The state government has apparently justified the lower tariff to new companies on the grounds that the older companies would have received some other sops as well in the past.
Given high infrastructure costs in India, or rigid labour laws and even high tax rates, governments find it easy to work out bilateral deals with big, or new, investors. That practice, however, could increasingly be challenged legally as preferential power tariffs are being done right now in Madhya Pradesh. The case dates back to 2016, when the MP State Electricity Regulatory Commission (MPSERC) had approved differential tariffs for new industrial units. The regulator had given a rebate of Rs 1 per unit or 20%, whichever was lower, on energy charges for new connections in the industrial category. After this was challenged in 2017, the central appellate tribunal for electricity, APTEL, struck down the differential tariffs, saying this was a matter of providing differential incentives to existing and new users in the same category of large consumers. Hopefully, the Supreme Court, where the case is being heard now, will do the same.
The state government has apparently justified the lower tariff to new companies on the grounds that the older companies would have received some other sops as well in the past. In that case, what the government needed to do was to extend those same sops to the new units. It is, in fact, quite surprising that the state electricity regulator allowed the rebate, even if it was at the prodding of the state government. But, all too often, state and central governments attempt to lure new investors with sops or offer financial support to a certain set of companies. A good case in point is the central government’s support, in terms of the EPF contributions for workers, in new textile and leather units. Obviously firms need incentives to hire workers, especially when minimum wages as well as statutory imposts are so high; others need lower power tariffs because India charges industrial units roughly double what it costs to produce the electricity, or concessional taxes because India’s corporate tax rate is much higher than that in competitor countries. Concessions also need to be given to make up for India’s higher infrastructure costs.
With more legal challenges likely to bilateral concessions, the government—at the Centre and the states—has no option but to make the business environment more friendly; in other words, have irreversible and lenient regulation, flexible labour laws and ensure clearances are speedy and that all contracts are honoured. If it is easy to do business, companies don’t really need any sops. Similarly, when there is a flaw in the policy environment, fix it for everyone. The central government did well not to grant Apple the import duty concessions it wanted to increase its manufacturing in India, but it is clear the current phased-manufacturing-programme—this uses high import duties to discourage imports—for mobile phones isn’t working either; the solution, then, is to look at a better policy to encourage genuine mobile phone manufacturing in India, and apply this for all manufacturers.