Good governance has a lot to do with continuity, especially when it comes to defining policy framework for industry. Because, there is no way that entrepreneurs would want to invest in a chaotic system where politicians change colour faster than a chameleon or political parties question every action of their predecessors out of compulsion.
This sense of continuity has played a major role in India’s economic success of the last two decades, or more precisely ever since that tectonic shift of 1991 when Dr. Manmohan Singh threw open the economy to global winds. In spite of seeing governments headed by Congress, the BJP and even one with outside support from the Communists, nothing much changed at the policy levels.
However, the recent tug-of-war between the centre and the Andhra Pradesh government over review of power purchase agreements (PPA) signed by a previous regime could change how the external world perceives India as an investment destination.
For close to six months now, AP Chief Minister Y S Jagan Mohan Reddy has been systematically reviewing and junking a bunch of PPAs that include 21 wind contracts, and those related to the 600 MW hybrid project of Siemens Gamesa and the Axis Energy project. A report published in the Mint quotes minutes of a review meeting to suggest that the government may issue recovery notices to all wind and solar PPAs for the ostensible losses caused.
That Reddy has chosen to ignore the Central government’s suggestions to the contrary is what is newsworthy here. A report published in the Hindu Businessline in June suggests that the Narendra Modi government in New Delhi had written to the regime in Andhra Pradesh asking them not to reopen the PPAs set up in the state as per the decisions of the previous government headed by N. Chandrababu Naidu.
The Reddy administration, which caused a few raised eyebrows by appointing five Deputy Chief Ministers as against seven that that existed since the formation of the state in 1956, nonetheless went right ahead claiming that the state had to shoulder additional burden via the power distribution companies due to higher payment obligations to these power producers. That too at a time when there has been a decline in unit cost of power production from solar and wind farms.
Simply, put the government sees nothing wrong with reneging on an agreement just because suddenly the costs have come down. Now, imagine if the global oil industry works the same way? India contracts for oil at today’s price to be delivered in six months’ time, but refuses to take delivery then claiming that the prices have gone down.
This isn’t the first such decision that the Reddy administration has taken. The government had scrapped the Amravati Start-up Area Development Project that Naidu had signed with a Singapore consortium right after the state was split into two six years ago. There were environmental deliverables even in this project, but Reddy thought it fit to brush it all aside to score political points.
The whole narrative one again brings to the fore the sanctity of government contracts. Stories of Enron and Tata Nano come to mind immediately though the former ended up being a good decision, given that the company itself went under in 2007. As for the Tatas, they simply exited one state and moved into another though sadly the Nano isn’t really on the top of anyone’s buy list anymore.
Finance Minister Nirmala Seetharaman went on record last month to assure investors that contractual commitments made in the renewables sector would be protected and investors have no reasons to worry about policy changes following political changes in states.
However, the manner in which Jagan Mohan Reddy seems to be systematically unravelling all the deals of his predecessor could prove scary for any investor worth her dollar. Maybe, Reddy Junior needs to be reminded of how his father late Y S Rajasekhara Reddy managed these affairs when he overthrew Naidu as the chief minister of then combined Andhra Pradesh between 2004 to 2009.
Of course, there are also those who believe that given India’s size and infrastructure needs, enterprises would be queuing up and governments should be driving a hard bargain.
Let’s wait and watch how reneging Reddy’s act of bravado pans out in the future.