During a private conversation economic journalist Dr. N Chandramohan made a telling remark. He said that no FDI may be expected as long as foreign powers do not trust the Indian government to honour sanctity of contracts. Why should that trust be absent? The record of the Indian government tells us why. There are two major reasons for the government’s tattered record while observing sanctity of contracts. First there is the government’s own arbitrary and ad hoc approach which makes nonsense of its prior commitments. Secondly the Supreme Court compounds the problem by judicial overreach and encroaching into the executive domain by passing impractical executive orders. Politicians demoralized by corruption and loss of public respect refuse to assert themselves through parliament to restrain the judiciary to its turf.
Two examples illustrate this problem. The UPA government passed an order allowing 51 percent FDI in multi-brand retail trade. The new NDA government has overturned that commitment. This commitment relating to business was made by a sovereign Indian government. Foreign investors would be expected to consider the sanctity of contract to be honoured. But the new government has reneged from that contract. If FDI in multi-brand retail had been made by any foreign firm how would the new order have affected its business and investments? With this kind of flip-flop which foreign nation would be prepared to invest in India?
Consider also the Supreme Court order on the government’s sanction of coal block allotments. After reviewing all the coal block allotments made from inception the Supreme Court ruled that the entire process of allotting coal blocks was illegal. The Supreme Court could have made this ruling and left it to the government and parliament to deal with the problem. Instead the Court ordered cancellation of all coal block allotments made till date. This order is not only administratively disastrous but totally injudicious. If a bidder in good faith and with merit obtained a coal block allotment and subsequently invested in the enterprise he would be punished for no fault of his own by accepting the government’s offer. Should he not in that event be adequately compensated? Or better still, be allowed to continue his business while the Court punishes the government by imposing a suitable penalty? The Court’s ruling is not only administratively disastrous but legally injudicious. Judges having no experience of governance take it upon themselves to make nonsense of the principle to separate the functioning of judiciary, executive and legislature which is the foundation of a democratic system. Several other examples can be summoned about judicial overreach resulting in bizarre and silly executive orders being passed.
As long as this flip-flop prevails in Indian governance Prime Minster Mr. Narendra Modi’s efforts to attract foreign investment will fail. Before risking investment foreign powers want to see India honour sanctity of contracts.