India's Growth Recovery to Bolster Tax Revenues and Capital Inflows, Supports Credit Quality-Moody's

India's (Baa3 stable) economic recovery, manifested in data last Friday showing annual GDP growth of 5.7% in the quarter ended June, is in keeping with our long-held view that growth deceleration to sub-5% levels over the last two years would reverse over time. This forecast has underpinned the stable outlook on India's rating amid currency volatility, declining investment and poor market sentiment.

Higher growth is likely to increase tax revenues and capital inflows. This will reverse some of the weakening that has occurred in India's fiscal and external position in recent years. India's macroeconomic outlook will also improve if, as we expect, the authorities implement policies that ease inflationary pressures and increase infrastructure investment.

Nonetheless, we forecast India's fiscal, inflation and infrastructure metrics to remain weaker than the median for similarly rated peers. While stronger growth in this large and diverse economy will help to counterbalance these credit challenges, they limit further upward momentum in the sovereign rating.

Manufacturing activity will lead GDP recovery

The deceleration in economic expansion since 2011 was largely due to a cooling in manufacturing output, which recovered in the June quarter, reviving GDP growth. We expect manufacturing activity to accelerate over the next two years, supported by positive sentiment and a policy focus on investment. Lower agricultural output due to a weak monsoon and more modest government spending growth as authorities aim to meet budget targets will likely temper the pace of GDP acceleration in the coming months. But growth will still likely remain above 5% this year, and rise further in fiscal 2016.

Tax revenues are likely to improve with growth

Even without policy efforts, the cyclical turnaround in growth will increase the consumption and corporate tax take, and help meet the central government's budget deficit target for the fiscal year ending March 2015 (fiscal 2015) of 4.1% of GDP.

Higher revenues alone will not boost the sovereign credit profile

A decline in the deficit based on revenue buoyancy alone would be credit neutral at best, as the fiscal position would remain vulnerable to future cyclical downturns and external shocks.

On the other hand, a significant reduction in long-term expenditure commitments, particularly those that are exposed to inflation, global or currency shocks, could lower this vulnerability. At the current time, it is unclear whether the government will reduce such commitments. Public spending has played an important role in supporting growth when private demand has slowed, but this practice has kept the fiscal deficit much higher than those of similarly rated peers.

Portfolio flows will continue to accelerate, boosting foreign reserves

We also expect a recovery in growth to have a positive effect on India's balance of payments and foreign reserves, via renewed investor appetite and capital inflows.

Rising portfolio and debt flows also increase vulnerability to shocks

Rising reserves, in and of themselves, are unlikely to provide uplift to India's credit profile, as long as capital flows are skewed towards increasing portfolio investment and higher external bond and bank borrowing. In such a scenario, India will remain vulnerable to domestic or global shocks that could lead to a cessation or reversal of these flows.

On the other hand, achieving greater competitiveness for manufactured goods - both those destined for export and those competing with imported products for local demand - through lower inflation or infrastructure development would lower India's merchandise trade deficit, benefiting the sovereign credit profile. So too would a more significant rise in foreign direct investment, which would offer efficiency gains and be unlikely to reverse as quickly as debt or portfolio flows.

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Narendra Modi plays drums alongside Japanese drummer at TCS event in Tokyo

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Narendra Modi back in India after successful 5-day Japan visit

Prime Minister Narendra Modi on Wednesday returned home after concluding his successful visit to Japan, which promised to give $35 billion to India over the next five years for developmental projects, as the two sides agreed to enhance their strategic cooperation to a new level.

He arrived here this afternoon after a five-day trip during which he visited Kyoto, besides Tokyo where he held talks with his Japanese counterpart Shinzo Abe and met other leaders.

Prime Minister Narendra Modi. AFP

External Affairs Minister Sushma Swaraj received him at the airport in New Delhi.

The two countries signed five pacts covering defence exchanges, cooperation in clean energy, roads and highways, healthcare and women while vowing to take their relationship to newer level.

Japan also lifted ban on six Indian entities including Hindustan Aeronautics Limited (HAL) which had been imposed in the aftermath of 1998 nuclear tests.

During the visit, his first bilateral outside the subcontinent since becoming Prime Minister in May, Modi invited Japanese investments while hard-selling India as a conducive destination for business particularly for the manufacturing sector.

He told the Japanese businessmen that India was awaiting the investments with a 'red carpet' and not 'red tape' as rules and procedures have been eased by his government.

