Working on a clean state

The recent cancellation by the Supreme Court of 214 out of 218 coal block allocations made by the government from 1993 onwards has raised an interesting debate on the impact of this decision on India’s attraction as an investment destination.  There is a school which believes that such judicial decisions, which have a retrospective application, take away from the predictability of the economic regimen. Well known economist and corporate personality Gurcharan Das went so far to say, on a TV programme where I was also present, that such decisions reduce us to a “banana republic”. If it is possible, he argued, that officially made economic approvals can be struck down years later, why would investors put their money in the Indian basket?  

I disagree with such an opinion. It is true that judicial decisions with retrospective application create some degree of economic dislocation, and should not be the norm. But in the long run, there is no getting away from the fact that we must genuinely create a transparent and predictable legal and economic framework, and weed out crony capitalism and corruption, to ensure India’s sustained appeal as an investor destination.

The need for this is particularly relevant in matters of the disposal of state resources. This area has been the source of big ticket corruption for years now. Licenses for the sale of land, minerals, forests, spectrum etc, have been routinely given away by government authorities at manipulated prices or as favours. The 2G allocation scam and Coalgate are high profile examples of such transactions, although there are scores of others that have not attracted the same media and public attention.  

US Supreme Court judge Louis Brandeis once famously said that sunlight is the best disinfectant in such matters. We need sunlight to penetrate the shrouded corridors of government decision-making. To this end, the first imperative is to make all government transactions in this domain completely transparent. Our Supreme Court judgment in the coal allocation case is a definitive step in this direction.

As a follow-up to this judgment, the government must now set out clear-cut rules and procedures for such transactions. To this end, it is essential that Parliament pass an umbrella Act providing comprehensive rules for the disposal in any form of all state resources. The new Act must lay down precise norms, including provisions for public disclosure, for the following among other things: (a) the enunciation of a policy framework for transactions

(b) the rules and procedures to be followed

(c) the qualifying criteria to bid

(d) the modalities for the selection process, accepting that, unless social policy imperatives clearly spelt out dictate the contrary, a competitive online auctioning system is the most transparent mechanism to ensure fair play and provide the best returns to the government

(e) the conditions that may require the creation of an independent regulatory authority for a specific transaction

(f) the use of e-technology to ensure verifiable public scrutiny

(g) the timely and full disclosure of all details

(h) and the penalties that unethical practices would invite.  

It would also help if an independent Transparency Commission with national jurisdiction to oversee major transactions of state resources is set up. If required, such a commission could recommend the setting up of an ad-hoc regulatory authority specific to a particular transaction which is above a certain monetary value. Of course, judicial recourse to an aggrieved party would always be available; the proceedings would be covered under the Right to Information (RTI) Act; and all transactions would continue to be in the audit jurisdiction of the Comptroller and Auditor-General (CAG).

Only when such a framework is in place do economic decisions acquire transparency and predictability. The argument that predictability for investors — both foreign and domestic — should have primacy over ethicality and systemic legality sounds both cynical and expedient. In setting up proper regulatory and procedural frameworks, some decisions would need to apply retrospectively.

They must be seen as part of a young Republics attempt to put its house in order, in the interests of its own people, and for the future. The short-term dislocations have to be weighed against the long-term benefits, both for the exchequer, and for investors.

As far as the coal allocations are concerned, the real truth is that coal extraction in this country is nothing short of a scandal. Five years ago the shortage of coal in our country was 43 million tonnes. Today it is over 140 million tonnes.  This is an unbelievable situation for a country with the world’s fourth largest coal reserves.

The reason for this artificial scarcity, which is the seed for crony capitalism to grow, has been glaringly plain to governments for years now. The monopoly of Coal India Limited, a public sector company which the government accepts wastes 25 per cent of what it mines, has to end.

What is needed is to bring in a coal regulator, introduce pricing reforms, and open up coal to the private sector. Secondly, while environment issues are important, the arbitrary policy of “go/no go” for mining clearance has jeopardised 600 million tonnes of coal in 203 mining blocks.  

Following the Supreme Court judgment, the Modi government has the opportunity now to start with a clean slate and clean up the system instead of wasting time trying to prove that the United Progressive Alliance (UPA) government allocations were more corrupt than their own.

The SC judgment has cancelled coal allocations from 1993 onwards. This is as much an indictment for the National Democratic Alliance (NDA) as it is for the UPA. There are lessons in this for all governments to learn. And, for economists who have their eye only on short-term gains for big business at the cost of the overall good of the country.

Author-diplomat Pavan K. Varma has been recently elected to the Rajya Sabha