Can political instability at the state level disrupt the India growth story by disrupting the Indian Infrastructure buildup and discouraging foriegn investment in the country?

Published: December 4, 2019

PM Modi and FM Nirmala Sitharaman have made it their mission to ensure that the country’s economy reaches the 5 trillion dollar mark by 2024-25. Infrastructure building, both by the Public, Private and Foreign sector will play a critical role in achieving this mission. 

Unfortunately, India’s quest to upgrade its infrastructure has encountered a new hurdle— Outright contract cancellation or politically motivated reviews of big projects following a change of government in the states. 

Two of the most important examples of this are Maharashtra and Andhra Pradesh. In Andhra Pradesh when Jagan Reddy led YSR overthrew  N. Chandrababu Naidu led TDP out of power it was followed by-

Cancellation of all projects sanctioned by the previous government but work on which was yet to take-off, renegotiating power purchase agreement(PPAs) signed during Telugu Desam Party’s regime.

 Re-negotiating power purchase agreements (PPAs) with renewable energy developers

Halt to procuring electric vehicles for government fleets from Energy Efficiency Services Limited (EESL).

Numerous project cancellations involving the Amaravati Capital City project after which the World Bank and Asia Infrastructure Investment Bank (AIIB) have pulled out of the project.

Similarly in Maharashtra, after the Devendra Fadnavis BJP-SS led alliance was replaced by Uddhav Thackeray-led Maha Vikas Aghadi government the new government has decided to stop and review key infrastructure projects like Ahmedabad-Mumbai Bullet Train and the metro car shed construction in Aarey which is critical to the timely completion of Mumbai Metro. 

Such politically charged disruptions of key projects not only lead to time and costs overruns but also lead to loss of foreign trust in the India growth story. Projects like the Bullet train corridor which is being jointly executed and funded by the Japanese government involve additional risks as the project will not only lead to loss of economic opportunities for local contractors but will also dent the Indo-Japanese bilateral relationship. 

A stable policy environment is a prerequisite for drawing investors in sectors like Infrastructure as it takes years or even decades before they start generating returns. Therefore, low-interest capital is critical to ensuring the success of India’s infrastructure story. When State governments introduce politically motivated instability in regulation, they are discouraging foreign investment in this space. If the government in state and centre want foreign investment in infrastructure then they must strive to bring in policy predictability and upholding the sanctity of contract.

Involving politics when it comes to critical sectors like Infrastructure will not lead to any winners, whether it be the Central government who will face the loss of face, the State government who will suffer the loss of investments needed to drive their economies or the citizens who will suffer from third world infrastructure.

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