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Finance Minister's Budget Speech - Part 3

Part 2

Banking Sector

39. Banking sector reforms have proceeded apace in a phased manner over the past decade. However, the problem of non-performing assets with banks has continued. Special attention is being paid to recovery of NPAs:

* Public Sector Banks have recovered Rs 800 crore of NPAs from 2 lakh accounts in 2000-01.

* Net NPAs as percentage of net advances were almost half at 7.4 per cent in 1999-2000 compared to 14.5 per cent in 1993-94.

* 22 Debt Recovery Tribunals (DRTs) and 5 Appellate Tribunals have been established.

* 7 more DRTs will be set up during 2001-02.

40. I also propose to bring in a legislation that will facilitate foreclosure and enforcement of securities in cases of default in order to enable the institutions to realise their dues.

41. In the light of new competition in the banking industry it is necessary to strengthen the management of the public sector banks. I propose to provide greater autonomy to bank managements. It is also essential to provide greater independence to bank managements in forming their own recruitment strategy and in implementing it. I therefore propose to abolish the Banking Services Recruitment Boards. This will be done in association with the Reserve Bank of India by July 31, 2001 or earlier. All future recruitment will be done by banks themselves.

Capital Account Liberalisation

42. Until about 10 years ago, all foreign exchange transactions were tightly controlled by the government and by the RBI. We have progressively loosened these controls and made the current account completely convertible. We have also liberalised the capital account for certain purposes. I propose to take further measures for liberalising the capital account. These are:

* Indian companies wishing to invest abroad may now invest up to US $50 million on an annual basis through the automatic route without being subject to the three year profitability condition.

* Companies which have issued ADRs/GDRs may henceforth make foreign investments up to 100 per cent of these proceeds; up from the current ceiling of 50 per cent.

* Companies with proven track record wishing to invest larger amounts may now get a block allocation in advance from the RBI for investments overseas.

* Indian companies that have issued ADRs/GDRs may acquire shares of foreign companies up to an amount of US $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher.

* ADRs/GDRs will be provided two-way fungibility. Converted local shares may be reconverted to ADRs/GDRs while being subject to sectoral caps, wherever applicable.

* Indian companies will now be permitted to list in foreign stock exchanges by sponsoring ADR/GDR issues against block share holding. This facility would have to be offered to all categories of shareholders.

The Reserve Bank of India will be issuing these guidelines separately. 43. Investments by Registered partnership firms and companies providing professional services have not, so far, been permitted to make overseas investments. This ban is now being removed. Similarly, Indian employees who have the benefit of ESOP schemes in foreign owned companies can now make investments abroad up to US $20,000 annually instead of in a block of 5 years.

Foreign Investment

44. Progressive liberalization has taken place in the provisions relating to foreign investment. I propose to take the following further measures:

* Foreign Institutional Investors (FIIs) can invest in a company under the portfolio investment route up to 24 per cent of the paid up capital of the company. This can be increased to 40 per cent with the approval of the General Body of the shareholders by a special resolution. I propose to increase this limit to 49 per cent.

* Foreign Direct Investment (FDI) in Non-Banking Financial Companies (NBFCs) is permitted on a case by case basis up to 100 per cent but with a condition that a minimum of 25 per cent of their holding is divested in the domestic market. This condition is being removed, provided the foreign investors bring in a minimum of US $50 million. FDI in NBFCs will now be put on the automatic route subject to RBI guidelines.

Structural Reforms

45. In order to accelerate growth in the Indian economy, we have now to address some of the difficult areas of reform that have not been tackled so far.

46. There are four significant areas where a price and distribution control regime exists. These are the areas of petroleum, fertilizer, sugar and drugs.

Administered Pricing Mechanism (APM)

Petroleum

47. As Hon'ble Members are aware, Government had, in November 1997, notified the details of dismantling of the Administered Pricing Mechanism (APM) in the petroleum sector by March 2002. I propose to adhere to this deadline. A time bound action programme is being prepared for the deregulation of APM by March, 2002. My colleague the Minister of Petroleum and Natural Gas will be outlining the road map for this separately.

