenders.

Up to a point, bankruptcy restructuring should be voluntary for the company. The onus must be on the company to convince its secured and senior creditors with a satisfactory rescheduling and cash flow plan. This should be outside the purview of BIFR.

Only if negotiations break down between the company and senior creditors should the case be taken to BIFR, which should give all parties an extra, time-bound chance to re-negotiate. BIFR should thus be a mediator between the company, its management and creditors.

If that fails, BIFR must immediately appoint an outside administrator (a chartered accountant, company secretary or company lawyer from a panel of professionals) to take possession of the company, with the mandate to advertise for sale of the company as a going concern. During the advertising and sale period, BIFR should impose a time-bound stay on creditors' claims. The administrator should appoint an independent professional to determine the liquidation value, which would serve as the confidential reserve price.

Sealed bid offers must be submitted for the company within a given time period. Until the last day for submitting bids, all prospective bidders should be permitted to conduct due diligence, subject to confidentiality. Existing promoter(s) can also bid. The bids must be in two parts: (a) the post-restructuring profit and loss account, balance sheet and cash flow projections, and (b) the financial bid, which could be in cash or recognised securities.

Secured creditors will first vote on (a), which their voting in proportion to their outstanding debt exposure. Those bids that secure the assent of 75% of the secured creditors are to be short-listed. The best financial bid, or part (b), of the short-list is the winning bid.

If the winning bid is less than the liquidation value, then the company is recommended by BIFR to the High Court for liquidation. If it is greater than the liquidation value but less than the secured debt, then the proceeds are pro-rated across secured creditors (including wage dues), with unsecured creditors getting nothing. If the bid is high enough to meet the outstanding of unsecured creditors, then all contractual claimants get their dues. And if is higher still, then old equity obtains the residual value.

These recommendations are, more or less, in line with the Sick Industrial Companies Bill, which was introduced in the Rajya Sabha in 1997. After tightening some provisions of the Bill in light of the recommendations, the Government must pilot the bill in both Houses of Parliament and legislate the bill into law.

SEBI Bailout Takeover

Chapter IV of the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997 provides for the 'bailout takeover' of 'financially weak' listed companies through purchase of shares. It is aimed at facilitating change in management of otherwise viable companies where the net worth was eroded between 50% and 100%, and excuses an acquirer from the provisions governing the takeover of listed companies.

Hardly, any bailout takeovers have taken place. Restructuring needs more such takeovers, and these require some changes in the procedures. These are :

The criterion for determining a financially weak company should be debt default. This would allow takeover of financially weak companies in the early stages, and deliver better value for minority shareholders.

Bailout takeover bids should be accommodated as a part of the bidding process suggested in the reform of SICA.

Debt Recovery Tribunals

The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (popularly called Debt Recovery Tribunal or DRT Act), has an effort to introduce a more expeditious adjudication and recovery of debts due to banks and financial institutions. However, the functioning of DRTs leaves much to be desired. Given below are suggestions to improve the law and procedures.

An Amendatory Bill provides for the appointment of receiver with full powers. However, it still vests the Presiding Officer of the DRT with discretion regarding such an appointment. Since the appointment of a receiver does not prejudice anybody, and not appointing one could cause serious prejudice to banks and FIs, it would be useful to remove this discretionary power, and state that the Tribunal shall appoint a receiver for the properties of the debtor with full powers of dealing in the same. The appointment of a receiver should be immediate and compulsory in all the cases, as soon as an application is filed.

Section 19(7) of the Act should amended so that the Recovery Certificate clearly mentions which debts are secured and which are not, and fully lists the priority of charges of the concerned bank or FI and their securities.

A provision must be inserted in the Act to allow banks and FIs to also file for specific performance to enforce contractual obligations of the debtor.

DRTs should be vested with a proper enforcement mechanism to enforce its orders. It should be clearly stated that not observing any order passed by the Tribunal will amount to contempt of court, and that the DRT has the right to initiate contempt proceedings. Moreover, in cases filed against the guarantor, the Tribunal should have the power to direct the guarantor to disclose all his assets, and also issue an injunction preventing him from transferring, alienating or otherwise dealing with or disposing off any guaranteed property.

