(Photo: AP)
(Photo: AP)

Behind the govt’s plan to protect foreign investors

  • Faced with the threat of global investors seeking international arbitration over the Andhra government’s move to scrap clean energy pacts, India is exploring a new law to protect investments affected by unilateral decisions
  • Mint explores why such a law could be important

Why is the move important?

With cumulative foreign direct investment inflows between April 2000 and May 2019 accounting for around $628 billion, India cannot afford to miff foreign investors as it aims to become a $5-trillion economy by 2024-25. And in the current global investment climate—with rising trade tensions and a slowing world economy—Andhra Pradesh’s planned move may make it difficult for India to bolster its investor-friendly image abroad. It took the efforts of successive governments for the country to emerge as the poster child of global investors from the ignominy of 1977, when Coca-Cola and IBM made an exit.

What would such a law accomplish?

The law would ensure that state governments cannot cancel contracts in the event of investments reaching a certain stage. It will make it difficult for them to annul pacts, and any such step will attract penalties. With the Indian economy growing at its slowest pace in six years, the Centre has repeatedly cautioned the Andhra Pradesh government against scrapping the power purchase agreements signed by the previous dispensation in the state, as it would affect India’s ability to attract overseas investments. Once the Act is passed, it will be binding on all states.

(Graphic: Paras Jain/Mint)
(Graphic: Paras Jain/Mint)

What is at stake for Andhra Pradesh and India?

Investors claim that Andhra Pradesh’s decision could put 5.2 gigawatts (GW) of solar and wind energy projects, with an estimated debt exposure of more than 21,000 crore, at risk. Such a move will also raise questions on India’s image as a green energy champion and impact its ambitious target of 175GW of renewable energy by 2022 and 500GW by 2030.

Why is global capital so important?

India has an installed renewable energy capacity of 83GW and is running the world’s largest renewable energy programme which would require $80 billion till 2022. This requirement will grow more than threefold to $250 billion during 2023-30. The investors in Andhra Pradesh’s clean energy space, such as Goldman Sachs, Brookfield, SoftBank and CPPIB, are marquee names on the global investment landscape. A negative signal from such blue chip investors may jeopardize India’s aspirations.

What is the way ahead?

Given the uncertain economic landscape, with slowing private consumption, investments and exports, India needs to make a bold statement before the global investor community that it is serious about its commitments. However, while the numbers in the Lok Sabha stack in favour of the ruling Bharatiya Janata Party, the National Democratic Alliance (NDA) lacks a majority in the Rajya Sabha. Therefore, pushing the legislation through would require some effort, despite NDA being the largest block in the RS.

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