Fertilizer

48. Hon'ble Members will recall that I have in the past referred to the rationalisation of fertilizer pricing with the objective of phasing out the existing retention price scheme (RPS) in the medium-term. Government has now decided to implement the recommendations of the Expenditure Reforms Commission for a phased programme of complete decontrol of urea by April 1, 2006. The following steps would be taken in the first phase commencing from April 1, 2001:

The unit specific RPS will be replaced by a Group Concession Scheme. The current MRP arrangement will be continued and the concession for each group calibrated to enable the units to sell urea at the stipulated MRP.

The rate of concession for urea units based on naphtha/FO/LSHS will be linked to international prices of these feed stocks.

Sugar

49. Government is committed to complete decontrol of sugar. But this must be irreversible. Government has decided to introduce futures/forward trading in sugar within the coming year, a step that is necessary before full decontrol. Sugar under the Public Distribution System will continue to be supplied to ration cardholders in the special category states, hill states, island territories and to BPL families in other states and UTs. Such supplies can even continue after sugar is completely decontrolled. The retail issue price of sugar under the PDS is being revised to Rs 13.25 per kg. with effect from March 1, 2001.

Drug Price Control

50. The domestic drugs and pharmaceutical industry needs support in order to meet the challenges and to avail of the opportunities arising out of liberalisation of our economy and the impending advent of the product patent regime. Government has been considering measures to lessen the rigours of the present price control mechanism where they have become counter productive. Towards this end, we have decided that the span of price control will be reduced substantially. However, keeping in view the interest of the weaker sections of society, Government will retain the power to intervene comprehensively in cases where prices behave abnormally. Changes in the Pharmaceutical Policy are being made accordingly.

Industrial Restructuring

51. Government had constituted a high level committee on law relating to revival, reconstruction and/or winding up of companies. The Committee has submitted its report and Government has accepted its key recommendations. It is proposed to repeal the SICA and also to amend the Companies Act in order to set up a National Company Law Tribunal. These legislative proposals are proposed to be introduced during the current session by my colleague, the Minister for Law, Justice and Company Affairs.

Labour Market

52. Along with these changes, it is also necessary to address the contentious issue of rigidities in our labour legislation. Some existing provisions in the Industrial Disputes Act have made it almost impossible for industrial firms to exercise any labour flexibility. The Government is now convinced that some change is necessary in this legislation. Chapter VB of the ID Act stipulates that employers in specified industrial establishments must obtain prior approval of the appropriate government authority for effecting lay-off, retrenchment and closure, after following the prescribed procedure. It is proposed that these provisions may now apply to industrial establishments employing not less than 1000 workers instead of 100. The separation compensation will be increased from 15 days to 45 days for every completed year of service. The enhancement of compensation would act as a deterrent on employers to take recourse to lay-off, retrenchment and closure in a routine manner.

53. Similarly, rigidities inherent in the existing legislation regarding Contract Labour inhibit growth in employment in many service activities. Section 10 of the existing Act envisages prohibition of contract labour in work/process/operation if the conditions set therein like perennial nature of job etc. are fulfilled. Section 10 enables the contract labour engaged in prohibited jobs to become direct employees of the principal employer. To overcome this difficulty and at the same time ensure the protection of labour, it is proposed to bring an amendment to facilitate outsourcing of activities without any restrictions as well as to offer contract appointments. It would not differentiate between core and non-core activities, and provide protection to labour engaged in outsourced activities in terms of their health, safety, welfare, social security, etc. It would also provide for larger compensation based on last drawn wages as retrenchment compensation for every year of service.

54. These measures will promote industrial investment in labour intensive, and export oriented activities providing for renewed industrial growth, while, at the same time safeguarding the interest of workers. My colleague, the Minister for Labour will introduce appropriate legislation to amend the Industrial Disputes Act and Contract Labour Act within this session.

Continued

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