A provision similar to section 20(4) of SICA by inserted in the DRT Act. This would empower the DRT to sell the assets of the Debtor Company and forward the proceeds to the Winding up Court for distribution in accordance with section 529A and other provisions of the Companies Act.

Unless SICA is radically overhauled according to the scheme suggested earlier, the DRT Act should be amended so that recovery of debt under the Act overrides the provisions of SICA.

There is an urgent need for more Presiding Officers in each Tribunal. It is necessary to upgrade the qualification requirements to the level of High Court judges or to be qualified as such. The appointment of Presiding Officers should be made in consultation with the Chief Justice of the High Court. Moreover, the Tribunals should have, along with the Presiding Officer, at least one member who has no less than 10 years experience in accounts, banking, company law and finance.

DRT should be referred to only in cases for recovery of amounts of Rs. 5 crores and above. This would reduce the volume of cases that get transferred to the DRT and facilitate effective recovery process and faster disposal of cases. Also, the Act needs to be amended to provide for a fund with subscriptions from banks and FIs to meet the capital and operating expenditures of DRTs, and to create a modern, fully networked office infrastructure.

Liquidation or Winding Up

If bankruptcy restructuring under BIFR is slow, liquidation is virtually impossible. Major delays n High Courts to wind-up companies have been prven by evidence. The second phase of reforms needs radically different winding up procedures. Law must recognise the international trend in corporate bankruptcy: sell assets first as quickly as possible, and adjudicate and distribute later. This will also facilitate the process of distribution of sale proeeds among claimants - because if the money is in the kitty quickly, parties will negotiate for faster disposal.

The working Group on the Companies Act kept these factors in mind and recommended an entirely novel and time-bound approach to winding up, whose key features are worth re-stating as recommendations.

Encourage voluntary winding-up, which is generally a more cost and time efficient manner of liquidation.

Distinctly separate the two aspects of liquidation: (i) asset sale and (ii) distribution of the proceeds. Expedite the first, and the second will follow quite smoothly.

Clarity in winding-up order, which should coherently describe the steps that have to be taken along with time frames for each action.

Clear enunciation of the manner in which the Act would analyze rapid, transparent, market determined sale of assets.

Well-defined and non-subjective norms to ascertain whether a company's asstes should be sold in totality as a going concern, or in parts as individual asset sale.

Permit professionals such as chartered accountants, lawyers or company secretaries to be empanelled by the High Court as Company Liquidator.

Most of these provisions are reflected in the Companies Bill, 1997, which was introduced in the Rajya Sabha. It awaits becoming a law.

Some Workout Processes

The approach to financial distress in the past was 'rehabilitation', not restructuring. When projects failed and companies went bankrupt either of external or internal reasons, they were invariably bailed out on the policy premise that they were 'sick', and needed to be 'rehabilitated' through 'sacrifices' in the form of 'relief and concessions' by lenders and the government. Even today, innovative equity and quasi-equity instruments are rarely used. Plain vanilla debt with a fixed interest rate still dominates restructuring packages.

Workouts involve three basic principles: (i) timely identification of the problem; (ii) realistic assessment of the future of the business - quick restructuring if viable, or quick liquidation if not; and (iii) aligning the capital structure and debt repayment obligations to realistically projected cash flows.

Timely identification. In the absence of consolidation of group accounts, no disclosures on related party transactions, no segment reporting and unaudited quarterly accounts, the bulk of the effort to identify distress early in thee day will fall upon the lenders. Banks and FIs should not only examine information provided by borrowers far more carefully, but also coordinate with each other to set up a systematic monitoring procedure.

Realistic assessment of the business. Before attempting restructuring, it is essential that a realistic assessment be made of the actual state and potential of the business. This requires (i) due diligence to ascertain the actual financial position, (ii) assessing technological viability, and the saleability of the products in the market, (iii) SWOT analysis that incorporates international competitiveness and possibility of elimination of import quotas and sharp reduction in tariff protection, and (iv) identifying nn-productive assets and division that can be sold.

