This is why the Supreme Court should take some blame for India’s economic crisis

Within just a few years, Supreme Court’s judgments — from 2G to coal block cancellations — have slowed the Indian economy, say experts.

Graphic: Arindam Mukherjee | ThePrint.in

New Delhi: When top lawyer Harish Salve said he “squarely blamed” the Supreme Court of India for some of the problems ailing the economy, many tried to dismiss it as rhetoric that sought to divert attention from the policy failings of the Narendra Modi government.

But Salve, who traced the origin of the slowdown to the court’s 2G spectrum verdict, may have been onto something.

At the heart of the argument sparked by Salve lie major Supreme Court verdicts delivered over the last seven years — cancellation of the 2G spectrum licences, coal block allotments, mining leases in Goa, and the court’s foray into policy-making through orders such as the highway liquor ban.

With the economic crisis only deepening, ThePrint analyses the Supreme Court judgments that are seen to have played a role in it.

‘1.76 lakh crore’

In the run-up to the 2014 Lok Sabha elections that installed the Modi government, the one number no one escaped was ‘Rs 1.76 lakh crore’.

It originated from a 2010 report, in which the Comptroller and Auditor General of India (CAG) pegged the “maximum notional loss” on account of the 2G spectrum licence auction scam in a range of Rs 57,000 crore to Rs 1.76 lakh crore.

In 2012, the Supreme Court quashed the licences in question. But the CAG’s methodology for calculating this loss has since been widely questioned.

For instance, Parag Kar, vice-president, government affairs (India and South Asia) at chipmaker Qualcomm, claimed in 2017 that “the real economic loss incurred at that time was not even close to the maximum ‘notional loss’ estimated by CAG”. But the impact, he said, was much larger due to the decisions taken subsequently.

Additionally, the SC judgment, too, was criticised by experts for having been based on “faulty premises relating to economics, finance and technology”. For India’s telecom landscape, the judgment sounded the death knell.

How the 2G order wreaked havoc

The 2G spectrum allocation in 2008 had marked the entry of several new players in the telecom sector, doubling the total number of companies deploying the technology from seven to 14 and leading to a 50 per cent drop in telecom rates. But the 2012 judgment changed the fate of several telecom companies involved.

The court quashed 122 licences belonging to nine companies — Unitech Wireless, Sistema Shyam Teleservices, Loop Telecom, Videocon Telecommunications, Etisalat DB Telecom (formerly Swan Telecom), Idea Cellular, Spice Idea, S Tel and Tata Teleservices.

Unitech, for instance, rode the real estate boom with stocks at an all-time high at Rs 547 in January 2008. However, after the CAG report on the 2G scam, its managing director Sanjay Chandra was arrested in connection with the scam along with other politicians and corporate leaders. With the global liquidity crisis on the one hand, and 2G haunting it on the other, its shares fell to Rs 6.6 apiece in December 2017.

In December last year, with Unitech’s promoters in jail for failing to meet their financial commitments, the Supreme Court allowed an auction of its properties.

Others like Loop Telecom, Etisalat, S-Tel and Videocon were forced to shut shop.

Norwegian operator Telenor, which had joined hands with Unitech in 2008, lost all of its licences after the SC judgment. It tried to make a return after acquiring six licences in a November 2012 auction, but was forced to exi4t after selling the venture to Airtel in February 2017.

But it wasn’t just the immediate effect of the court order that wreaked havoc on the sector. The UPA government’s response to the Supreme Court rap led to high reserve prices in later spectrum auctions, and even auctions for in-use spectrum.

Sanjeev Aga, former managing director at Idea Cellular, called the auction of in-use spectrum “extortion masquerading as auction”.

“It is one thing for A and B to be bidding for five litres of blood in a blood bank. But if A and B are bidding for the five litres of blood running through B’s body, and if A triumphs, he not only pockets the five litres, he also eliminates B. Conversely, B is hardly bidding for any five litres of blood. He is bidding for his life,” Aga wrote in a 2015 column.

Today, the telecom sector is buried under a debt of Rs 7 lakh crore and is staring at “bankruptcy-driven shrinkage, burdening banks with a fresh load of bad loans, and leaving consumers to the tender mercies of a virtual duopoly”.

Coal was next

Telecom wasn’t the only sector that was set back with “one stroke of the pen”, as Harish Salve called it. Merely two years after the 2G verdict, the Supreme Court’s next casualty was the coal industry.

In its August 2014 ‘coal scam’ judgment, the top court declared all 218 coal block allocations from 1993 to 2011 illegal and arbitrary. Subsequently, in September the same year, it cancelled all but four of these allocations.

Ashish Bharadwaj, professor & dean, Jindal Global University’s School of Banking & Finance, related the cancellation of these coal blocks with the current economic slowdown.

Issues with the economy go down to significantly high debt at the state level, with all state electricity boards being bankrupt. While the government promised electricity to all households, the burden fell on the electricity boards, he said.

“This puts pressure on the private sector players… The cycle goes on, and the private power players have to borrow more, not just for capital expenditure but to cover losses… All of this is happening simply because the most important raw material (coal) which is required has been cut off,” explained Bharadwaj.

