This article is a part of an EXCLUSIVE SERIES on slowdown. If you haven’t yet read the previous part of this series, check it out here: PART III
“Commerce and manufacturers can seldom flourish long in any state which does not enjoy a regular administration of justice, in which the faith of contacts is not supported by law.”- Adam Smith, The Wealth of Nations, Book v, Chapter III.
The explicit point that has been highlighted through the classical economic theories is that growth and development would be difficult to sustain if the judiciary system of any country is not in place. Every other missing piece of the economic growth falls into place when a country has a sound judicial system.
There have been various statistical tests and theories that prove that contract-intensive industries would grow faster than non-contract intensive industries if an efficient judicial system is in place and this system would become all the more important from the Indian perspective as we have already discussed that our country is in dire need of the manufacturing industry to step up to fuel the second line of defence for the economy.
Is Current judicial system in jeopardy?
Assume that one of your long term suppliers provided you substandard goods which were rejected by your client and now they lie as dead inventory in your warehouse. In such a scenario you would want to drag your supplier to the court to take legal action against the product that he supplied to you but do you actually know how many years would go into all of this? According to World Bank’s “Doing Business” Indicators, it would roughly take about four years to resolve a hypothetical commercial sales dispute over the quality of the goods
through the Indian judicial system. Only a handful of countries out of almost 200 are worse on this measure. All of the time that goes down the drain when a legal route is taken is the opportunity cost of the money that you can earn in the same amount of time. You would rather bear some losses and move ahead and permanently end your supply terms with your existing supplier to avoid the legal hassles.
This is what TS Thakur, the Honourable Chief Justice of India tried to highlight in his statement addressed directly to the Prime Minister at the Annual Chief Ministers and Chief Justice Conference and below is excerpt of the same:
“We want people to come and ‘Make in India’, we want people to come and invest in India, but those whom we are inviting are also concerned about the ability of the judicial system in the country to deal with the cases and disputes that may arise out of such investments. Efficiency of the judicial system is so vitally connected with the development of this country and therefore, it is not only in the name of… the poor, litigant, people who are languishing in jails, but also in the name of development of the country… that I beseech you to rise to the occasion…”
The emotional appeal of the Chief Justice to the Prime Minister was primarily due to speed in which the Indian judicial system works. There are over 20 million cases currently pending in the district courts where the pain of the speed is seen the most. More than 30% of the cases have been pending for more than five years and roughly around 10% of them are pending for more than ten years. Also, the backlog is so dampening that one of the High Court justice mentioned that it would roughly take about 320 years to clear all the pending cases and this situation can only get worsened. All of the delay in time to solve a contractual issue would lead to an increase in the legal costs for the companies and hence if the contracts are costly to enforce, parties may avoid making any investments or engaging in potentially surplus-generating transactions.
Could informal agreements substitute formal contractual agreements?
Taking a case to trial in India could well turn out to be a lengthy process but could informal agreements turn out be the answer for the same with less reliance on the judicial system? For example, any company could enter into a long term contract with a supplier on the underlying understanding that the relationship can end if any of the parties do not follow the agreed conditions of business. There is very less empirical evidence to prove the same. However, there are several hypothesis’ and research studies conducted on the same which conclude that contractual industries tend to thrive in those areas where there is a better judicial system and that faster courts do encourage faster growth (Amirapu, 2016). Furthermore, about 22.5% of the firms have reported that one of the major business constraints for them is the poor enforcement of contractual agreements (Ahsan, 2013).
Economic Impact and the way ahead:
Statistical tests have confirmed that there is a significantly positive relationship between the growths in a variety of different measures of industrial outcomes and the interaction between state-level court efficiency and industry-level contract intensity. The testimony for the same is the figure attached below:
We can see that the states which have slower courts often also have lower growth rate of employment. Bihar, West Bengal and Uttar Pradesh are the worst performing states in terms of development as well as the speed at which the court proceedings are undertaken. Investments in manufacturing are really low in these states and hence if the government wants to lure private investments, it is really important that the speed of the judiciary proceeding increases so that the cost of legal contractual agreement decreases and investments could start to flow.
All in all, the Chief Justice’s statement is worth of gold dust as the judiciary needs to step up, if the country wants to attract hassle free private investment in the country.
If India wants to make sure that their economic growth does not head into a plateau then it needs to make sure that apart from the main engine that is the consumption, there is another line of defence that is held firmly so that any jerks could be handled with ease.