It’s Time We Started Talking About The Economic Costs Of Judicial Overreach

The higher judiciary in India is perhaps the most powerful in the world. From appointments to functioning to the scope of the judgements, the power it enjoys is unprecedented in a democratic setup. And this scope has only expanded under the ambit of public interest litigation (PIL) petitions and judicial activism prompting allegations of judicial overreach.

Although it is a very thin line between judicial activism and judicial overreach, the appropriation of the legislative and often executive roles by the judiciary has become frequent and often leads to complications like that in the case of the Scheduled Caste/Scheduled Tribe Act, or the Sabarimala case, or the university reservation roster case.

This issue has been highlighted by various commentators, but what has been ignored by and large is the economic cost imposed by judicial orders.

A recent case pertains to the Aadhaar judgment, which restricted the use of Aadhaar by private companies, thus dealing a blow to the entire FinTech ecosystem and innovations evolving around Aadhaar. This has the potential to substantially push the financial sector in India several years behind the curve when big data and artificial intelligence-fuelled innovations are restructuring and radically transforming the sector.

Similar was the case with the Supreme Court order to ban the sale of cars not complying with the Bharat Stage-IV norms from an abrupt date of 31 March 2017, without accounting for the lakhs of vehicles held in inventories and, thus, causing a loss of thousands of crore to the industry and affecting some 20,000 dealers as well as employment. The sudden ban on firecrackers days before Deepavali last year also jeopardised thousands of traders who had already purchased stocks.

A question, then, arises: Who, if anyone, is accountable for such massive costs imposed by the judiciary, which often ignore such costs in its deliberations?

An even greater fallout of such judicial verdicts, however, can be seen in the power and steel industry, where the cancellation of the allotment of coal blocks and imposition of massive fines on private players has crippled the industry. In 2014, the Supreme Court cancelled the allotment of 214 coal blocks since 1993 based on the estimated loss to the exchequer to the tune of 1.86 lakh crore, according to the Comptroller and Auditor General’s (CAG) report. The Supreme Court not only took over the monitoring of the Central Bureau of Investigation (CBI) enquiry into the allotments based on a PIL but also prohibited the CBI from sharing the report with the government. It dismissed the plea of the private players operating the functional mines to exempt them from cancellation. The miners had argued that it will lower “investors’ confidence, cause acute distress in some industries, affect 28,000 MW of power capacity, and cause an estimated loss of Rs. 4.4 lakh crore in terms of royalty, cess, direct and indirect taxes, besides raising the cost of coal imports and setting back the process of extraction and effective utilisation of coal by eight years.” The argument was valid, in hindsight.

It is true that the auction of coal blocks would have fetched higher revenues to the exchequer, but the estimates of the CAG were disputable and had fluctuated over time. The CAG had taken the Coal India-operated mines to estimate these numbers, but it is also true that Coal India has the best coal blocks under it, whereas the quality of coal varies across India. India lacks high-grade coal, which is also a major reason for the coal imports. Therefore, estimates arrived at by the CAG couldn’t be mechanically imposed on all the blocks and mines. But this is exactly what was done. Not only was the license of those blocks cancelled, where no mining activity/investment had commenced, but of functional mines as well, jeopardising huge investments and disrupting the entire backward and forward linkages across the industry.

Essentially, the judiciary took over all the power of policymaking, implementation, enquiry, and judgement, and the obvious blind spots such an arrangement creates has caused severe distress in the economy, with power and steel companies suffering from the disruption and, in combination with other problems, leading to the ballooning non performing assets (NPA) crisis in these sectors. The thirty-seventh and fortieth Parliamentary Standing Committee (PSC) reports on energy have also pointed out the shortage and non-availability of coal as a major reason for the stress in the power sector, with dozens of power projects heading to the National Company Law Tribunal after the Reserve Bank of India (RBI) deadline for the resolution expired.

The thirty-seventh PSC report on energy pointed out that there were 34 power plants categorised as “stressed”. The different categories of stressed power plants are (i) plants having power purchase agreements (PPA) and requiring coal; (ii) plants having neither coal linkage nor PPA; (iii) plants having coal block but where the issue of coal block is sub-judice; and (iv) the plants stressed on account of reasons other than coal linkage/block issues. And of the 34 coal-based power projects of 40,000 MW capacity, 17 projects are affected because of coal linkage that may be partial or due to full non-availability of coal linkage.

The Committee also noted that “despite serious attempts made by the Government to make available coal to the power sector, the desired results are not achieved, and the sector is starving for fuel”. Despite the various routes adopted by the government, like the Memorandum of Understanding (MoU) route, special forward e-auction, and extension of the term of the MoU, the situation remains far from satisfactory, which has seriously hampered not only the growth of the sector but has also become one of the major factors turning assets into NPAs.

