How Indian courts could be holding back the economy

The burden of economically irresponsible judicial decision-making could be exponential as was the case with the famous coal block allocation case.

 |  5-minute read |   24-10-2019
  • ---
    Total Shares

The central government's budgeted fiscal deficit target was exceeded earlier this year due to fiscal slippages at the state level.

A proximate cause was the effort by states to rescue bankrupt electricity boards that continue to pile on excessive debt. The outcome is that combined fiscal deficit of the Centre and the states is nearing the dangerous mark of 8 per cent as share of GDP. The government's stand on handling its deficit seems contradictory and raises more questions than answers. This is central to the goal of achieving a $5 trillion economy.

The coal conundrum

What role does the judiciary play in this mission and what happens if judicial reforms do not go hand in hand with economic reforms?

Sometimes, the burden of economically irresponsible judicial decision-making could be exponential as was the case with the famous coal block allocation case where the decisions of Union governments to allocate coal blocks, going back decades, were declared arbitrary and quashed by the Supreme Court. The problems started with the court's decision in 2014 to arbitrarily de-allocate 214 coal blocks that were allocated since 1993 under the Coal Mines (Nationalisation) Act, 1973.

coal-690_102419114025.jpgThe Supreme Court relied on an erroneous figure of Rs 295 per metric tonne for all coal extracted from the inception of mining activity to impose a retrospective fine. (Photo: Reuters)

In this case, then Chief Justice of India RM Lodha observed, "Coal can help significant economic growth. India's energy future and prosperity are integrally dependent upon mining and using its most abundant, affordable and dependent energy supply, which is coal."

The Supreme Court relied on an erroneous figure of Rs 295 per metric tonne for all coal extracted from the inception of mining activity to impose a retrospective fine. This figure of average price was calculated by the Comptroller and Auditor General of India (CAG) by deducting cost of mining of Rs 733 per tonne from the price of coal (per Coal India Ltd) of Rs 1,028 per tonne. The concept of 'net present value' was entirely ignored. Moreover, it was incorrectly assumed that the quality of coal and the cost of mining remain the same. There are seven grades of quality of coal of which lowest two are mined in India. Comparison with Coal India is also not impartial because the PSU relies on opencast mining that is considered superior due to lower coal mining-to-use ratio of one is to one, whereas the private sector faces heat of a burdensome 3.5 ratio.

The CAG had laid out plans to incentivise production and disincentive those who did not produce sufficient coal. Its recommendations have not been taken up by the government since then. It is impossible for the power sector to operate freely when coal blocks, the lifeline of power companies, are in litigation. If the government is serious about realising its ambitious plans of making India the hub of manufacturing, of building smart cities and promoting digitalisation, then power is indispensable. This can't be achieved if coal mines are not immediately utilised.

Power sector in peril

The addition of 130 million Indians to the existing electricity consumer base in the last five years has further increased the debt burden on the already loss-making power sector.

The failure to complete existing projects on time due to cutting off supply of raw materials has forced companies to resort to more lending to cover operational losses rather than to fund new capital expenditure.

Staying afloat from risk of liquidation is a real and present danger. The decision to increase tariff to counter the problem in Odisha and Rajasthan was met with fierce resistance from political opponents and consumers, and subsequently rolled back. Excess demand with a severe shortage in supply creates market distortions that have massive cross-sector repercussions. Huge dependency on coal and excessive shortage of it is an important factor in rising non-performing assets (NPAs) in the steel and power industries. Rising NPAs reflect an underlying systemic problem, intricately linked to how private sector participation has been historically perceived with suspicion in India and continues to be seen as such almost three decades post liberalisation.

Impact of judgments

While coal is available in plenty in India, we are not allowing its use where it is most needed. So consumers are forced to carry the burden of expensive electricity. At the macro level, the exchequer is paying a heavy import bill for coal, worsening trade deficit.

The foregone revenues from cancelled coal blocks could have been used to handle the current economic challenges like the farm loan crisis. If companies are not allowed to bid for coal blocks that provide the most crucial raw material then it is a lost game. The government must not return to the pre-liberalisation era when the private sector was seen with suspicion. I've written elsewhere that there are limits to our constitutional courts in delivering economically responsible justice.

It is not for the court to examine the substantive content of the economic policy that is exclusively in the domain of the executive and legislative branches of government. The Supreme Court in the 2017 Shivashakti Sugar Mills decision wrote: "[…] it becomes the bounden duty of the court to have the economic analysis and economic impacts of its decisions."

The 2014 decision not only violated the twin principles of 'fairness' and 'natural justice' but also dealt a severe blow to the growth of major industries in India. It is time the court undertakes a thorough economic impact assessment of all its decisions, especially those that have repercussions on the economy.

(Courtesy of Mail Today)

Also read: Why this is a not so Happy Diwali

Writer

Ashish Bharadwaj Ashish Bharadwaj @ashishbharadwaj

The writer is professor and dean of Jindal School of Banking and Finance.

Like DailyO Facebook page to know what's trending.