India as a 'business partner'

Two prominent incidents in the past six months highlight the unanticipated risks associated for a foreign investor in India

India received a record $44 billion in foreign direct investment (FDI) in the financial year 2016-17, which was seen as an affirmation of the growing pro-business orientation of the current regime that Prime Minister Narendra Modi eloquently emphasised at Davos on Monday. It is worth wondering, however, how much higher these FDI figures would have been had the Government of India — and this includes all regimes since 1991 — had showed itself to be a robust “business partner” in every sense of the term. 

Over the years, there have been frequent examples of reneged promises, unexpected policy changes, and clumsy contractual drafting to reassure investors wary after the 2008 crash. Look around; there are few examples of “model” FDI mega-projects in which the government of the day can said to have played a uniformly constructive role. 

Two prominent incidents in the past six months alone highlight the unanticipated risks associated for a foreign investor in India. In September, for instance, the fate of a $2.6 billion diesel locomotive manufacturing contract between the Railways and US global major GE hung precariously in the balance when a new railway minister, fresh from the power ministry, spoke of complete electrification of the state-owned transport network and, therefore, the redundancy of diesel locomotives. 

This statement appeared just as GE had shipped its first model locomotive to India. A chagrined official statement from GE spoke darkly of the possibility of putting future investments at risk. It caused enough of a kerfuffle for the minister concerned to rapidly issue a clarification saying the contract would be honoured.

In December, Nissan began arbitration proceedings against the Indian government for non-payment of incentives worth $770 million promised in a 2008 contract to set up a car-manufacturing unit in Tamil Nadu. This move would not have come as a surprise to the government. The company had sent the prime minister a legal notice in 2016 and protracted negotiations with central and state officials had been on for some time. 

Coming on top of arbitration proceedings by Vodafone and Cairn, and more than a dozen other cases for retrospective tax claims and cancellation of contracts this would have done little to enhance India’s reputation for honouring contracts, the foundation for a sustained investment regimen.    

These problems top up, so to speak, the cancellation of investment treaties with 50 countries last year, in order to negotiate better terms for India. For the current government, these legacy concerns are valid since earlier treaties were negotiated when India was something of a supplicant in the FDI stakes. It is hard to see how that position has changed significantly, however. Reports suggest that the “model treaty” that the government has worked on is unlikely to assuage investor apprehensions about future tax claims or the robustness of the Indian legal system in settling disputes. 

Erratic and unexpected policy gyrations perhaps explain the somewhat anaemic response to the recent open acreage licensing policy inviting global majors to participate in domestic oil and gas exploration. As Jyoti Mukul pointed out in a recent article in Business Standard, participants in the original rounds of oil and gas exploration in the 1990s suddenly found themselves facing significantly altered terms when the contracts came up for renewal. In March 2016, they were told, that to get an extension of their contracts the companies would need to  agree to a flat 10 per cent increase in the government’s share in profit petroleum and that they would now have to bear their share of statutory levies of cess and royalties.

The first is a valid change but the second significantly altered the dynamics of these contracts. That’s because under the terms of the original contracts, cesses and royalties were borne by state-owned ONCG, or OIL. This admittedly absurd proviso was introduced to encourage FDI in this (then) fledgling sector. Indeed, Vedanta was one of the early victims of this abrupt change of policy when it bought Cairn. Vedanta promoter Anil Agarwal eventually accepted the terms that impacted the flagship Barmer fields in Rajasthan but not before the controversy attracted unwanted international attention.

Mr Agarwal, of course, knows all about reneged contracts having struggled for some years now to acquire full control of Bharat Aluminium Company and Hindustan Zinc, in both of which he acquired a controlling stake in the Great Privatisation Drive of the early 2000s. 

At the state levels, similar confusions proliferate. As serial state governments from Odisha to Jharkhand have discovered, poor compensation design and delivery mechanisms have made land acquisition such a perplexing problem that Posco eventually threw in the towel after a decade of trying. Meanwhile, out in Maharashtra, the mega-job-creating investment planned by Taiwanese giant Foxconn may not materialise because of India-China tensions over a triangle of frozen land called Doklam.