Crony capitalism, engendered by corrupt politicians is slowly chipping away at the edifice of the India growth story that has been sold to the world. For an eternally supply side (read physical infrastructure) constrained economy, every foreign infrastructure investor worth its salt would have been eying the Indian market, given the perceived growth potential. But India remains eternal under-achievers as policy makers bungle from one step to another while trying to enrich self and their kith and kin. CAG’s reports on 2G spectrum and various coal block allocation anomalies have exposed the nexus that various politicians have with the beneficiaries of their largesse. Closeness to politicians and/or his/her kin has taken precedence over technical competence in the process of allocation. Not that everybody can be painted with same brush, but such corrupt practices cut across party lines. In case of the 2G scam, India’s Supreme Court went ahead and cancelled all licenses. Many coal block allocation are now facing the same fate. Not that the de-allocation decisions are wrong since wrond-doers need to be punished. But the worry is the regularity with which such problems crop up. A foreign investor’s business decision will be incumbent upon availability of the relevant natural resource with an Indian partner. A business decision taken on the basis of allotment by the government goes awry as a scam is exposed and de-allocation takes place. This increases the risk perception of the country and every investor would now have second (nay innumerable) thoughts about investing in the country since the government approval may not actually mean anything in the long run. If they can’t trust the government, who would they trust?
The coal block allocation issue is actually a continuation of the sordid saga that is the Indian power sector. The State Electricity Boards (SEBs) are bankrupt because the politicians want to ensure under-pricing of electricity to keep their constituencies happy. Squatters (read allottees) without any technical competence to get the coal out of the pits have ensured that various power projects suffer from coal shortage due to their unavailability, which forces them to go for costly imported coal, thereby ensuring all the commercials of a project going awry. Weak balance sheet of the companies is a recipe for disaster, as far as the infrastructure companies are concerned.
Further out, this messes up the balance sheets of the banks since they have lent huge amount of resources to companies basis the allotments received by them from the Government of India. Now, as these allotments are withdrawn a few years down the line, the banks end up holding duds as collaterals. In an already stresses environment, the finances of the banks get stressed even further as the threat of NPAs become real. Infrastructure anyone?