This was to be expected as the Supreme Court gave Coal India the responsibility to take over coal production from the mines whose licenses were cancelled, till the new auctions were held. But a single entity can only do so much. It takes time to take over assets and manage them according to the new setup and then maintain the production. No proper view was taken of the enormity of the task. In fact, the court remarked: “That the CIL is inefficient and incapable of accepting the challenge is not an issue at all.” But now we find that it’s an important issue. After the initial jump in the coal stock due to the strenuous efforts of the government after 2014, there is a steep fall in the stock as can be seen from the picture below:

And, as of now, several coal-powered plants of 10,500 MW capacity are shutting down because of coal shortage and rising prices due to the auction route, where smaller players are prised out. Some of these shut-downs can be explained as strategic ones under the government’s flexi-utilisation policy, which allows thermal power plants to transfer existing coal linkages to more efficient generation units nearer to mines. But the underlying problem remains that it’s the fallout of the coal-block cancellation against which both the United Progressive Alliance (UPA) and National Democratic Alliance (NDA) governments argued against.

The thirty-seventh PSC report on energy also stated: “The Committee are of the considered view that providing finances, though vital, to the project is only one of the several factors essential for the commissioning of the project. As of now, commissioned plants worth of thousands of MWs are under severe financial stress and are currently under SMA-1/2 stage or on the brink of becoming NPA. This is due to fuel shortage, sub-optimal loading, untied capacities, absence of FSA and lack of PPA, etc. These projects were commissioned on the basis of national need/ demand of electricity, availability of all other essentials required in this regard. However, due to unforeseen circumstances, these plants are suffering from cash flows, credit rating, interest servicing etc. Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery.”

This is also having an impact on the banking sector. The fortieth PSC report on energy pointed out that “total outstanding loans of scheduled commercial bank to the power sector (including renewables) stood at Rs. 5.65 lac crore (as on March 2018). Nearly 80 per cent of this amount is accounted for by the public sector banks (PSBs) and almost a fifth of this exposure is stressed on account of various structural factors plaguing the power sector”.

And, according to the United States-based brokerage Jefferies, the banks may have to take a haircut of 60 per cent from the close to Rs 1.8 lakh crore of loans to the power sector after the Allahabad High Court refused relief to the power companies from the RBI’s 12 February circular, leading them to the bankruptcy court.

A similar story played out in the steel sector, where cancellation of the captive mines suddenly increased the costs to the companies, and their balance sheets deteriorated. The steel sector accounted for some 60 per cent of all captive coal blocks allocated to private companies.

Investment in the steel industry is a long-term investment and those who made their investments from 1990s had no inkling of the fact that their mining licenses would be cancelled two decades later because judiciary may find the policy of successive democratic governments “arbitrary & illegal”. This has devastated the sector and played a role in it becoming the largest contributor to the NPA problem. Not only were the licenses cancelled, but companies were asked to pay fines based on the contested calculation of “loss to the exchequer”, immediately pushing them into massive debts, like in the case of Jindal Steel and Power Limited, which had to borrow to pay the additional levies of Rs 3,500 crore, and including the debt-servicing total burden it amounts to Rs 5,000 crore.

Similar is the case with other companies where the debt and default on interest payments increased due to the fallout of coal block cancellation. Several of them had to increase their dependence on imported coal, which was several times expensive than the coal from the captive mines. A CRISIL report in 2014 had also pointed out that the deallocation of coal blocks by the Supreme Court would hit metal players harder than most power players and cause a sharp decline in their profitability.

In fact, as early as 2012, the Department of Economic Affairs (DEA) had submitted to the Inter-Ministerial Group (IMG) that the companies that have been allotted captive mines are not primary coal producers or mining companies, and that any delay in developing the mines is linked to the fate of the end-user power plant or factory. So, it argued, the mining development plan should not be looked at separately from the status of the end-use plant. The Finance Ministry also expressed a concern about the impact large-scale deallocations could have on the banking system, which was already under stress by then.

But none of it mattered when the final verdict was given, as the judiciary couldn’t take a 360-degree view of the long-term economic impact of deallocation of coal blocks. And we are left with massive debts, mounting NPAs, and rising imports of the coal. And this is happening despite the best efforts of the government to control the situation, which has also dragged down the growth momentum due to the ‘Twin-Balance Sheet’ problem. What the government is left to do is fire-fighting, which was avoidable if the judiciary was perhaps not swayed by public pressure demanding action. And coal mining has still not picked up; several mines are still left to be auctioned and not all auctioned mines are operational yet.

What’s more, the policy uncertainty caused by such disruption has lowered investor confidence, and there aren’t many takers for the auction in sectors burdened with NPAs.

The current crisis in the power and steel sector is because of a combination of several factors, like delay in payments by discoms, aggressive bidding, less-than-prudent banks, imports of steel, and so on, but the deallocation of the coal block really did push them to the brink. And here arises the crucial question about the role of the judiciary and accountability in such economic matters. This is a serious question that has no easy answers because it leads us to Constitutional checks and balances, which, in the past decades, has steadily tilted towards the judiciary, which is now deciding everything from reservation rosters to movie screening to economic policy to delicate political issues like the SC/ST Act, and even intervening in the selection process for Election Commissioners. A serious democratic debate is needed on the long-term impact of such a trajectory on the democratic republican polity itself.