Disturbing takeaways from Amaravati fiasco

Narendar Pani | Updated on November 21, 2019

Cancelling contracts by cynically playing the corruption card can have serious consequences. Bona fide investors will stay away

There is reason to be deeply disappointed with the decision of the Andhra Pradesh government to drop the Amaravati Capital City Start-up Area project with a Singapore consortium. Among those affected by the decision are farmers who have contributed their land in a deal where they would benefit from an increase in land value. Any doubts about the proposed capital city would delay, if not substantially reduce, the profit they expected to make. Such abrupt cancellations also add considerable uncertainty to investments. As foreign investors factor in this uncertainty, it would further increase the cost of capital for all Indian cities.

The stated reason for the termination of established contracts is invariably the suspicion of corruption. Since the specific acts of corruption are not proved — even if everyone believes them to be true — it is not difficult to scale up the notional loss to the exchequer. The possible loss of a couple of thousand crores can, as the 2G scam indicated, be converted in the public perception to lakhs of crores. In this mood of general public distrust it is in the interests of individual politicians to ramp up the projected degree of corruption against political rivals, and respond with self-righteous, extreme actions.

The costs of this approach have now reached truly serious proportions. Former Prime Minister Manmohan Singh, putting on his economist hat in a recent op-ed, made a convincing case of how we may have reached a point where genuine economic failures could be branded as acts of corruption. Individual investors now have to factor in not just the possibility of an economic loss, but also the risk of their inability to pay back a loan being treated as an act of corruption calling for them to be jailed.

Real dilemma

What the former PM did not spend too much time on was the genuine dilemma involved. There is no doubt that levels of corruption in India are extraordinarily high. At the same time, it is now equally true that an atmosphere of fear of an economic loss being converted into a criminal act drives away many investors. This would be particularly true of large investors who have the option of investing elsewhere in the world. This process cannot be countered by large tax concessions, such as the recent one on corporate taxes. While the companies will undoubtedly be thrilled to receive the monetary benefit, fear over failed local investments would persuade them to invest outside the country.

Faced with this dilemma most governments tend to lean one way or the other. Manmohan Singh had the economists’ preoccupation with growth leading him to play down, if not turn a blind eye to, the possibilities of corruption in his government. The political success of Prime Minister Modi’s rhetoric against corruption pushes him in the other direction. His political compulsions force him to be seen to be coming down on corruption, leading to dramatic actions against individuals. The possibility of incarceration, and humiliation before trial, could tilt the balance against local investment, contributing to a lower growth rate.

At the heart of this dilemma is the inability to distinguish between a failed investment and a corrupt act. A significant portion of the blame for this inability must lie in the delays in our judicial process. A quick judicial process would help distinguish between corrupt investors and those who happen to fail in an economic activity. The government could then punish the former and leave the latter to their economic misery. An honest investor would not then need to fear being treated, in public perception, as a criminal.

Detrimental possibilities

To make matters worse, blurring the distinction between an honest failure and an act of deliberate corruption, also throws up a number of other detrimental possibilities. Innocent investors could be branded as corrupt by their competitors.

They could also be targeted by politicians, and others, whose demands they have not met. The extended delay before such cases are resolved would also reduce the chances of a failed investor ever investing again.

The combination of local investors fearing the loss of reputation and liberty, along with foreign investors facing uncertainty in the continuation of their contracts, reduces the availability of capital for development, including infrastructure development in our cities.

Those who factor in the risks of investing in this environment will demand much higher payments. The resultant expensive infrastructure does little to help industry and services grow in an increasingly competitive global market.

For our cities to re-emerge as engines of growth we would need to find a way of dealing with corruption that does not use the sledgehammer of cancelling international contracts or slipping into an effective jurisprudence of being guilty until proven innocent.

The writer is a professor at the School of Social Science, National Institute of Advanced Studies, Bengaluru

Published on November 21, 2019

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