The impact was felt not just in the power sector but in several other industries as well.

Soon after the SC’s coal blocks judgment, it was predicted that public sector banks may take a hit of Rs 96,484 crore due to the cancellation of coal blocks, as they had extended credit to power plants that expected coal supply from some of the mines cancelled by the court. State Bank of India (SBI) alone had an exposure of about Rs 4,000 crore to six power companies that were hit by the judgment.

By August last year, SBI chairman Rajnish Kumar pulled in the judiciary to share the blame for the banking sector’s massive bad loan problem. He cited the coal block cancellations, claiming that banks had suffered due to the order, having lent massive amounts to the mining industry.

Former Sterlite Power Grid Ventures in-house counsel and current Partner at HSA Advocates, Apoorva Misra, echoed Bharadwaj’s argument. According to Misra, the judgment did not penalise the government. Instead, it ended up penalising the companies, industries and other inter-linked sectors.

“The power sector of course has a ripple effect on the banking sector automatically, because if they are not operating the plant, they won’t be doing any debt servicing — typically in a power plant, the repayment of the debt starts only after commercial operation of the plant,” he said.

Misra also asserted that the judgment eliminated several smaller players.

“All in all, the judgment did deter the sentiments… So, if you see in thermal power sector, there are hardly any big or international players coming in. The players who were there are out,” he said.

The overall impact on the coal industry became visible with the Economic Survey 2016-17 highlighting that non-performing assets (NPAs) in the power sector, especially in thermal projects, had grown significantly. By June 2017, gross non-performing assets in the power sector were at Rs 37,941 crore. The judgment was among those blamed for the stress in the power sector, with assertions that it had put approximately 24,000 MW of captive coal-based thermal capacity under stress.

In April last year, it was reported that production from 89 coal blocks that were reallocated was far below the level compared to before the court’s verdict. Waning investor interest had also forced the government to cancel the fourth round of auctions in early 2016. Earlier this month, auction for 21 other coal mines was also cancelled because of tepid response.

The coal ministry is now hopeful of domestic production from auctioned mines reaching pre-cancellation levels when the current financial year comes to an end. However, higher production would not necessarily result in lower coal imports, which stood at 235.24 million tonnes in 2018-19, up from 217.78 million tonnes in 2014-15.

Judiciary’s foray into regulation: Mining in Goa

The Supreme Court dealt another blow to the economy in February 2018 when it cancelled 88 iron ore mining leases in Goa on a petition filed by the NGO Goa Foundation, which alleged severe environmental damage through mining activities in the state. The leases had been renewed by the state government in 2014-2015 just before the Mines and Minerals (Regulation and Development) Act mandated the auction of leases.

The court had banned mining in Goa back in 2012 as well. That decision was largely based on the report submitted by Justice M.B. Shah Commission on illegal mining, estimating a massive Rs 35,000 crore loss to the exchequer due to such activities during the preceding 12 years.

The industry remained banned for almost 19 months until April 2014, when the Supreme Court finally permitted it to function, albeit with several riders.

In its 2018 order, the court cited no specific evidence of corruption, but noted that the Goa government had rushed to renew mining leases at minimal costs days before the introduction of the national law making auctions for such leases compulsory.

Relying on the Grant of Mining Leases Policy 2014 — devised by the Goa government in the aftermath of the Supreme Court orders — the apex court acknowledged that since iron ore mining had been suspended for 19 months in view of its judgment, the state was short of funds to undertake infrastructure projects and other activities.

The 2014 state policy had also noted a tremendous loss of foreign exchange — of about $8 billion — through exports and over Rs 850 crore towards loans/advances on the mining sector for a variety of activities, as well as nearly Rs 1,000 crore towards housing, business and other loans. The suspension, it had said, impacted the standing of Goa as a steady and dependable supplier of low-grade iron ore in the international market, allowing Australian and Brazilian suppliers to occupy the space instead.

While the court took note of all these aspects, it nevertheless opined that the state government’s action “jettisoning the rule of law was unjustified”.

Questioning the top court order, commentators have since pointed out that the verdict highlighted a key issue with India’s economic development: Remaining a fast-growing economy while protecting the environment and enforcing the rule of law.

In the meanwhile, however, the mining order has had an undeniable impact on the economy.

Goa’s iron ore comprised 40 per cent of the sector’s low grade ferrous exports from India, and was a major contributor to the country’s GDP. The ban stopped 15 million tonnes of exports. The Rs 3,400-crore sector also contributed to around 10-12 per cent to the state GDP, claim experts.

The decision directly impacted 60,000 households and 3 lakh livelihoods. Effects have also been felt within allied industries, including equipment suppliers, truck companies, barge owners and logistics suppliers.

Highway liquor ban

The Supreme Court’s “excessive judicial activism”, as some critics have called it, is not just limited to cases involving corruption and irregularities, but also those about executive inaction.

