India’s record in upholding contracts is mixed. (Getty Images)
India’s record in upholding contracts is mixed. (Getty Images)

Opinion | A state must honour its past commitments

In trying to scrap power deals struck by the earlier dispensation, the Andhra government has worsened the country’s global reputation for upholding contracts. This affects us all

A decision by the Andhra Pradesh government to review power purchase agreements for renewable energy projects has revived the debate on the sanctity of contracts in India. Chief minister Jagan Mohan Reddy’s point is that the deals struck by the government of his predecessor N. Chandrababu Naidu have burdened the state’s power distribution companies with high payment obligations, while the unit costs of producing electricity from solar and wind farms have declined sharply. The state’s repudiation of a set of contracts inked earlier has caused consternation not just in New Delhi— which places renewable energy at the heart of its commitment to climate change—but also in several global financial capitals from where the money for these projects came in. The Andhra government now finds domestic banks questioning the strength of its guarantees. Power purchase agreements aside, Reddy also wants to renegotiate projects developed in partnership with foreign investors for a new state capital. His insistence flies in the face of the Centre’s counsel and judicial pronouncements.

India’s record in upholding contracts is mixed. While their sanctity is largely intact, multilateral agencies and foreign governments have flagged its patchy efforts to enforce them. But there have been occasions when deals have been reopened by successor governments, and the outcome has caused considerable economic losses for the states concerned. Typically, there have been instances when a party in opposition has turned a particular deal, such as the Enron power project in Maharashtra and the Tata Nano car project in West Bengal, into a rallying point to win elections. The two political gambits had paid off, but the economic consequences for both states were dire. Reddy’s approach has been different. He came to power earlier this year and is seeking to reopen contracts that do not have much riding on them politically. This makes his course of action enigmatic to the Centre, which is considering legislation to curb such zeal.

Since India started opening up its economy to foreign capital, several industrial clusters have been set up that offer stable policy regimes to multinational companies. Some of these are in states where governments have changed frequently without previous deals being disturbed. Yet, grumbles can be heard overseas. Disputed taxes, like those imposed on Vodafone, Cairn and Nokia, have wound their way into international arbitration tribunals designated by a raft of bilateral investment treaties India has signed to attract foreign direct investment. In the span of a few months, the country has turned its back on a trans-Asian trade bloc that would have plugged it into global manufacturing value chains, and has made an aborted attempt to tax foreign portfolio investors.

This signals that India is becoming inward-looking. It has, however, lowered corporate taxes, with a special low rate for new manufacturing units. Overall, the picture for foreign investors is cloudy. Instances of contracts being shunted aside cloud it further. The Andhra Pradesh high court has sent Reddy’s decision to the state’s electricity regulator for a review. It would be in the country’s interest if, between the courts and the central government, the fallout of these developments is contained. 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 honour their word.

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