Flip-flop economy: The costs of policy U-turns in Indian states, from Maharashtra to Delhi to Andhra

Enron had signed the power purchase agreement with the Congress government in Maharashtra. But faced allegations of corruption from early on, and that the project was against the best interests of the state since the cost of the power produced was too high.

When the BJP-Shiv Sena alliance came to power with the Enrol deal as a major election plank, all eyes were set on the new Maharashtra government. The chancellor of the exchequer, Kenneth Clarke, and French business leaders declared that Enron project’s fate was “a litmus test of India’s ability to do business with Western companies”.

The new government first suspended the project, took Enron to court alleging that the contract was obtained fraudulently, only to renegotiate the agreement months later.

When the Congress came back to power in 1999, it cancelled the project because by then, the cost of power had increased considerably as the price of imported naphtha had shot up and the rupee had also depreciated.

By 2002, Vicky A. Bailey, then Assistant Secretary in the US Department of Energy was issuing warnings that the “recent problems in the power sector have created serious concerns about the investment climate in India’s electric power sector”.

The $2.9-billion Dabhol power plant and adjacent LNG pier and storage facility were left idle on the Arabian Sea coast south of Mumbai.

Enron collapsed globally in 2001, after which minority owners in the power plant project, Bechtel Enterprises Holdings and GE Structures Finance, bought out the Texas energy company’s 65 percent stake in the inactive power plant and then sold their interests to a group of Indian lenders, who were to then transfer the assets to a joint venture company formed by the National Thermal Power Corporation (NTPC) and Gail (India) Ltd.

It cost India more than 40 different litigations and arbitrations over four years in five countries to settle the claims—$160 million settlement with Betchel and $145 million settlement with GE.

“The Enron project became a symbol of everything that can go wrong,” Montek Singh Ahluwalia, who served as Finance Secretary from 1993 to 1998, wrote in his book, Backstage: The story behind India’s high growth years.

In India today, the Enron story keeps repeating—across states, across political regimes. Political parties across the board are guilty of reversing their predecessor’s decision or refusing to honor the commitments of past governments, citing reasons such as corruption, illegal tendering, environmental concerns and public interest.

There may be some truth in these reasons, experts argue, but the end result is dwindling investors’ confidence in Indian states.

Ahluwalia now says that such policy reversals have a “totally negative” impact on the investment and business climate of a State. “It creates an impression that no deal in India is ever final, it can be undone at any time,” he told ThePrint.

Over the years, policymakers and economists have made several proposals to address this—from conducting a detailed cost-benefit analysis of projects before they are approved to bringing in a more stringent Centre-State Investment Agreement regime that would endorse states that honour their commitment to investors. However, all such suggestions remain on paper.

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‘New CMs reverse orders’

Examples of such reversals cut across states, sectors and parties. And date back to the 1990s, when Indian markets were just opening up to foreign investments. 

An Indian Express article from 5 December, 1993 had a section on page 1, titled ‘New CMs reverse orders’, enlisting the backflips that the new chief ministers were taking at “amazing speed to undo a lot that had been planned or executed by their predecessors”. 

Some of these policy adventures were purely populist measures or administrative moves. For instance, Mulayam Singh Yadav scrapped the ‘Anti-copying Act’, which was called former BJP Chief Minister Kalyan Singh’s “much-trumpeted contribution”. Chief minister Bhairon Singh Shekhawat in Rajasthan had undertaken an administrative shake-up.

The Sunday edition of the paper mentioned how Virbhadra Singh, the new CM of Himachal Pradesh, had been sworn in Friday and had taken time off Saturday to “dwell at length on all that was anathema to him about the old regime”. He announced that all policy decisions taken during former CM Shanta Kumar’s era would be “reviewed”. This included the signing of memoranda of understanding for hydel power projects.

Cut to 2026. Newly elected chief ministers are still undertaking such policy review, or making reversal decisions.

 

For instance, last month in Kerala, the newly inaugurated Congress-led United Democratic Front (UDF) government decided to scrap a semi-high speed rail project, SilverLine, proposed by the previous LDF administration. It was designed to link the state capital Thiruvananthapuram with the northern-most district of Kasaragod.

The decision was taken within a week of the UDF government taking charge, with Chief Minister VD Satheesan saying his government was not against a high-speed rail corridor, but that the SilverLine project was both “an environmental disaster” and “financially unviable”.

The project became a mass rallying point against the previous Pinarayi Vijayan govt, witnessing stiff resistance, with concerns about massive displacement, environmental damage and Kerala’s high-debt burden.

When the new Jagan Mohan Reddy government took charge in Andhra Pradesh in 2019, his plan of action also seemed focused on erasing the previous Chandrababu Naidu government’s imprints from the state.