Winding up his official programme yesterday, Modi had expressed gratitude to Japan for reposing "trust" in India and demonstrating its friendship with a quip "yeh fevicol se bhi zyada mazboot jod hai (this bond is stronger than that of fevicol)".

"This visit has been very successful," he had said at the Indian community reception hosted in his honour here earlier.

"There has been talk about billions and millions. But there has never been talk of trillions," he said, referring to 3.5 trillion Yen ($35 billion or 2,10,000 crore) promised by Japan to India through public and private funding over the five years for various works, including building of smart cities and cleanup of the Ganga river.

During the talks between Modi and Abe, the two sides agreed to enhance their defence and strategic cooperation to a new level and also decided to speed up negotiations on civil nuclear deal that could not be concluded now.

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Ukraine says Putin, Poroshenko agree on "permanent ceasefire" in Donbass region

"Mutual understanding was achieved concerning the steps which will enable the establishment of peace," the statement also said after Poroshenko and President Putin spoke by telephone.

Pro-Russian separatists are battling Kiev's forces in the mainly Russian-speaking Donbassregion, which is home to most of Ukraine's heavy industry and accounts for about 18 percent of the country's economic output.

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India’s fiscal deficit, inflation may prevent further upgrades: Moody’s

India's fiscal deficit and inflation outlook could prevent any upgrades in the country's sovereign rating, even as the economy is headed for recovery, Moody's Investors Service said on Wednesday.

Although Moody's expects the government to meet the fiscal deficit target of 4.1% for the fiscal year ending in March, it noted the country's finances would "remain vulnerable to future cyclical downturns and external shocks."

Reuters

Meanwhile, Moody's also said India's ratings were constrained by inflation, reiterating comments made last week.

"We forecast India's fiscal, inflation and infrastructure metrics to remain weaker than the median for similarly rated peers," Moody's said in a report dated Wednesday.

"While stronger growth in this large and diverse economy will help to counterbalance these credit challenges, they limit further upward momentum in the sovereign rating."

The credit agency rates India at "Baa3", the lowest investment-grade rating, with a "stable" outlook.

Reuters

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CBI chief Ranjit Sinha accused of having links with 2G scam accused

A non-government organisation (NGO) on Tuesday told the Supreme Court the entry register of Central Bureau of Investigation (CBI) Director Ranjit Sinha residence showed a "disturbing" and "explosive material" coming in the way of the administration of justice in the 2G telecom spectrum allocation scam.

The issue was raised by the Centre for Public Interest Law (CPIL), one of public interest petitioners on whose pleas 122 licences for the 2G spectrum were cancelled by the court.

The court stopped the NGO's counsel from reading his note after the CBI counsel raised objections to making the content public in open court. It agreed to hear it on Thursday.

AFP

"If you can give a copy to us, the CBI and the director's counsel, we can take up the matter on Thursday," a bench of H L Dattu, S A Bobde and A M Sapre said.

CPIL's counsel Prashant Bhushan said that after keeping DIG Santosh Rastogi out of the investigation, rectified by the apex court, and during the pendency of an application for the recusal of Sinha from the spectrum matter, a "disturbing" thing had happened.

"On Monday night I came across a disturbing and explosive material - the entry register," Bhushan said. He referred to a news report that executives of a company charged in the scam had met the CBI director at his residence over 15 months.

K K Venugopal, appearing for the CBI, intervened and asked the bench to pass an order that all materials be placed in a sealed envelope.

Ram Jethmalani, appearing in a 2G-related matter for DMK member of Parliament Kanimozhi, one of the accused, came to the defence of the director saying "he is performing his duty well but all kinds of allegations are being levelled."

Sinha deputed Vikas Singh who said attempts were being made to destroy the CBI as an institution.

Jethmalani said every time Bhushan came out with notes the CPIL be asked to file through an affidavit.

The bench asked the CPIL to file an affidavit and posted the hearing to Thursday when it will also hear the NGO's application for recusal of Sinha from all 2G matters for allegedly trying to protect some influential accused.

Meanwhile, CBI on Tuesday dismissed a report that officials of a telecom company charged in the scam had met Sinha.

Referring to the report Did Anil Dhirubhai Ambani Group officials try to influence CBI in 2G case?, the agency said it was "false, baseless and malicious and intended to destroy the credibility of the CBI and reputation of its director."