Aligning debt-servicing obligations in line with borrowers operations. After deciding that restructuring is feasible - and less costly than liquidation - every attempt should be made to align the company's debt servicing obligations to its realistic cash flows. This involves forecasting and rigorously stress-testing future cash flows, estimation free cash flows, and then designing a debt servicing with appropriate instruments.

There are many instruments available for restructuring, some of which are:

Straight debt-equity swaps.

Zero coupon debentures issued at a discount or redeemable at a premium, with options to convert to voting equity in the event of mismanagement or non-performance.

Low fixed cost bearing instruments issued at a discount, or redeemable at a premium, with convertibility options.

Graded interest instruments, where interest rates rise with the increase in a company's debt servicing capability.

Preference shares. These can be of two types. The first is the traditional cumulative preference shares, which may be issued at a discount or redeemed at a premium. The other is participating preference shares - which carry a low rate of dividend. But give the shareholder the right to participate in the profits of the company in a pre-determined ratio with the ordinary equity shareholders.

Sale and lease back. This is an effective way of providing funds to the borrower at a lower cost, given the tax shield to the lessor on account of depreciation for recently acquired assets

Securitisation of existing or future receivables from financially strong customers of the borrower. It could also be used to replace existing loans, thereby effecting a credit swap.

Operating lease. Finding a buyer for a unit under stress is not easy. In such situations, allowing a strong and competent player to operate the unit often ensures that fixed costs and debt servicing obligations are met.

Acquisition of assets to retire debt.

While substantial debt-equity swaps are technically feasible for the FIs, these are not so for Indian banks. This is because the Banking Regulation Act, 1949, and the RBI guidelines prohibit commercial banks from holding more than 5% of their assets as corporate equity.

If the government wants to encourage restructuring through debt-equity swaps, then it must amend the Banking Regulation Act 1949, to distinguish between equity held as investment and that held as a part of debt-equity swap in restructuring. While the current 5% cap suffices for the former, there should be no ceiling on the latter.

The RBI must issue guidelines that explicitly enables scheduled commercial banks to use the packages outlined above, instead of limiting the menu to fixed interest rate debt rescheduling. This will increase the frequency of successful corporate turnarounds and, hence, better serve the needs of the bank themselves.

The distinction between term lenders and working capital bankers will fade as India moves towards universal banking. Therefore, we need to pool all securities and share the charge on all secured assets. This would reduce the asymmetry between banks and FIs, and prevent defaulting companies from playing one against the other. More significantly, it would create a sound and lasting environment for coordinated monitoring of companies.

There should be a system for pooling of securities and sharing of cash flows on a pari passu basis between all secured lenders. This would bring about greater parity between term lenders and working capital bankers.

However, to do so in a transparent manner, it is necessary to fully list and rank the seniority of all charges, and for banks and FIs to agree on that listing. Also, banks and FIs should agree that all fresh loans given for restructuring must bee ranked prior to existing loans.

The 'Group' Approach

The 'group' approach has been a contentious issue between banks and Fis on the one hand, and corporate borrowers on the other. The former maintain that defaulting companies should be treated as a part of an industrial or family group: if three are substantial defaults in one or more companies belonging to the group, then the group should bear the burden. Many industrialists dispute such claims. According to them, a company is an independent legal entity, and there is no concept of a 'group' in Indian corporate law. Therefore, the defaults of a company should be treated on a stand-alone basis; and other companies where promoters and their associate have controlling interests must not be penalised on this account.

There is nothing wrong with banks and FIs internally pooling their information on various industrial groups. It is good banking practice, and gives all the lenders an accurate picture of their gross exposure to the group as a whole.

However, in the absence of any legal definition, there should be no hard and fast rule about mandating the group concept. Debt defaults can be bona-fide or mala-fide. For the former, bankers could decide to deal on stand-alone basis. For the latter, a group approach would probably yield better results. The decision should b left to the banks and FIs who have significant exposure to the company.

