In reviewing the agreements signed by the previous government, the government of Andhra Pradesh has severely undermined already abysmal reputation of upholding contracts. This should be a cause for concern for all of us.
Against the warning of the central government, the YS Jagan Mohan Reddy led government of Andhra Pradesh has decided to renegotiate the power purchase agreements signed over the last five years by the previous government. The Reddy administration is claiming that the agreements signed by the previous government burden the state electricity distribution companies with high payment obligations. Even if that allegation is true, it is not in the interest of the state and indeed the country for a government to renegade on its past promises.
The question here is of trust and not of finances of the state electricity distribution companies. The refusal of the Andhra government to uphold contracts will have far-reaching implications. From now on, no foreign investor would be able to trust the commitment of any state government or even the central government. The state government is likely to be questioned by domestic investors as well, who will not be able to trust the government to keep its end of the contract.
In any case, India has a dubious record for upholding contracts. Even in a minor dispute arising out of a simple contract, it takes 1445 days and over 30 per cent value of the claim in legal costs. On this indicator, India ranks 163 out of 190 countries measured in the Ease of Doing Business by the World Bank.
Apart from losing the reputation in the investor community, not upholding contracts also involves considerable economic costs for the state. Some companies have already announced that they will not invest in Andhra Pradesh again. Likely, other domestic and international companies will also look to invest in other places. The future cost would be enormous, as one multi-national alone controls thousands of jobs and millions of dollars in investments.
It would be wise for the Andhra government to reconsider this decision and uphold its previous commitments. The decision of the government have the potential to affect the whole country. Soon, foreign investors might think – why not avoid India altogether? After all, Andhra is not the first state to back out of its contractual obligations; West Bengal also backed out of the Tata Nano project at the last moment causing substantial losses to the Tata group.
As a developing country facing a recession, we need to be seen reliable and investors must be able to trust that a contract signed by a government in India will be honoured.