PTI

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Thought of the DAY

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Tangalooma Ship Wrecks Island of Moreton, Australia

The ship wrecks of Tangalooma are located on the western side of Moreton Island is the third largest sand island in the world, located on the eastern side of Moreton Bay, on the coast of south-east Queensland, Australia. Moreton Island lies 58 kilometres northeast of the Queensland capital, Brisbane. The island is 95% National Park and a popular destination for day trippers, four wheel driving, camping, recreational angling and whale watching and just a 75 minute ferry ride from Brisbane. Together with Fraser Island, Moreton Island forms the largest sand structure in the world.

These wrecks were born out of the recreational fisher people's desire to have a safe artificial harbor on the eastern side of Moreton Bay. In 1963 when a group of boat owners requested the construction of a man-made harbour just off the island for safe anchorage. As a result of lobbying, their request was granted and approximately 15 junk ships were buried in a sandbank off Moreton Island. The decommissioned vessels included old barges, dredges, and flatboats, with the Maryborough taking the lead as the first vessel to be sunk in the waters. The huge structure created a break-wall, which served as a sanctuary to protect smaller boats. On top of that, the wrecks also provide a great place in which to dive and snorkel. It’s now a popular attraction of Moreton Island. [First Image credit imgur]

Image credit accommodationmoretonisland.com.au

Image credit Sam Brady

Image credit Tom Lennan

Image credit nauticalnancy - sailing OZ

Image credit nauticalnancy - sailing OZ

Image credit Margaret Donald

Image credit Philip Rickerby

Image credit Tom Lennan

Image credit Ruy Dyaz

Image credit Jörn Guy Süß

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World Inflation Makes 56-Month Low

Our world inflation proxy, which simply takes the equal-weighted, year-over-year change for 33 different countries CPI, hit its lowest level since November 2009. The proxy stands at 1.72% which is just lower than the level it hit in February. We identify six countries, all in Europe, where the year-over-year change in consumer prices is basically zero (Switzerland, Sweden) or there is currently outright deflation in consumer prices. Charts of those countries are below.

  

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Clamp down on Mallya just the beginning: Many more Kingfishers will fly out of the nest

The harsh steps banks have taken to get their money back from Vijay Mallya-owned, now defunct Kingfisher Airlines was something waiting to happen. With an estimated Rs 7,000 crore exposure, Kingfisher is arguably the largest case of bad loans for Indian banks, at this point.

There have been several rounds of negotiations banks conducted with the grounded airline’s ill-fated emperor in the last few years to work out a possible solution to the Kingfisher mess, none of which worked out.

The decision of Kolkata-based United Bank of India (UBI) to tag Mallya as a wilful defaulter is the harshest step a bank can take upon any borrower, since it virtually ostracises the company and its promoters from the financial system and even disqualifies the promoters from holding executive role in any other firms.

The matter doesn’t end there. Following UBI, other lenders, including State Bank of India (SBI) are planning similar steps, including levelling charges of criminality against Mallya, seeking the intervention of investigating agencies in the case.

Beyond Mallya and Kingfisher, the banks’ action on Kingfisher has major significance in the banking system since it could encourage banks to seek similar recourse to recover money from other companies, where their money is at stake.

That will be particularly so, when there is immense pressure on state-run banks (which control 70 percent of assets in the banking system) to cut the bad debt.

In the face of recurring cases of bribe-for-loan scams, it has become clear that criminality is indeed a major reason for the current pile of stressed loans.

There are several other cases, where criminality can be cited as a reason for stress.

Winsome Diamonds is one such, where the CBI has begun a probe to the working of the company after it allegedly defaulted Rs 6,500 crore worth of loans to a host of banks, making it equal in size to Kingfisher. The company claims that the default has occurred following non-payment of dues by its trading partners in the Middle East. But the banks haven’t bought that excuse and have slapped legal notices against the firm.

Another one is that of Deccan Chronicle Holdings Ltd (DCHL), where the CBI is investigating alleged cheating and fraud. According to some of the bankers to DCHL, part of the reason the company faced the crisis was diversions of funds to expansion plans of the group, which was not stated to the lenders at the time of taking the loan.

Another major case banks will have to deal with, the fate of which is still uncertain, is that of Bhushan Steel, which has about Rs 40,000 crore loan to some 51 banks.

