Policy instability reigns

Investors will see government action as primary risk

The government has sought to make India an easier place to do business, and has pushed for reform to this end at both the central and state levels. Some of its efforts have been crowned with success, and India’s ranking in the World Bank’s ease of doing business rating has risen. The hope is that this will revive investment, both domestic and foreign. But the question to be asked is why investors would want to come in to India at the risk of catastrophic capital loss, and when the greatest risk continues to be the Indian state itself. One major risk comes from the possibility that a change in administration following an election might lead to the government reneging on agreements. The situation in Andhra Pradesh is an unfortunate example of this. The new government under Jagan Mohan Reddy had previously announced it was re-opening power purchase agreements, which threw investment into the renewable energy sector nationwide into crisis. Now news comes that it is ending a development project in the new state capital city of Amaravati, which was supposed to create a commercial real estate-focused area in the new city on the banks of the Krishna river. This will involve pulling out of a contract it had signed with Singaporean investors. The Amaravati project was supposed to be a proof of concept, a demonstration that foreign capital could co-operate with the Indian state in order to build world-class urban infrastructure. Instead, it now serves to demonstrate the opposite.

 
Similar risks have intensified at the all-India level as well. At a media call after Vodafone released its first-half results, its chief executive officer, Nick Read, said the situation for the company in India was “critical”. This is a consequence of the government having taken a case about revenue sharing all the way to the Supreme Court, which has now ordered debt-laden telecom operators to pay $13 billion to the government, with Vodafone Idea due to hand over $4 billion to that. The government is not responsible for a court judgment, but it is certainly responsible for having fought the case up to that level, as well as refusing to see what such extortionate demands are doing to profitability and investment in the sector. Vodafone has rightly pointed out that it is among the largest foreign investors in India. What would other large investors considering going into critical or infrastructure sectors, where partnership with the government is essential, take away from its behaviour in the telecom sector? Now it seems the government has taken aim at the successful e-commerce sector, another location for high investment. It changed the rules of the game after major investments had already been made, and ministers have been routinely speaking about “predatory pricing” in the sector while remaining silent about such pricing in telecom.

 
The simple fact is that as long as governments allow political considerations rather than a commitment to policy stability to dominate, investment in India will continue to be muted and growth will not return to a sustained higher trajectory. It is vital that governments, both Union and state, re-examine their approach towards investment and prioritise policy stability.