Reddy dropped the Amaravati Capital City Start-up Area project—which was Naidu’s dream project—with a Singapore consortium. Amravati was initially picked as the capital region of Andhra Pradesh in 2014 after Telangana was carved out of the state in 2014, and Naidu wanted it to be an Indian city like no other. 

However, Reddy pulled the brakes on the project, and pitched a three-capital plan instead. Reddy cited monetary concerns, claiming that while the project would need an investment of Rs 1.09 lakh crore for setting up just the basic infrastructure, the state could afford to only spend around Rs 6,000 crore. 

The Singapore Ministry of Trade and Industry had claimed that the closure was based on mutual consent between the parties, despite the cost of “a few millions of dollars” due to the termination. 

Vinayak Chatterjee, the founder and managing trustee of The Infravision Foundation, points to several reasons that may underlie policy reversals by new state governments.

“It is often about political messaging that something cleared by an earlier regime we will not honour. Sometimes it is about the fact of suddenly discovering that it’s not such a good deal to buy power at a certain rate, and sometimes it is pure callousness,” he says.

‘Rs 2 lakh cr gain to GSDP lost’

Paradoxically, the same trend of reversals has managed to bring the Amravati project back to life. 

When N. Chandrababu Naidu’s TDP won the Assembly polls in 2024, he listed out the pitfalls of the project being cancelled, saying that if things had moved the way they were planned, the world-class capital would have added Rs 2 lakh crore to the GDP, and 7 lakh jobs could have been created during construction.

Talking about the estimated losses, he alleged that Amaravati would have brought “Rs 10,000 crore income by way of state taxes every year with a 15 percent annual increment”. Also lost was the investors’ confidence in the state, Naidu rued.

He has since tried to revive the Singapore partnership dream. The Singapore government was also ready to dip its toes in the Amravati investment stream again—but this time it said it would do so if the Centre backs the plan.

Having seen the project scrapped once, Singapore wanted greater institutional backing before recommitting. The state entered into an agreement with Singapore last year, and a joint implementation steering committee was set up. 

Two months ago, Amravati was officially recognised as the capital city.

 

Last month, state IT and HRD minister Nara Lokesh announced that the government is planning to develop a Singapore-style smart economic township in Amaravati, while addressing a meeting of the Joint Implementation Steering Committee in Singapore. He spoke of the AP-Singapore partnership, and said that Andhra Pradesh aims to build a model township for India with Singapore’s expertise.

With the TDP also being an NDA ally, the Union cabinet earlier this month approved Central government infrastructure projects worth over Rs 2,500 crore in Amaravati. However, Jagan has continued to voice his disapproval of the project, alleging that the Amaravati plan would cost nearly Rs 2 lakh crore.

Ritesh Kumar Singh, the CEO and Chief Economist at Indonomics Consulting Pvt Ltd, explains that the most vulnerable projects are those which are long-term in nature, like infrastructure projects.

“A long-term infrastructure project like a dam or a power plant which will take 10 or 15 years, there is always a chance that the government may change during this time. So long-term infrastructure projects, power plants, even real estate projects may be vulnerable,” he says.

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Power and PPAs

The Amravati project isn’t the only decision of the previous government that Jagan had overturned.

In an almost filmy-style, Jagan first called a collectors’ conference in a brand new convention centre worth Rs 9 crore that Naidu had built, and then razed it down. Jagan labelled it as just one of his many steps intended at exposing Naidu’s “corrupt” administration, and alleged that the structure was built illegally.

Jagan also rolled back the tenders by the Naidu government in the Rs 55,000-crore Polavaram power project on the Godavari river. After coming into power, the Jagan government terminated the contract of the earlier firm and floated new tenders. He claimed that the price quoted by the new bidder had saved the state Rs 780 crore, and accused Naidu of irregularities in the execution of the project. 

Power Purchase Agreements (PPAs) in Andhra Pradesh have been a bone of contention between the Naidu and Reddy governments as well. Back in 2019, Jagan sought to renegotiate the PPAs in the state alleging corruption and claiming a consequent loss of over Rs 2,200 crore to the state exchequer. The move rattled the renewable energy industry, raising concerns about contract sanctity and policy certainty for wind and solar investments in India.

However, the Andhra Pradesh high court in 2022 ruled that tariffs under concluded PPAs cannot be renegotiated.

In turn, the TDP-led NDA government in the state had also alleged kickbacks and irregularities in the PPA’s signed by the Jagan government with Solar Energy Corporation of India (SECI), and had ordered a probe into the agreements. However, the Andhra Pradesh Electricity Regulatory Commission (APERC) approved the PPAs last year.

Richard Rossow, Senior Adviser and Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies (CSIS), asserts that even though Reddy did not succeed in revoking PPAs, it was still a chilling effect on the investors to know that the agreements were under threat.

