Indo-Nepal border: Let trade boom

Can the seven-member south Asian Free Trade Agreement (SAFTA), scheduled to come into effect on January 1, 2006, become the next big trading hub? At the moment, the answer seems like a "no", given the major differences that exist among the member states. There's little agreement on a host of issues such as rules of origin, revenue compensation and the sensitive list of products to be exempt from the tariff-free regime. Of course, there's always the issue of political rivalry between the nuclear-capable India and Pakistan.

Most of the issues are serious enough to render SAFTA a non-starter. For instance, the member states are still undecided about the extent of value addition required before a good can be deemed manufactured in a particular country. Under the SAFTA accord, India, Pakistan and Sri Lanka, the region's largest economies, have until the end of 2008 to reduce tariffs to between zero and 5 per cent, while Bangladesh, Bhutan, Nepal and Maldives have time till 2016. But an appropriate mechanism to compensate countries for loss of revenue from lowering of tariffs is yet to be worked out.

The biggest stumbling bloc, however, is the fear of "Big Brother" India gobbling up its smaller neighbours. Smaller countries of South Asia, especially Pakistan and Bangladesh, fear that once their borders are opened up, India will swamp them with goods, sounding the death knell of their own industries. "One should not expect trade to rise rapidly in the initial years," cautions Manoj Pant, Professor, School of International Studies, Jawaharlal Nehru University. "With a dominant player like India, the smaller countries may put lots of products on the sensitive list." If India's five-year-old free trade agreement with Sri Lanka is any proof, its neighbours have little to fear. The smaller trade partner has actually seen a three-fold increase in bilateral trade over the last five years, and not a carpet-bombing by Indian exporters as initially feared.

Something similar may happen in the case of other countries with SAFTA. According to a FICCI study, trade among the seven countries, home to a quarter of the world's population, can soar from the current $6 billion to $14 billion annually in just two years. More importantly, it may give the region greater voice in world trade fora.

-Ashish Gupta

Pussy-footing Around Disinvestment
Finally, the government gets to sell its stake in non-navratna public sector companies.

FM Chidambaram: Minor victory

The congress-led united Progressive Alliance government's biggest hurdle in its divestment story is over. At least, for now. After much deliberation-the UPA's coordination committee met for two hours-the Left parties agreed to the divestment of a small percentage of government equity in non-navratna public sector units on a case-to-case basis. "We have identified some such PSUs and shared information with the Left parties. They have agreed to consider the proposals," a visibly relieved but cautious Finance Minister P. Chidambaram said soon after the coordination meeting. However, the Left has made it clear that even in non-navratna category, companies in the energy, power and metal sectors will be out-of-bounds for the government. Even so, it must be a major relief for the government, which had to face a major embarrassment after it was forced to abandon a 10 per cent stake sale in Bharat Heavy Electricals, although it had been cleared by the Union Cabinet. But corporate M&A artists needn't lick their chops. There will be no strategic sale, but only IPOs.

According to Finance Ministry sources, those on the block are companies such as Engineers India, Bharat Electronics, National Fertilisers, Bharat Earth Movers and Dredging Corporation. The government doesn't have much choice. Of the 240-odd PSUs, only 28 are listed and out of these, eight are navratnas, so out of bounds.

For the government, the Left's support could not have come at a better time. Not only do many of the PSUs such as Air-India, Indian Airlines, Bharat Sanchar Nigam, National Hydro Power Corporation and Power Finance Corporation require funds for expansion, but the government also needs money to fund its schemes like the National Employment Guarantee Act. Even if grudgingly, the Left is beginning to see the government's point.

-Ashish Gupta

A Second Chance
RBI allows sick companies to restructure their debt, saving them from liquidation.

RBI's Reddy: Betting on the tide

In what could be one of the most significant relaxations in debt recovery rules, the Reserve Bank of India (RBI) has allowed basket case companies (those referred to the Board of Industrial and Financial Reconstruction, or BIFR) to go in for a restructuring using the corporate debt restructuring (CDR) guidelines. The concession has been extended even to companies considered willful defaulters, but not to those where fraud or mala fide diversion of funds is suspected. The two other riders are that total outstanding borrowings should be Rs 10 crore or more, and that 60 per cent of the lenders by number and 75 per cent by value must support such a restructuring proposal (to make sure that there's consensus on revival candidates). A core CDR group, comprising CEOs of banks such as IDBI and ICICI, will now be put in place.

What could have prompted the central bank to take a more charitable view of the defaulters? "The new guidelines are in line with the overall recovery in economy, where several of the industries are doing well," says K. Cherian Varghese, Chairman and Managing Director, Union Bank of India. "For instance, the steel sector, written off a couple of years ago, is now doing well." (Textiles is another sector that's turning the corner.) The current guidelines, says another senior banker, will help speedier turnarounds since the earlier rehabilitation process was time-consuming. "The BIFR route also involved the state governments to see the process through, but the CDR alternative will only involve the lenders," he points out. Without a state bureaucracy to navigate, sick companies may actually get going faster. "Overall, the guidelines will ensure that there will be no need for companies to rush to the BIFR," says Varghese, adding that this will also give banks an opportunity to lend to genuine customers. BIFR firms know who to thank for their Christmas gift: the Mint Street Santa.

-Krishna Gopalan