Informal Workouts

Informal workouts between debtor and creditors often work faster than formal bankruptcy procedures. When it occurs, it reflects the realization that:

There may be greater benefit to negotiate an arrangement than use confrontational devices such as recovery and insolvency laws.

Legal process will not work, either due to their inefficiencies and delays, or considerations such as labour, importance of the industry to the economy, and the like

There are not too many claimants, and most have similar scales of exposure.

Usually, informal workouts follow certain procedures, in the first place, a 'forum' is formed in which both the debtor and creditors come together negotiate an arrangement. The forum then appoints a lead bank creditor to provide leadership, organisation, management and administration. This is followed by selecting a committee which represents the interests of creditors and acts as a sounding board for the proposals suggested by the debtor. The committee also negotiates a standstill agreement to suspend adverse actions for a defined period. Thereafter, it initiates due diligence to obtain accurate information on the financial position and business activities of the debtor. After this, the negotiations begin which, if successfully concluded, become a set of new contracts between the creditors and the debtor, as well as the creditors themselves.

The permanent, high-powered steering committee of senior bankers and FI executives that has been recently constituted by the RBI should be a forum for structuring informal workouts for important distressed borrowers.

Asset Reconstruction Companies (ARCs)

Many countries have sought to address their NPA problems by creating dedicated 'bad banks' for acquiring and managing NPAs. These are known as Asset Reconstruction Companies or ARCs. An ARC is a special purpose limited liability company which (i) acquires the problem assets of banks and financial intermediaries, and (ii) subsequently sells these to other buyers.

Beginning with the Narasimham Committee Report in December 1991, there have been consistent recommendations for setting up ARCs in India. Narasimhm II reiterated this point. More recently, the M.S. Verma Committee Report on Weak Banks has made a case for ARCs.

International examples of ARCs suggest that India should be very careful before structuring any large sized Arc. Globally, every instance of government intervention in setting up of ARCs was preceded by widespread Banking failure. This has not occurred in India. This is true even if one considers the three weak public sector banks, namely Indian Bank, United Bank of India and United Commercial Bank, whose gross NPAs stood at 39%, 32% and 23% respectively on 31 March 1999. There is no systemic economic explanation for their state neither is it that these banks are exposed to high-risk sectors vis-à-vis others. Nor can they claim that their branches are all located in economically depressed areas. The only explanation is inadequate management. That cannot be a reason for recapitalising and setting up ARCs with scarce taxpayers' funds.

This scepticism about using ARCs to restructure the three weak banks does not extend to the financial sector as a whole. It is feasible to design ARCs in an incentive compatible manner for some of the relatively healthier banks and FIs. However, certain principles have to be meticulously observed to generate desirable outcomes.

First, the three weak public sector banks must not be bailed-out through ARCs. They need a far more radical solution.

Second, in the situation of a full-blown banking crisis, there exists a rationale for a government-sponsored bailout, where NPAs are sold at book value to an ARC against payment in zero-risk government securities. Nothing in India warrants this type of generosity.

Third, if there is to bee an Arc, then the NPAs should be transferred at either market prices or at sizeable discounts to book value. That will mitigate the dead-weight loss to the taxpayers and reduce the potential loss to the ARC.

Fourth, the government must allow public sector bank managers to sell NPAs at less than book value without being harassed by the Central Bureau of Investigation (CBI) or the Central Vigilance Commission (CVC)

Fifth, it is imperative that any ARC be structured as a mutual fund with a board of trustees, a professionally organized asset management company, with investors or 'unit-holders' belonging to the general public. At no stage should the government invest in the fund, or insist on being on the board of trustees. In the initial stages, the bulk of investors will probably consist of public sector financial institutions. However, as the fund begins to prosper, it must attract investors belonging to the wider public.

Sixth, even if the fund has to initially comprise of investors from healthy public sector banks, FIs, insurance companies and mutual funds, it has to be managed by privately run asset management company (AMC). That will ensure the management begins staffed by workout specialists.

Seventh, international experience shows that ARCs should not exist forever. They should have a finite life, preferably not more seven to eight years.

