There are two key hallmarks of any economic regime in the world when it comes to attracting investments. One is the sanctity of contracts. It essentially means that when two or more parties—including private sector firms, public sector enterprises, and government agencies—enter into a legally binding contract, their contractual rights will be protected and they will have to discharge their contractual duties.
The second important enabler is consistency in regulations. That as and when regulations are framed, they will be applied uniformly and stay in force for a reasonable period of time. This is meant to help businesses foresee the business environment and take operational and capital investment decisions accordingly.
It is a fact that the Indian government has taken several measures to boost investor sentiment and attract domestic and global capital over the last five-six years. The formulation and implementation of a single, nationwide tax regime (the Goods and Service Tax), and the implementation of an insolvency and bankruptcy framework to protect the financial interest of stakeholders are two strong examples of the work done in this regard. As a result, India gained 23 spots in the World Bank’s Ease of Doing Business rankings for 2019 and was ranked 77. In 2015, when the Bharatiya Janata Party-led National Democratic Alliance government came to power for the first time, India was ranked 142.
But two unfortunate examples from two disparate industry sectors, involving government agencies of diverse natures, serve to remind us that despite such advances, there is much left to be desired when it comes to consistency of policy and sanctity of contracts.
The first example pertains to the challenges faced by the renewable energy sector in Andhra Pradesh (AP). Shortly after a new government under the leadership of Y.S. Jagan Mohan Reddy came to power in AP in May 2019, the state government announced its intention of re-looking at all Power Purchase Agreements (PPAs) signed between individual renewable energy producers and the state electricity distribution company (discom). The purported rationale for this decision was alleged corruption in the way in which some of these PPAs were signed under the previous government in the state.
On July 1, the AP government constituted a high-level negotiation committee (HLNC) to review, negotiate and bring down wind and solar energy tariffs in the state. A few days later, the AP state discom sent notices to power producers and intermediary power procurers like Solae Energy Corp of India (SECI) and NTPC, India’s largest state-run power utility, asking them to renegotiate wind and solar tariffs to ₹2.43 and ₹2.44 per unit respectively.
The AP government’s decision and follow-up action has sent a shiver down the spine of the Indian renewable power industry for understandable reasons.
A producer takes the decision to bid a certain level of tariff to secure a wind or solar power project keeping in mind a number of factors: the cost at which it raises equity and debt to finance the project, the cost of equipment such as wind turbines and photovoltaic (PV) cells, the operating expenses of running an installation and the margin that a producer decides to make.
Many such projects that developers have successfully bid for were announced and awarded out four-five years back when equipment such as PV cells (which are mostly imported) were more expensive than at present. It is true that power producers who are bagging solar power projects at present are doing so at much lower tariffs than earlier, but that is due to factors such as the import of Chinese PV modules becoming considerably cheaper and economies of scale setting in.
Renewable energy producers claim that the AP government’s move puts at risk investments to the tune of $1 billion put in by various companies in the state. The total commissioned renewable energy capacity in AP stands at around 7,200 MW. The total installed renewable energy capacity in the country stands at around 75,000 MW at present.
On the face of it, this might seem like an issue that is specific to just one state, which is AP. But it doesn’t take much time at all for a politically sensitive issue like energy tariffs to rage on and spread to other states.
Quite predictably, the spat has taken a legal turn, with nine renewable power producers including national names such as ReNew Power, Hero Future Energies, Azure Power and ACME Solar moving the AP High Court challenging the state government decision.
Many of these companies have raised debt and equity from international investors, who have found India’s clean energy sector attractive enough to pour in serious, long-term. The fear now is that not only will the AP government’s decision put existing investments at risk, it will also deter future investors from looking at the sector.
While the matter is still pending in the high court, if one were to hypothetically assume that the AP government eventually has its way and a precedence is set, what would prevent other state governments from following a similar approach to provide succour to its citizens at the cost of industry? And if sanctity of contracts is undermined in this fashion, how realistic would India’s ambition of installing 175 GW of green energy by 2022 remain?
The second example has to do with India’s the broadcast television sector.
It wasn’t that long ago—February 2019 to be precise — that the New Tariff Order (NTO) issued by the Telecom Regulatory Authority of India (TRAI) came into effect. The NTO brought about sea-change in the country’s linear TV landscape. It mandated broadcasters to set a maximum retail price for every individual channel in their portfolio and called upon customers to proactively choose which channels they wanted to consume.
While this caused some disruption and led to an increase in a customer’s monthly outgo on account of subscription to broadcast television services, the ecosystem—comprising broadcasters, distribution partners and the end-consumer—was coming to terms with the new environment.
But only a few months post the implementation of the NTO, TRAI floated yet another consultation paper in August 2019, seeking the industry’s views on a slew of proposed policy changes including proposals that seek to effectively do away with the current practice followed by broadcasters of putting channels in a bouquet that is then offered to customers.
Any broadcaster that has a large portfolio, has channels that are popular with the masses and in high demand (like leading Hindi general entertainment channels), as well as channels that are newly launched, and often in niche segments like infotainment. The strategy behind offering channels in a bouquet is to subsidise the cost of new channels, which are bundled along with the more established channels. If each of these channels were to be sold a-la-carte, they would be more expensive and customers would invariably end up choosing the better known channels, over the new ones.
In a strongly-worded statement issued on August 23, 2019, the Indian Broadcast Federation (IBF) stated that the new consultation paper, which appears just a few months after the NTO and seeks to make fundamental changes in channel pricing and bouquet formation, “goes against all norms of a stable regulatory regime so necessary for the economic advancement of any industry.”
The IBF is an industry association representing the interests of India’s largest broadcasters, comprising both domestic as well as foreign broadcasters.
“TRAI’s (consultation paper) proceeds on the assumption that consumers are being denied their choice of channels by excessive discounts on bouquets. IBF wishes to point out that the cap on bouquet discounts under the NTO was struck down by the Madras High Court as “arbitrary”. Further, the global practice in the television and cable industry is the offering of content in bouquets customized to meet the diverse needs of consumers,” the federation said in its statement.
The IBF said that the prime minister’s call to make India a $5-trillion economy by 2025 required all industries to grow exponentially. “Frequent tinkering with regulations and attempting to micro-manage free markets can lead to adverse consequences,” it said. “Promoting a la carte at the cost of bouquets will deny consumers the choice they need in a country like India with such a large and variegated diversity of cultures and languages. Smaller as well as niche content channels will lose out and their viability will come under question. Broadcasters will be unwilling to launch new channels and producers will be unwilling to experiment with new content.”
Apart from these, there are other examples as well wherein ambivalent messaging from the government has taken a toll on specific sectors. For instance, confusion on the fate of cars that run on conventional fuel in light of the thrust on electric vehicles, and older petrol and diesel cars post the introduction of BS-VI emission norms, have played their part in keeping prospective buyers away from auto showrooms.
The Indian economy is floundering at the moment. Economic growth has slowed down to 5% in the April-June 2019 quarter, a seven-year low. The finance minister has been taking centre-stage every Friday to announce a slew of measures aimed at jumpstarting the economy. While their end-impact remains to be seen, ensuring sanctity of contracts and consistency in regulations surely wouldn’t hurt.