Economy

KEY POINTS

·         In the latest Ease of Doing Business report by the World Bank, India ranked a dismal 164 in the category of enforcing contracts.

·         It takes, on average, almost four years to enforce a standard sales agreement in a local court, and costs up to 31% of the claim’s value.

·         This is much higher than the average for South Asia and China and has crippling effects on the dispute resolution mechanism of the economy.

·         India’s poor ranking in enforcing contracts relates directly to its judicial capacity.

·         A sound judiciary is a key to enforcing laws and creating trust in the economy, allowing economic exchange between complete strangers by deterring fraud and increasing the incentives for fair play.

·         When the justice system breaks down, the consequences are bad.

·         A slow judiciary with a large number of pending cases reduces trust in the economy and makes people fearful.

·         The recent Economic Survey 2017-18 has also rightly points out that addressing pendency, delays and backlogs in the appellate and judicial arenas is the next frontier for improving ease of doing business (EODB) in the country.

Effects of reducing trust in the economy

·         A slow judiciary forces participants to adopt loss-minimizing strategies that are not always efficient.

·         The most intuitive result is for the cost structure of the entire economy to go up.

·         For example, landowners have to increase the rent significantly or ask the tenant to deposit a security amount to cover the risk due to the insecurity created by a weak judiciary.

·         Similarly, the interest rates on credit are higher in an economy with poor enforcement, due to the inclusion of a risk premium by the lender.

·         It deters firms from making relationship-specific investments.

·         Relationship-specific investments — investments for products that have lower value in alternative uses than they have in the intended use between the parties involved.

·         For example, a company supplying especially treated ash-less coal to a power generation company has made the initial investment, then he/she is in a vulnerable position should the power company change the terms of the contract.

·         The threat of hold-ups can dissuade efficient investments, and could even rule out exchanges that are potentially valuable.

·         Firms and industries have developed ways around this problem.

·         In many industries, firms vertically integrate in order to align their incentives in the different stages of production, or sellers require a security amount from the buyer.

·         Integration, however, increases the cost of starting a business and makes the industry less competitive.

·         Vertical integration also reduces the focus on becoming more competitive in their development and achieving economies of scale.

Judiciary is an ideal instrument in preserving the faith in the country's constitution. It not only safeguards the rights of an individual or a firm, but also emphasis the role of responsible governance. In this scenario, maintaining the public trust and social order is pre-requisite for the smooth functioning of the nation's economy.

          The judicial proceedings needed to be faster to entrust faith in itself.Pending cases reduce the efficacy of the functioning of the government , in particular for PIL cases. An example can be taken from the case of contract assistant professors in various universities of AndhraPradesh versus state government of AP filed in high court of Andhra Pradesh. The judgement is awaited which inturn halts the entire process of recruitment of faculty in all the universities.

Also, it has been reported by OECD that for a 10% increase in rate of judicial proceedings, there would be a 0.2% increment in the GDP growth of the nation. Also the Debt recovery tribunal, Appellate tribunals are established in sidelining the tedious judiciary process with a prescribed rule of law. Taking this into account, many nations across the globe including India abided to international conventions and took steps for faster judicial action in atleast loan and debt recovery cases eg: IBC, SARFEASI act etc. 

On a whole, the governments agreed for the necessity of faster trials and indeed started their measures to achieve the same for the improvement in economy.