Eighth, given the finite life of an ARC, it should choose a cut-off date for NPAs, beyond which it must not purchase any bad loans. This will reduce the moral hazard of banks and FIs continuing to generate NPAs with the implicit assurance that these could always be sold to ARC.

Ninth, the objective of an ARC should be to clean the books of relatively batter run banks an FIs prior to privatization.

Finally, the corollary: the issue of setting up an ARC should not be considered until the is a time-bound an credible commitment to privatizing public sector banks and FIs.

It is to be noted that given the current state of SICA, BIFR, winding up, DRTs, foreclosures and other recovery processes, an ARC will find it very difficult to lead a viable existence. Therefore, India first needs to make radical changes in bankruptcy and recovery laws and procedures before it decides to clean-up banks and FIs through ARCs.

Labour Laws

These are some of the most contentious issues that have to be adroitly tackled by the government during th second phase of reforms.

One of the greatest barriers to corporate restructuring in India especially of public sector enterprises and large industrial companies is Chapter VB of the Industrial Disputes Act, 1947. The problems lie with sections 25(N) and 25(O), which, under the tripartite structure, require management to take prior permission of the government before lying off workers. In the past, permission was rarely granted under section 25(N) and 25(O). Therefore, many businessmen illegally shut down their plants or declared lock-outs to subvert these two sections.

A more fair and equitable alternative would be to (i) eliminate the need for government approval altogether, and also (ii) raise the compensation limit from 15 days pay for every year's work to at least 45 days. That will not only raise the benefits to workers, but also confer flexibility to business. Parallely, efforts should be made for establishment of a safety net for the protection of workers such as National Renewal Fund.

Mergers and Acquisitions

It is necessary to look at some of the provision of the Income Tax Act, 1961, that militate against more widespread use of mergers. Some of these are:

Unabsorbed depreciation allowance and accumulated business loss of the previous owner are normally not allowed to be set off by the successor. This is a damper on the take-over of companies that have been serious NPAs. This should be allowed automatically, and has negligible tax implications.

Expenses arising out of mergers, amalgamations, takeovers and de-mergers are not allowed to be amortized. These would have positive effects for M&As.

SLR, CRR, Risk-Weighting and Financial Disclosures

Since 1992, the RBI has shown considerable regulatory skills. While continuous upgrading of housekeeping practices has maintained a tight leash on commercial banks, it has also highlighted the classic conundrum of all regulators: how much does on regulate? And how can one discriminate between the wheat and the chaff? Prima facie, there is a case to adopt risk monitoring like UK's Financial Services Authority (FSA), whose entire focus is to differentiate varying levels of risk, and monitor accordingly.

One suggestion that can be implemented quickly is given below, and it will not only allow for some differences in regulation but also induce banks to lend more to business.

RBI should set up threshold levels of capital adequacy, coverage ratio and maximum net NPA ratio which would be used to determine healthy banks and FIs. Such banks and FIs should be allowed to rate their loan risks to listed companies in line with the credit rating CRISIL, ICRA, CARE and Duff and Phelps. The correspondence between a credit rating and its risk-weight can be worked out by the RBI. Highest safety will get assigned the same weight as sovereign debt; low safety will get full risk-weight extra provisioning, even if the account is performing.

This will create a more logical process for identifying risk, and create a continuum of risk, not only between NPAs and performing loans, but also across the spectrum of the latter. It will also eliminate the current zero-one discontinuity in risk weighting between government security and advances. This will nudge banks away from over-purchase of government securities.

All other banks will have to continue with the existing risk-weighting systems.

All else being equal, differential risk-weighting will reduce bank management's excess demand for government securities at the margin. However, it will not fall sufficiently enough so long as India has its 25% SLR and 9% CRR norms. This yields the next recommendations.

The RBI should be commended for reducing CRR from 10% to 9% in its October 1999 credit policy. However, it should go further.

In the fiscal year 2000-01, the CRR and SLR requirement should be together reduced by another 5 percentage points. This will release something like Rs 22,500 crores for business. The additional supply of loan funds plus the continuum of risk weights should reduce interest rates and allow the better banks to advance more credit to the corporate sector.