The firm is facing a crisis after its vice chairman Neeraj Singhal was arrested on serious charges of bribery in the Syndicate Bank loan scam. Singhal allegedly bribed Jain to seek undeserving credit facilities from the bank that kept its loans standard.

Even though the loan is at present standard, bankers fear that any possible slippages in the loan can have huge impact on the banks in the consortium.

But beyond Bhushan, one other critical factor linked to the Syndicate Bank scam is the role of middleman Pawan Bansal and his firm Altius Finserv Private Limited, which will have much wider implications for banks.

Besides Syndicate, his firm has facilitated loans to other firms as well, which are being investigated by CBI sleuths. According to a report in the DNA, the CBI has recovered documents to prove that Bansal has facilitated loans from UCO Bank to Era Infra (Rs 600 crore), Tayal Group (Rs 500 crore) and Arshiya International (Rs 1,300 crore).

That apart, Bansal has also facilitated loans from Bank of Maharashtra to these firms. This include Rs 200 crore to Era Infra, Rs 400 crore to SEL Manufacturing and Rs 200 crore to Shiv Vani Group.

Now, take a closer look at these cases. Almost, all these loans are under the stressed category in the books of banks and have been moved to the corporate debt restructuring (CDR). Some of these cases have been approved by banks for recasts and the process has already begun.

By definition, CDR is a facility, where banks relax the loan repayment terms for companies, which face genuine stress. This is done through reduction in interest rates, elongation of repayment terms and offering a moratorium.

If these loans originated through bribes, there is a possibility that, in the first place, these firms didn’t deserve the bank funding through genuine channels. Not surprising that all these loans have turned stress and is under restructuring. Banks need to take a look on whether these cases deserved loan recasts.

In the case of Tayal group, the group was in the news in connection with the erstwhile Bank of Rajasthan case. According to Securities and Exchange Board of India, Tayals, promoters of the bank, fraudulently hiked their shareholding in the bank through a series of off market transactions. Again, the middleman worked to get the deal done.

Indian banks are already reeling under the pain of stressed assets. The amount of bad debt of 40-listed banks in the country stood at Rs 2.5 lakh crore in the banking system as of end June.

Among the banks with high level of gross non-performing assets (NPAs) are United Bank of India (10.49 percent), Central Bank of India (6.15 percent), Andhra Bank (5.98 percent) and Indian Overseas Bank (5.84 percent).

Besides the bad loans, a huge chunk of loans are being restructured, which is estimated to be between Rs 5 lakh crore to Rs 6 lakh crore. A sizeable chunk of such loans could turn bad too in the absence of significant economic revival.

Banking system is the backbone and a proxy to the economy, hence damages caused to it can have serious ramifications on the overall economic stability as well.

If the banking system is determined to find the actual root causes of the bad debt pile and tackle criminality with iron hands, a significant portion of the problems associated with bad loans can be resolved effectively.

Many more Kingfishers will fly out of the nest then.

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Nifty hits 8100, but the Sensex crossing 27000 is sexier

The NSE Nifty made history yesterday (1 September) when it hit the 8,100-mark for the first time, but I am personally not as excited about it as I was when the Bombay Stock Exchange Sensex crossed the 25,000 mark some time ago, and look forward to the index besting 30k some time by March – as some experts are assuring us it will. I myself tend to make predictions more on the Sensex than the Nifty.

This love-affair with the Sensex is illogical, for, as The Economic Times assures us, the Nifty is a more solid index. It has 50 stocks in it (against 30 in the Sensex), a higher market capitalisation (Rs 55 lakh crore versus the Sensex’s Rs 45 lakh crore), and higher price-earnings and price-to-book multiples, not to speak of being the base for the entire market for derivatives. If you are married to money, like many foreign institutional investors (FIIs) and fund managers are, you have to be married to the Nifty.

But love-affairs are driven more by emotion than logic. And so the public is likely to track the Shifty Sensex more than the Nifty Fifty.

I must confess, I have a personal interest in the Sensex because I was one of the unofficial midwives around the time of its unofficial birth.

Some time in 1988 or 1989, a chartist called Deepak Mohoni – now  a popular face on business TV channels for his technical analysis – met me (I was then editor at BusinessWorld) to demonstrate how good his charts on the BSE Sensitive Index were. He wanted me to use the software, but I was more interested in the technicals output. As I remember it, Mohoni was not happy with the use of a long name like BSE Sensitive Index, and was looking for a shorter – sexier – name, and hit upon the acronym of Sensex. I was one of the first editors to use the shorter form in BusinessWorld magazine, and the short-form soon caught on with the investing public.