“You’d rather have the government honour its commitments than have to rely on the courts to have contracts and business honoured, so you began to see a real slowdown in the development of renewable energy projects in the state, just because of the concern and threat that the contracts might be under fire,” he told ThePrint.

To factor in the risk of their projects being halted, Singh says, businesses often jack up the prices.“So that will lead to higher costs for the state government, and in turn for taxpayers. Banks also know that if the project gets canceled, their money will be blocked. So they also want to charge higher interest rates to cover the extra risk,” he told ThePrint.

 

Tarred with the same brush

Dishonouring commitments often takes the form of a tit-for-tat loop between state governments. Take the example of the Maharashtra government, for instance.

When the Uddhav Thackeray-led Maharashtra Vikas Aghadi (MVA) came to power in 2019, it announced a review of commitments made by the BJP-Shiv Sena government to the Rs 1.1 lakh crore Mumbai-Ahmedabad bullet train projects. It also stopped the water grid project focused on the drought-prone Marathwada region.

When the new Eknath Shinde government, which came into power in Maharashtra after the previous Shiv Sena-led MVA government fell in 2022, its eyes were set on several decisions taken by its predecessor, especially in its last few days in power.

From an investment perspective, what stood out was the new government ordering a freeze on 191 land parcels allotted by the Maharashtra Industrial Development Corporation (MIDC) on or after 1 June 2022, during the previous MVA government’s tenure. The allotment of parcels was done for a projected investment of Rs 12,000 crore. However, the new government had to end the freeze for most projects within two months, after investors began raising concerns with the MIDC, as per news reports from the time.

When questioned about these reversals, the Deputy Chief Minister had told the media in 2022, “They (MVA) have reversed all our decisions when they came to power. However, we won’t be unfair, and if they (MVA) raise any issues on the decisions reversed, we will study them.”

The state government has since also revived the water grid projects and the Maharashtra section of bullet train project.

Foreign Direct Investment (FDI) in multi-brand retail faced a similar fate of policy flip-flop in Delhi.

In 2011, the Congress-led UPA government announced a 100 percent FDI in single-brand retail, and also announced that 51 percent equity would be allowed in multi-brand retail in cities with a population above 1 million.

Facing stiff opposition from various states, the government said that the policy would be applicable only if the states opt for it individually. Then Delhi Chief Minister Sheila Dixit, who was a Congress leader, volunteered for the policy to be notified as applicable in Delhi.

However, when Aam Aadmi Party leader Arvind Kejriwal came to power in Delhi in 2013, his government withdrew the approval. Kejriwal asserted that his decision was to address the problem of unemployment in Delhi. His logic was that the move was to protect “mom and pop” stores in the capital.

Business organisation Federation of Indian Chambers of Commerce and Industry (FICCI) had expressed its “disappointment” with the move. Even the Centre had spoken against the move back then. Commerce Minister Anand Sharma had famously quipped that states being given an option to join the multi-brand retail policy was not a “revolving door”.

“Option was to join…We are not a banana republic that you create policies in the name of options or revolving doors,” Sharma was quoted as saying, highlighting the need for policy stability to build investor confidence.

A dream, an ideal

The groundwork for undoing the decisions taken by predecessors is often laid out during election campaigning.

For instance, two months before the Tamil Nadu assembly polls this year, AIADMK general secretary Edappadi K Palaniswami had assured people that once his party is elected to power, they would cancel all the tenders for the projects being implemented in “haste” by the DMK dispensation.

While making this promise during a rally, Palaniswami reportedly alleged that the projects were being undertaken for “commission”, without allocating requisite finances for the work.

The DMK lost power, but not to the AIADMK, which would have allowed it to follow through on its promise.

Rossow points to such promises being one of the reasons for policies of predecessors being rolled back. “If a state government needs to save money and talk about rolling back some popular policies like free power for farmers, it provides a substantial target for an opposition party to work against, and if they dethrone the incumbent, suddenly they’re on the hook to try to enact those decisions,” he says.

Such policy reversals, as per Rossow, often also raise concerns about transparency and corruption.

“Are they revoking decisions and recontracting just because they want to get a piece of the action and have those negotiations back on the table? Unfortunately, there isn’t a lot of data on this because it’s one of the concerns that investors have,” he asserts.

Singh agrees that there may even be valid reasons for cancelling a project approved by a predecessor in a state. “However, it has a cost for business and investment that one should not ignore.”

This is why Rossow advocates for an initial cost-benefit analysis by the government at all levels, at the time of regulatory intervention. However, he acknowledges the fact that state governments do not always have the capacity for such analyses.

“It’s a dream, it’s an ideal, very difficult to do in practice. That’s one of the hopes that I have for the role that artificial intelligence might be able to play. It is to have something that you can speak to in vernacular language, ask basic questions on some expected impacts, and get a little better context and feedback than maybe just doing an internet search,” he told ThePrint.

