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15 October 2020, Gateway House

Pay up. Don’t appeal judgments.

The central government has announced a stimulus package, a one-time payment solution for liquidity needs. But the real winner will be announcing that all of government, its departments and agencies, should withdraw all domestic arbitration appeals and those it has lost at the tribunal or higher level - and make pending payments. It will positively impact the economy and India’s ratings, and demonstrate efficiency.

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In the Covid era, everyone is agreed that the government should provide more “stimulus” to the economy.

The problem is that any stimulus ends up benefiting some sections disproportionately. There is immediately a hue and cry by those who have been left out. The question arises: Is there a stimulus which can be seen as impartial and one that cannot be subject to harsh criticism?

One suggestion that has come up in recent times is that the government should pay its vendors, suppliers and contractors their dues in full and not delay these payments. While this is an admirable suggestion, government officials will be reluctant to do this in a hurry. They are legitimately scared that any speedy decisions that involve clearing payments without the complex process of checking, re-checking, auditing, re-calculating, “objecting”, disputing, corresponding, inviting fresh information and so on – in other words following the “normal” government processes – will result in objections from the Comptroller and Auditor General’s office a couple of years down the road and possibly even a visit from a friendly CVC official. After all, delays are supposed to indicate that decision-making has been “proper”. If an official is accused of “undue haste”, then it is the kiss of death. It is assumed that the official was/is corrupt.

This is a pity. A government not paying its bills promptly is an immoral act. It is a-dharmic. But over the years our systems have become so ossified and the presumption of guilt and corruption is so overwhelming, that a mere Covid crisis is not going to change the scene.

There is another way out which might not be hindered by the obstacle of the presumption of corruption. The entire government – all departments and agencies – should withdraw ALL appeals where it has lost at the Tribunal or higher level and make pending payments against these withdrawn appeals in three working days.

Similarly ALL appeals against domestic arbitrations should be withdrawn and the government, its departments and agencies should make payments within 72 hours. Since these payments will be based on judicial and quasi-judicial pronouncements, no one can argue that the official releasing the payment was/is corrupt. If the decision to withdraw appeals comes down from the Cabinet, and is applicable to all payments not just to payments to select beneficiaries, then no one can argue that there is any favoritism involved or that any corruption has occurred. In fact if all payments are released, the major beneficiaries will be those who have not greased palms and who have no intention of doing so.

There is an argument to be made in favour of payments in foreign arbitrations also. But here it is best to be realistic about political economy options. Paying off foreign arbitration awards will generate unnecessary opposition. Foreign awards can be dealt with subsequently. In the current environment, small payments arising from foreign arbitration awards will possibly go through. Bigger payments may happen at a later date after the precedent regarding domestic arbitrations has been firmly set. In any event,  giving precedence to domestic arbitration will have the added advantage of making Indian arbitration more attractive.

No one can argue that this measure is illegitimate. It is merely acknowledging the rule of law, the judgements of tribunals and the statistics that the Government loses 70% of its appeals.

However, there are two arguments that will be made in favour of the status quo. Elements within the bureaucracy will argue about “loss of revenue”. With that rate of appeals loss, there is negligible revenue loss and in fact economic gain and hence possible offsetting of revenue gains as the recipients of funds reinvest them. The loudest voices raising the concern of revenue loss will probably come from those who have something to lose by not being able to sit on payments and make arbitrary, self-serving decisions. These specious, self-appointed defenders of government finances can, and should, be ignored.

The second argument against the move will be that it will increase the fiscal deficit. The fact is that any stimulus payment will add to the deficit. In fact, these payments can and should be treated as a balance sheet adjustment of proper expenses (or overstated revenues) and, strictly speaking, should not be counted in this year’s fiscal deficit number. The rating agencies should be told that India is avoiding the Greek trap of delays and accounting gimmicks. Acknowledging and closing out these items will actually improve India’s ratings.

The central government has been making far-reaching reform moves even in the midst of the Covid-19 crisis. In the same spirit, it should not stop with a one-time payment solution. These payments will doubtless serve important current liquidity needs of the economy. What will be a real, massive winner is  the simultaneous announcement of a “structural” reform, similar to the coal auctions, free trade in agriculture or labour law consolidation, that will say this: “In future, government departments and agencies will NOT appeal any decision lost at the Tribunal or Arbitration level”.

This single announcement will result in an enormous positive impact on “ease of doing business”. It will demonstrate that India is a state that runs on the principle of dharma—not one which uses the delays of a clogged up system to visit injustice on its citizens. It is morally correct. It is economically efficient.

Jaithirth Rao is an Indian businessman and entrepreneur. He is the founder and former CEO of software company MphasiS.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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