However, I root for the Sensex more than the Nifty not only because I was present at the former’s birthing, but because it simply has more oomph. Some reasons why…

One, being more volatile, it can demonstrate more dance-floor moves than the Nifty. People love the Sensex for the same reason why the Dow Jones Industrial Average – with all its idiosyncratic volatility – is watched more than the S&P 500 in the US. A 25-30-point move in the Nifty is less exciting than a 100-point surge in the Sensex even though they tell us the same story.

Two, to know the direction of the wind, you need a weathercock more than a barometer. The weathercock registers the smallest shifts in wind direction; a barometer measures changes in atmospheric pressure, which is important to tell something about the broader weather, but not good enough to tell me which way the wind is blowing now. The Sensex is more weathercock than barometer; the Nifty is a bit of both – barometer and weathercock.

Three, I believe the Sensex measures the demand and supply situation for stocks better than the Nifty for the simple reason that it is less influenced by pure speculation in the derivatives market. The Sensex has practically no futures and options (F&O) presence; the Nifty’s direction is practically defined by the F&O market. Sensex derivatives are just 1 percent of the Nifty F&O market. Some market purists will say the real market is a mix of both cash and derivatives. I won’t quarrel with them. But I believe that the Sensex tells us what the market for stocks is like now; the Nifty tells us about current and future sentiment, including speculative intent. You can like either of them depending on what your own investment intent is.

This is a neat reversal of the actual history of the Sensex and the Nifty. It was the BSE that was once considered a den of unbridled speculation that often led the bourse towards infamous defaults. The NSE was created to ensure a disruption-free market environment where the players were not the umpires. The NSE today is a safe market, and so is the BSE. But speculation drives the NSE more than the BSE.

Four, however, this is not to say that the BSE is better than the NSE. In fact, if I buy or sell anything – which is rare, since I am a buy-and-hold type of investor, not a speculator – I tend to use the NSE because it gives me finer rates. This is also why institutional investors with large buy and sell orders prefer the depth of the NSE. The NSE cash market is five times as big as the BSE (daily average Rs 15,441 crore in 2014 versus BSE's Rs 3,043 crore), but it is still the Sensex that pumps up the adrenalin.

Five, the Sensex also had the early mover advantage. One tends to remember first-loves better than subsequent flings.

If I were to put it simply, the SenSEX has more sex appeal, even if the Nifty is less fickle. The Sensex is about heart, the Nifty about mind. May both prosper.

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Thought of the DAY

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Live: Japan promises $33 bn for India’s infra projects, support for bullet trains

3:35 pm: Japan promises all support for bullet trains in India

Japan has also expressed readiness to provide financial, technical and operational support to introduce bullet trains in India. So it looks like the project will be on the fast track after all.

3:25 pm: Japan agrees to give $33.58 bn over 5 years for infrastructure projects

PTI reported that Japan has announced it will give 3.5 trillion yen (over USD 33.58 billion)
to India over five years to finance projects including infrastructure and building of smart cities.

10:00 am: Modi promises special PMO team to boost Japanese investments in India

Prime Minister Narendra Modi, who is on a five-day trip to Japan, today assured business delegates in Tokyo that the Indian government has decided to set up a special team under the Prime Minister's Office to facilitate Japanese investments into India.

Speaking at a summit in Tokyo, Modi promised investors that good governance and ease of business are his top priorities in order to facilitate investment into the country.

"Single window clearance is part of good governance and every initiative taken by our government in the last 100 days is already showing results.. I can promise you that in the coming days you will get the same speed and response as you have witnessed in Gujarat," Modi said today.

He also said that India wants to follow Japan's model of skill development and research  in order to meet the global workforce requirement by 2020.

"The 21st century will belong to Asia. The world has accepted it. The question in my mind is- How will it be? We have to provide this answer.. and India and Japan need to deepen ties in order to achieve this," said Modi.

India needs faster economic growth to create work for the one million young people who enter the workforce every month.

The Modi government has already  allowed foreign investors to invest upto 100 percent in railway projects with an eye on drumming up interest in building India's answer to Japan's high-speed 'bullet' trains. He is also courting Japanese investment in an ambitious industrial "corridor" between Delhi and Mumbai.

