Tuesday, July 30, 2019

Enforce rule of law and ensure certainty of policy

Some food for thought
"Thank goodness I was never sent to school; it would have rubbed off some of the originality."
—Beatrix Potter (English Author, 1866-1943)
Word for the day
Fulgurant (adj)
Flashing like lightning.
 
First thought this morning
Reportedly, Prime Minister Narendra Modi will feature in an episode of Man vs. Wild, to be aired on Discovery Channel on 12th August 2019. Enticing stills from the episode, with PM enjoying the wilderness of Uttrakhand with UK television presenter and adventurer Edward Michael Grylls, popularly known as Bear Grylls, are splashed all over the internet.
Distressed participants in financial markets, stressed businessmen and disenchanted commoners have naturally reacted negatively on the social media. The general feeling is that the prime minister himself should be focusing more on the economic slowdown and depressed markets rather than indulging in this almost contemptuous show of love for nature.
On the other hand there are many who believe that this rendezvous of prime minister is important from two viewpoints: (a) It encourages countrymen to see that PM is in full control; and (b) the real socio-economic conditions may not be as bad as the popular narrative on social media, pink papers and blue TV channels is indicating.
I would avoid taking a view this morning, but honestly I am not comfortable with the present socio-economic environment.
Chart of the day

 
Enforce rule of law and ensure certainty of policy
The first thing after assuming charge of office, the incumbent Chief Minister of Andhra Pradesh had ordered cancellation of many projects awarded by the preceding government (see here).
Andhra Pradesh Government has also decided to reopen power purchase agreements (PPAs) inked under the previous TDP government, that could potentially bring 5.2GW solar and wind energy projects with an estimated debt exposure of over INR21,000cr under stress (see here). The state seems to be moving ahead with this proposal despite strong request from central government (see here) and order of the High Court (see here).
Subsequently, the World Bank decided to "drop" funding of “Amaravati Sustainable Infrastructure and Institutional Development Project”, seriously affecting the future of the project which has already swallowed Rs 45,000 crore worth of public money with less than twenty per cent of the work completed. (See here) Following the World Bank, the Asian Infrastructure Investment Bank (AIIB) has also decided to withdraw from funding the project. The decision to withdraw funding has been reportedly taken after the Central Government withdrew its request for funding of this project.
I understand from various sources that the Chief Minister Office has also ordered a hold on payments due to contractors for various projects under execution, pending investigation of any irregularity in awarding of contracts by the preceding government.
Reportedly, the newly sworn in Chief Minister of Karnataka has also expressed his intention to review the decisions taken by the preceding government.
These decisions to "review" or "cancel" contracts awarded by outgoing administrations are ostensibly "anti corruption" measures, giving the incumbent governments a high moral ground. We have therefore not seen much outcry against such appalling decisions. Media, central government, corporate, civil society, youth, and judiciary all seem to have accepted this as fait accompli.
The immediate impact of these decisions is -
(a)   Firms which have invested in capacity building to execute the contracts "under review" and/or part execution of the contracts face losses and uncertain future;
(b)   The lenders who have funded the firms for execution of these contracts face uncertainty about the realization of loans already disbursed and future demand of funds;
(c)    Political risk exacerbate to a new level. This "review" process sets dangerous precedence for all future government contracts. This might deter all firms to bid for government contracts, especially during the last couple years of the term of the government.
(d)   Investors will take a negative view of the government business leading to material erosion in the valuation of contractors executing government projects. We have already seen almost 40% erosion in the share price of NCC Limited, who got Rs61bn worth of order cancelled by the Andhra Government in past two months.
The worst impact of such actions is however immeasurable. The trust deficit between private enterprise and government has been a major impediment to the growth and development of the country. These actions would only further widen the deficit.
I understand that besides these latest instances of government reneging on its contractual obligations, there are numerous cases where the governments (central as well as state) are refusing to honor arbitration awards given in favor of contractors like HCC Limited and others.
This also reminds me about the concerns and promises made in the recently released Economic Survey 2019. For example, consider the following:
Chapter 05, Part 1 of Economic Survey 2019
"Arguably the single biggest constraint to ease of doing business in India is now the ability to enforce contracts and resolve disputes."
"The relationship between economic governance and the Rule of Law (Dandaniti) has been emphasized by Indian thinkers since ancient times. It is seen as the key to prosperity, and a bulwark against Matsyanyaya (i.e. law of the fish/jungle). It should be no surprise, therefore, that the Preamble to the Constitution of India defines that the first role of the State is ‘to secure for all its citizens: Justice, social, economic, and political’. In other words, it is well accepted that economic success and prosperity are closely linked to the ability to enforce contracts and resolve disputes."
"India continues to lag on the indicator for enforcing contracts, climbing only one rank from 164 to 163 in the latest report of EODB, 2018."
Chapter 06, Part 1 of Economic Survey 2019
"What is the effect of uncertainty/ambiguity in policy making on the investment climate in the economy?" "...such uncertainty can spook investors and spoil the investment climate in the economy. Such uncertainty in economic policy can be avoided. In contrast, a nation state that ensures predictability of policy action, provides forward guidance on policy action, maintains broad consistency in actual policy with the forward guidance, reduces ambiguity and arbitrariness in policy implementation creates economic policy certainty. Investors may enjoy the certainty provided by such an environment and flock to invest in this environment."
The government recognizes that the biggest impediment to the ease of doing business in India is State's inability to "enforce contracts and resolve disputes". And policy uncertainly and ambiguity could "spook investors and spoil investment climate".
Despite this realization we see absolutely no effort to guarantee at least the contracts where the government is a party. In fact as per several reports, the government itself is the largest litigant in the country.
 

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