One such order was the court’s December 2016 judgment, banning the sale of alcohol within a distance of 500 metres on national and state highways across the country. The ban was supposed to be implemented from 1 April 2017. The reason: To curb accidents due to “drunken driving”.

A lack of clarity on how to measure this distance prompted malls and stores to change entry point for customers, bypassing the judgment. Faced with unemployment as well as lobbying by powerful trade associations, a few states also took to denotifying highways.

Amid all this, a NITI Aayog-sponsored study, conducted by policy think-tank Consumer Unity & Trust Society (CUTS) International, pegged the notional negative impact on business for the period between April and September 2017 to be around Rs 496 crore, for every 1,000 km of highway.

The CUTS study, released in March 2018, also took into account the claim by Riyaz Amlani, president of the National Restaurant Association of India (NRAI), that the judgment had an estimated impact of Rs 10,000-15,000 crore and job losses of 100,000.

Additionally, it suggested that there was no significant reduction in drink driving cases after the SC order.

Relief came from the Supreme Court in August 2017, when it clarified that the ban did not apply within city limits. A month before that, it had also allowed state authorities to denotify highways passing through the municipal limits.

A year later, the petitioner in the case, Harman Sidhu claimed that almost 70 per cent of the national and state highways across the country had managed to get exempted from the Supreme Court order.

Damage to investor perception

With these judgments being delivered over a period of just a few years, they have been blamed for the perception that India’s business environment is “uncertain”, owing to unexpected wholesale cancellations and bans by the Supreme Court.

Prof. Ashish Bharadwaj claimed the 2G spectrum as well as the coal block allocations order have “definitely a role to play in where we stand in terms of our macro economy”. He said there has been a “no-entry board for investors”.

Prof. Khagesh Gautam, assistant director, Jindal Global Law School’s Centre on Public law and Jurisprudence, said the primary reason for judicial interference has been executive inaction.

While he agreed that the court did go “beyond constitutional boundaries” in some cases, Gautam added that “if the other branches of the state discharged their due constitutional obligations there would be no reason for the judiciary to intervene”.

Separation of powers

The Supreme Court making inroads into the functions of other branches of India’s democracy is often seen as the major concern over such judicial decisions — especially because separation of powers forms a part of the indestructible basic structure of the Constitution of India.

Speaking to ThePrint, senior advocate K.T.S. Tulsi raised objection to the expansion of Article 14 of the Constitution of India — which declares arbitrary state action unconstitutional.

“We have expanded Article 14 to such an extent that you can interfere in anything, even when it has such adverse consequences on the economic policy… The court should be strictly confining itself to adjudication,” he said.

He said, “Article 32 (allowing writ petitions before the SC) must not endeavour to take over government functions, howsoever they may be functioning.”

“If the government is guilty of mal-governance, they can impose a fine on them, but they can’t take over their functions,” he said.

Lack of ‘institutional mechanism’ for economic audit

Concerns, however, are not just over the court overstepping its power. The lack of “institutional” mechanisms to deal with such cases has often been highlighted as the primary reason for the Supreme Court to avoid taking up matters that can have grave consequences on the Indian economy.

The court itself acknowledged the necessity for adopting an interdisciplinary approach in May 2017 in a regulatory dispute involving 2 sugar factories — Shivashakti Sugars limited v. Shree Renuka Sugar limited & Ors.

In the judgment, a bench comprising Justices A.K. Sikri and A.M. Sapre called on the courts to consider the economic impact of decisions as well.

Gautam said the judgment in Shivashakti sugar mills case “must not be overstated”, arguing that judicio-economic impact assessment has several disadvantages.

“What happens if a particular economic concept is not properly explained to the courts, or there are multiple concepts pressed into service to advance a legal argument? What happens if the mathematical modelling used in a particular judicio-economic impact assessment is later shown to be wrong? How does the court decide which economic concept/model to apply and which one to reject?”

The court’s decisions must be based on a firm constitutional and legal basis, and then an economic rationale may be given as an “additional supporting ground”, according to Gautam.

The road not taken

Whenever issues as significant as the 2G case come up before the Supreme Court, it devotes a lot of time and energy into the hearings. Because of this, adjudication, which is the court’s primary function, “has been taking a beating” lately, said Tulsi.

So what should the court do when faced with cases like the 2G or instances of governmental inaction?

According to Mohan Guruswamy, economist and former advisor to finance minister, the Supreme Court should not interfere with economic policy decisions at all and must restrict itself to interpretation of the law.

Talking specifically in the context of the 2G scam case and the coal block allocations, he said the court should’ve restricted itself to singling out corrupt officers, rather than quashing the licences and allocations altogether.

“The court should just restrain itself to the extent of whether the government is empowered to do that and within the law… It is not qualified to take economic policy decisions. It is qualified to interpret the Constitution and to interpret the law,” he said.

Tulsi echoed this viewpoint, pointing out that the Supreme Court shouldn’t interfere in such cases right at the beginning — through PILs, like in the 2G case.

“Even if there is an irregularity, why should anybody come to the Supreme Court straight… If the Supreme Court intervenes right in the beginning, then all other institutions lose their jurisdiction.”