Modi today promised investors that since India has got a central government with a majority vote after thirty years, accountability and responsibility are also the government's top priories.

With such a policy-driven government which does not favour one corporate over the other, it will help aid business and investment in the country, he added.

Japan's Honda Motor Co Ltd, Suzuki Co Ltd, Sony Corp and Toyota Motor Corp are household names in India. Yet, India accounts for only 1.2 percent of Japan’s total outward foreign direct investment.

Modi, on his first major foreign visit since a landslide election win in May, arrived on Saturday in Japan  for a five-day trip aimed at capitalising on a personal affinity with  Japan's Prime Minsiter Shinzo Abe to bolster security and business ties in the face of an assertive China.

Also under discussion will be a proposal to formalise a 'two-plus-two' format for talks bringing together the foreign and defence ministers of both countries, and the possible sale of an amphibious aircraft to the India navy.

India and Japan will also likely agree to hold regular joint training exercises in maritime defense, some of which will involve the United States as well, according to a report.

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Government urges SC to exempt 46 coal blocks from cancellation

Given the power shortage in the country, the central government today urged the Supreme Court that about 46 of the 218 coal mines it declared illegal should not be taken back from the companies that operate them as they were either producing or were close to producing.

Attorney General Mukul Rohatgi also told a Supreme Court hearing that the government was open to re-auctioning the coal blocks if their allocations are revoked.

According to a CNBC-TV18 report, the AG asked the court  to not refer the matter to a committee as it would further delay coal auctions. Rohatgi reportedly told the court that the government had no objection to cancellation but it required an early decision on the matter.

Last week the apex court termed the method of allotment of coal blocks between 1993 and 2011 as illegal but stopped short of deallocating the blocks that were awarded during the UPA regime.

"All allocations were done in an illegal manner and it suffers from vice of arbitrariness," the apext court had noted.

Analysts have warned that a  mass cancellation of the blocks would add to a shortage of coal for power plants.

A bench headed by Chief Justice R M Lodha has examined the allegations about alleged irregularities in the allocation of around 194 coal blocks without following proper guidelines and said that the allocation by the screening committee was not fair and transparent.

The coal blocks were alloted in Jharkhand, Chhattisgarh, Maharashtra, West Bengal, Odisha and Madhya Pradesh to private companies and parties bewteen 2004 to March 2011.

However, the SC allowed the coal block allocations to ultra mega power projects to continue but disallowed them from using the coal for any purpose, read commercial exploitation, other than captive consumption.

The apex court said that issue of de-allocation requires further hearing and will take a decision on cancelling 218 coal block allocations on 1 September, 2014. It clarified that more hearings are not required to decide whether coal mining rights should be cancelled or not.

The court also noted that no objective criteria was followed for the allocation process.

The bench, also comprising justices M B Lokur and Kurian Joseph has been monitoring the CBI probe into the scam and special court has been set up to exclusively deal with the prosecution of cases arising out of it in which politicians and businessmen have been named as accused.

The apex court on September 14, 2012 had for the first time issued notice on the PIL filed by advocate M L Sharma and later an NGO, Common Cause and other public spirited persons joined him in the matter which saw CBI facing tough time and government getting pulled up for alleged interference in the probe.

During the hearing, the apex court sought the details of guidelines framed by the Central Government for allocation of coal blocks and examined the process adopted for it.

Lengthy arguments were also advanced as to what were the reasons for "not following the policy of competitive bidding" adopted by the Centre way back in 2004 for allocation of coal blocks.

SC had rejected the contention that the petition based on the CAG report was "premature" as the Public Accounts Committee (PAC) was then slated to examine about the correctness of allocation.

When the petition was filed in 2012, it was alleged that that the CAG has estimated a huge loss of about Rs 1.64 lakh crores to the country in the allocation of coal blocks.

The Supreme Court in 2012 had ordered the setting up of a screening committee to consider proposals from the private sector for captive mining.

As many as 70 coal fields were allocated between 1993 and 2005, 53 were given away in 2006, 52 in 2007, 24 in 2008, 16 in 2009 and one in 2010. Altogether, 216 block were allocated between 1993 and 2010, out of which 24 were taken away at different points in time, effectively leaving the total number of allocated blocks at 194. Of these, 39 were assigned to companies before Manmohan Singh's coalition government first took office in 2004.

