From UPSC perspective, the following things are important :
Prelims level : Ease of Doing Business - Enforcing contracts
Mains level : Contract enforcement for investments
Andhra Pradesh government’s review of the power purchase agreements for renewable energy projects has revived the debate on the sanctity of contracts in India.
Reason for the move in AP
- It is pointed out that the deals struck by the previous government have burdened the state’s power distribution companies with high payment obligations.
- The unit costs of producing electricity from solar and wind farms have declined sharply.
Impact of the move
- Climate change – This goes against India’s commitment to renewable energy against climate change.
- International impact – the money for these projects came in from several global financial capitals.
- Fiscal – domestic banks are questioning the strength of their guarantees.
- India’s record in upholding contracts is mixed. Their sanctity is largely intact.
- Limited enforcement – Multilateral agencies and foreign governments have flagged their patchy efforts to enforce them.
- Reopening deals – There have been occasions when deals have been reopened by successor governments. These have caused considerable economic losses for the states concerned.
- Examples – Enron power project in Maharashtra and the Tata Nano car project in West Bengal became rallying points to win elections.
- Clusters – Since India started opening up its economy to foreign capital, several industrial clusters offered stable policy regimes to multinational companies.
- Stability – Some of these regimes are in states where governments have changed frequently without previous deals being disturbed.
- Disputes – Disputed taxes, like those imposed on Vodafone, Cairn, and Nokia were taken to international arbitration tribunals.
- RCEP – India has turned its back on the trans-Asian trade bloc that would have plugged it into global manufacturing value chains.
- Negative signals – This signals that India is becoming inward-looking.
The country can do without a spate of international arbitration over renegotiated power purchase agreements. India needs to be seen globally as a country where governments honor their word.
On the Ease of Doing Business Index(rank 63rd), India lags in enforcing contracts (163rd).