However, not everyone agrees. Former Cabinet Secretary K.M. Chandrasekhar asserts that state governments usually do not have any wiggle room financially to make dramatic policy changes.

“Sometimes, policies have to be changed on account of financial crises faced by the state. There could also be spillover from election campaigning on specific issues, particularly those relating to welfare schemes. Of course, if any state is perceived as changing course to provide more encouragement to industry, this will be noticed, and industry will watch it more carefully,” he told ThePrint.

Chandrasekhar asserts that generally investors, particularly in FDI, look at the government of India policies when they make investment decisions, and that they have “clear notions regarding the administrative efficiency of states and friendliness towards industry”.

In any case, good companies, he says, generally establish easy relationships with the governments in power, regardless of the party in power.

 

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An economy of harm

State governments not honouring their commitments creates not only a trust issue with investors, but often leads to real-time harm to investors, as well as the country’s economy.

Chatterjee says such policy flip-flops render several big projects unviable or turn them into non-performing assets (NPAs). “If I’ve set up a power plant and then I can’t sell the power to you, you made my assets unproductive, so the implications are far beyond costs. The implications are about existential dilemmas. You made a project unviable.”

It may also affect the manner in which business communities and investors within and outside India respond to such uncertainty in policy implementation.

“Investors have always protested (against reversals), but the protest means you have to take the concerned sponsor, that is the state government, to court, and you know what happens when you go to court— it drags on for 10 years, so it doesn’t really satisfy anybody. That’s why you had so many NPAs,” Chatterjee told ThePrint.

It is risk share that also plays in his mind when talking about the repercussions of such reversals.

Speaking about public-private partnership (PPP) contracts in public infrastructure, Chatterjee explains, “In the old days, the PPP contracts were very, very heavily biased against the private sector and practically structured to benefit the state sponsor, so the misallocation of risk was a very big event in PPPs signed from the early 2000s onwards.”

However, he says that PPP contracts in India have fallen, and blames the ongoing “shenanigans” for this fall.

“At their peak in the 11th plan, private investment was 37 percent of total infrastructure investments. Today, it is about 17 or 18 percent, so it’s almost half, which means private sector has lost confidence in so many projects where risk had to be allocated, and are happier with being thekedars, being EPC contractors, or the foreign investment has been more confident about taking REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts), where the project is already a brownfield operating project,” he says.

According to Chatterjee, there has been a clear move away of private capital from greenfield startup projects—which are new ventures built from ground-up— to brownfield operating projects—which involve modernization, expansion, or repurposing of an already existing facility or site.

“That is the price the nation has paid for all these kinds of shenanigans,” he says.

The carrot and the stick

Over the years, there have been several carrot and stick measures that have been developed to improve the investment climate in states.

One such measure was the Centre-State Investment Agreement proposed by then Finance Minister Arun Jaitley in 2016-17.

The annexure to that budget speech said this agreement was being proposed “to ensure effective implementation of Bilateral Investment Treaties signed by India with other countries”. Jaitley believed that this would “ensure fulfilment of the obligations of the State Governments under these Treaties”.

The carrot dangled was that the states that sign these agreements were to be seen as “more attractive destinations by foreign investors”. Conversely, officials were also quoted as saying that the Centre will inform the other countries about states do not sign the agreement with the Centre, urging them to keep this fact in mind before investing—hinting at non-cooperating states being marked as unsafe destinations for foreign investment.

Critics at the time had warned that such agreements may further sour Centre-state relationships, and that the concept also goes against international law. Experts were quoted as saying that while the Centre may be attempting to shift blame internally, the onus of violations of actions of state governments will still bind the Centre. 

While the Agreement suggested by Jaitley remained on paper, Rossow spoke about the Business Reform Action Plan (BRAP), which is an exercise aimed at providing a conducive business environment and ranks states in terms of various Ease of Doing Business parameters. The Plan has “reform points” which are both business-centric and citizen-centric.

Under BRAP 2024, which had 489 reform points, States were categorised as ‘Top Achievers’, ‘Achievers’, ‘Fast Movers’, and ‘Aspirers’ based on their compliance with the action plan.

Rossow advocates for such measures, asserting, “It is about holding states accountable, which I think the Union government is the only credible group to be able to do.”

Chatterjee asserts that there should be a central legislation that requires state governments to pay a very high fee for exiting a contract in such a manner. “When the investments have already been made, you have to have a very large penalty or a drop-dead fee, which is a substantial penalty.”

Chatterjee says such a measure may go against center-state relationships. “But till that happens, the states won’t get the kind of private investments they look forward to,” he says.

(Edited by Ajeet Tiwari)

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