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.
No comments:
Post a Comment