In fiscal year 2001-02, the SLR should be further reduced by another 5 percentage points. Thus, by March 2002, the SLR should be around 17% and CRR at 7%.

The third recommendation relates to another important element of the financial system - the quality of disclosures in the annual accounts of banks and FIs. If corporate governance considerations deem it important for listed companies to substantially increase their level of disclosures, ten it is even more important for banks and FIs. Depositors and shareholders alike have the right to know much more such as the maturity structure of assets and liabilities, and full account of various classes of NPAs and their extend of provisioning.

RBI should mandate far better disclosures for all banks and FIs. These should involve details of assets and liabilities, structure of cost of deposits and interest on loan assets, the extent of asset-liability mismatch in rates as well as tenure, classification of the top 50 NPAs and their share in total NPAs, and net income from and NPAs due to priority sector advances.

RBI should examine the best global disclosure practices, and ensure that these are reflected in the annual accounts of all banks and FIs.

RBI should also consider the proposal that strong banks and FIs should also publish their accounts according to US-GAAP.

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Annexure

No. 260/3/C/3/99-EE&S 1

Government of India

(Bharat Sarkar)

Prime Minister's Office

(Pradhan Mantri Karyalaya)

New Delhi

Dated 14.12.1999

NOTIFICATION

Subject: Appointment of Special Subject Groups of the Prime Minister's Council on Trade and Industry

On the basis of discussions held at the meeting of the Prime Minister's Council on Trade & Industry on 11.12.1999, Government have decided to constitute eight Special Subject Groups from among the Members of the Council to consider and recommend implementable action points in the following areas:-

Good Governance in the Private Sector:

Shri N R Narayana Murthy

Shri Kumar Mangalam Birla

 

Policy Framework for Private Investment in Education, Health and Rural Development:

Shri Mukesh Ambani

Shri Kumar Mangalam Birla

Strategy for a reconvened WTO Ministerial Meeting:

Shri N. Srinivasan

Shri Rahul Bajaj

How to get Disinvestment going?

Shri G P Goenka

Shri Rajeev Chandrasekar

Shri Nusli Wadia

Review of Regulations and Procedures to unshackle Indian Industry/Recommendation of measures for reviving traditional industries:

Shri Nusli Wadia

Shri Ratan Tata

How can India avoid the pitfalls of Globalisation?

Shri Rajul Bajaj

Shri Sanjeev Goenka

Power Sector Reforms:

Shri G P Goenka

Shri A C Muthiah

Shri Sanjeev Goenka

Harnessing the Wealth and Talent of Indians Resident abroad for Development:

Shri Mukesh Ambani

The Groups will interact with the concerned Ministries/Departments who will provide all necessary assistance and data to them. The interaction of the Groups with the concerned Ministries/Departments will be facilitated by the PMO.

The Groups may co-opt officials from concerned Ministries/Departments and external experts as necessary

The Groups will finalize their Action Plans within 60 days for the consideration of their reports in the subsequent deliberations of the council.

The TA/DA of official members co-opted to the above Groups shall be borne by their parent Departments. The TA/DA of non-official members (as admissible to Grade-I officers of the highest category in Government of India) shall be paid by the PMO.

(N. K. Singh)

Secretary to PM

Copy to: All Members of the Council on Trade and Industry as per list attached.

(Jawed Usmani)

Joint Secretary to PM

Copy also for information to

Cabinet Secretary

All Secretaries to Government of India

(Jawed Usmani)

Joint Secretary to PM

Prime Minister's Council on Trade & Industry

Members

1. Chairman: Prime Minister

2. Members: Shri Ratan Tata

Shri Mukesh Ambani

Shri Sanjeev Goenka

Shri Kumar Mangalam Birla

Shri N Srinivasan

Shri N R Narayana Murthy

Shri Nusli Wadia

Shri A C Muthiah

Shri Rajeev Chandrasekar

Shri Gouri Prasad Goenka, President (designate, FICCI

Shri Rahul Bajaj, President, CII

Principal Secretary to Prime Minister

Member-

Secretary Secretary to Prime Minister