A CAG report in 2012 pegged windfall gains to allottees in the coal block allocation process to Rs 1.76 lakh crore. The report caused a storm and was the second big scam unearthed during UPA's second consecutive tenure

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Coalgate verdict today: Supreme Court should let govt fix what it has broken

The Supreme Court, which declared all coal block allocations made after 1993 as illegal due to the non-transparent and arbitrary processes followed, will  today ( 1 September) tell us how it is going to deal with the consequences of its own verdict.

It should refrain from doing so, for the job of dealing with the consequences of a verdict is that of the executive, not the court. The Supreme Court should clearly ask the elected government to come up with remedies and ratify them if they are sensible. It should not take upon itself the task of deciding each allocation case through a process controlled by itself or its nominees. The court’s job is to protect the constitution, not run policy. It has no competence in this regard.

In fact, the verdict of 25 August is unnecessarily disruptive for the simple reason that the court went far deeply into history – right up to 1993 – to decide legalities. But is it the court’s job to take its task so far back, when the immediate question was the illegalities involved in the allocation of coal blocks over the last few years? Even in the 2G case, even though spectrum was allocated as far back as the early 1990s, the Supreme Court did not go that far. It focused on A Raja’s allocations and his wayward processes.

As TN Ninan pointed out today (30 August) in Business Standard, if courts can go into economic history to decide that something wrong or inadmissible was done, businesses can’t function. He asks: why not question the allotment of ore mines to Tata Steel in British India, an allotment that gave the company an unfair advantage in terms of cheap ore? A businessman today can, after all, go to court claiming he can’t compete with the Tatas without getting an equally good deal on ore mines.

The point is cancellation of coal allocations from 1993 – even if declared illegal – has its costs, and it is not the court’s job to give verdicts that can ruin the business climate or damage someone’s long-established business. At best, it should suggest a penalty – or let the government suggest one.

In fact, past Supreme Court verdicts, and even its 2012 answer to the UPA’s presidential references on the auction of natural resources, suggest that some decisions are best left to government, even if errors and misjudgments were made.

Apart from holding that auctions need not always be the best way to allot natural or scarce resources, the bench, headed by then Chief Justice SH Kapadia, quoted several judgments from India and the US to show that courts should not get into judging the efficacy or even desirability of policy legislated by parliament in its wisdom.

For example, the bench noted that in economic matters, the court should show “judicial deference to legislative judgment” unlike areas involving fundamental human rights. It quotes from an admonition pronounced by the US Supreme Court to emphasise the same point: “‘In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the judges have been overruled by events - self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability’...”. (Italics mine)

Note the significant sentence, “the courts have only the power to destroy, not to reconstruct.”

If the Kapadia Supreme Court quotes this point approvingly, there is no reason why the RM Lodha Supreme Court should believe that its coal verdict should not stop with declaring illegality, but it should be following through on what needs to be done.

When it does not have to power to reconstruct what its verdict may destroy – business confidence, fiscal policy, bank portfolios, supply chains, etc – it should not take upon itself the right to decide what to do on a case-by-case basis in these cases. That is the job of the government, not the courts.

In yet another case quoted by Kapadia & Co in the presidential reference case, the Supreme Court went even further and suggested that courts should not sit in judgment on mistakes and even iniquities inflicted by legislation for the simple reason that legislatures (and, by implication, the executive) have a learning curve.

Quoting from the judgment of a five-judge bench headed Justice PN Bhagwati in the RK Garg Vs Union of India case, Kapadia noted that “every legislation, particularly in economic matters, is essentially empiric and it is based on experimentation or what one may call trial and error method and, therefore, it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture Vs Central Reig Refining Company, be converted into tribunals for relief from such crudities and inequities.” (Italics mine).

This quote, if interpreted in the extreme, can even be used to suggest that the flawed and opaque system of a screening committee used by recent governments to allot coal blocks was also a trial and error case, and hence courts must not make too much of it.

I don’t think it can be taken that far. What the Kapadia court said was essentially that while a bad law can be struck down, its implementation cannot be unfair. The Lodha court has done just that by declaring the process of allocating coal blocks as illegal.

It does not follow that it must now take on the job of fixing what it thinks was wrong. That is the job of government.

The Supreme Court has used its power to destroy by declaring the allocations illegal; it must not extend its mandate by trying to pretend it must now decide things case-by-case. It should let the government fix what it has broken.

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