THE DETOX: 12 Steps To Fix India’s Economy – A Monthly Series
Legal delays have turned us into a risk-averse society, adding another hurdle to economic growth
By Jaithirth Rao
ECONOMIC GROWTH does not happen by accident. For centuries, human societies existed with very low levels of growth. Then a combination of innovations and institutional practices led to an astonishing increase in human wealth and income. One of the institutional prerequisites to sustaining growth is a legal and judicial system that enhances growth prospects. In India, we have a sound set of laws and a brilliant Constitution derived from a Common Law tradition. We have a fearless, sensitive and robust judicial system characterised by a commitment to avoid rapacious tyranny, which can be one of the greatest inhibitors of growth. Nevertheless, over the years, our legal process has become an albatross around our necks — a key element that stifles growth.
We cannot hope to have a prosperous society and meaningfully eliminate poverty unless we drastically alter this process. The media frequently highlights stories of delays and problems in the criminal justice system, and rightly so, because we are fast becoming a country where the innocent can languish in jail for years, while the guilty can delay, and often avoid all punishment — the very antithesis of a desirable criminal justice system. In this column, however, I would like to focus on our civil justice procedures, as weaknesses here have a direct detrimental consequence apropos fast economic growth that can benefit all citizens.
Sound economic growth requires, at the least, a reasonable expectation on the part of economic agents that contracts will be honoured and remedies provided for breaches. This, of course, is how our statutes are written. But in the realm of practice, we have become prisoners of form over content. A person or a firm that breaches a contract is able to ensure procedural delays on a virtually endless basis by frequent appeals to higher courts, not on substantive issues, but on trivial points, by seeking numerous adjournments, and by obfuscating the actual content of the legal issue at stake. The resulting delays make ‘sacred’ contracts anything but sacred in our country. A party in breach can merrily say “sue me”. In the old days, people might have been scared of lawsuits against them. Now they welcome lawsuits as they have become the most convenient way to delay and, perhaps, never perform the contract that one had earlier solemnly entered into.
Our legal process has become an albatross around our necks and has become a key element that stifles growth
Delays are costly in any environment. But in an economy with high interest rates, the cost of delays beyond a couple of years is so exorbitant that the legal process begins to do the exact opposite of what citizens would want. The process discourages economic activity, entrepreneurship, wealth creation, growth and poverty alleviation. Delays reduce predictability for economic agents. This makes us all risk-averse. A risk-averse society can never become prosperous. An identical business activity that one would undertake in a country with a quick and predictable legal system will not be undertaken in today’s India. We are all losers because of this.
We need to get back to a position where we start focussing on content over form. A breach of contract is something that does not impoverish only the affected party, it impoverishes all of us. We shouldn’t have a situation where a party or a person can delay and escape the financial consequences of not fulfilling one’s obligations under the contract. Non-payment of rent, non-repayment of loans and non-payment for goods or services received are now perceived as “smart” business, as one does not get hit with any penalty for such actions. The number of small businesses that are systematically denied timely payment by larger companies and government bodies are so numerous that we have become quite insensitive to their plight. Legal costs and the costs of delay are very difficult for small businesses to bear, especially if the offending party has access to all the weapons of procedural delays at its command. We forget that the dynamic engines of growth in any economy are, in fact, small businesses. A more sinister consequence is that since contracts cannot be enforced through the legal system, many small businesses have to turn to local godfathers, touts and fixers to help them operate. We are creating incentives for otherwise honest entrepreneurs to become criminals.
Instead of moving to a simpler, faster process holistically, we try to achieve second order sub-optimality, by passing new laws. Indian businesses have become casual in repaying bank loans. The poor bankers are unable to enforce their security. So, instead of making the system simpler, we pass a new law called SARFESI, which presumably makes the enforcement of security simpler, faster and so on. But since the basic procedures remain unchanged, recalcitrant borrowers are able to get around even the draconian SARFESI and, of course, small businesses who are not the beneficiaries of SCARFESI are left exactly where they started — weak and disempowered.
We don’t apply the principle of the right of “adverse possession” to properties. Even if I have spent the past 20 years asleep and not bothered to get my name added to that of my brother in property inherited from our father, I can suddenly wake up and prevent my brother from selling the property. Nobody benefits. Economic activity gets paralysed. Valuable land remains unutilised. Incidentally, the legal dispute that starts in this manner first goes to a tehsildar; at every stage of the process, for some trivial reason — e.g., inappropriate service of notice — one can keep appealing to the assistant collector, then the deputy collector, then the collector, and then to several courts for weeks, months and years on end before the actual content of the dispute is heard. In the interim, evidence gets lost, witnesses and litigants die — and, of course, judges get transferred — resulting in endless re-hearings and re-opening of cases (e.g., if a litigant dies, getting the heirs on board can take forever and a day). Once the content is adjudicated, the interminable appeals process starts all over again. Incidentally, if anyone has been to a Small Causes Court, please do check with that person if anybody there, anyone at all, believes that their lawsuit will be decided any time in the foreseeable future. Verily, in India, it would be fair to say that litigants may die, but their litigations will not. Unfortunately, this is not just a joke. It has extremely deleterious economic consequences. We have become a nation in perpetual gridlock. We need to account not only for the economic activity held up by legal delays, but for the enormous amount of economic activity that does not even get started, merely on account of the fear of such impediments.
It is high time we changed and gave ourselves a legal system characterised by celerity, efficiency and predictability
During the erstwhile NDA government, when Arun Jaitley was the law minister, considerable progress was made in reforming legal procedures. Unfortunately, he was shunted out. His successor, Jana Krishnamurthy, was unable to accelerate the process. Veerappa Moily, in the current UPA government, has done some very good work in terms of increasing the capacity of our court systems. Unfortunately, he too has not had much success in changing procedures. It is frequently argued that lawyers, who are a very powerful lobby, are opposed to changes in procedures. They are currently beneficiaries of this system of delays, adjournments and focus on form over content. It is important that lawyers be made to understand that, in fact, their business would increase greatly and there would be an exponential increase in litigations if people are assured of speedy judgments. An inefficient system is certainly not in the real interests of lawyers — it only superficially appears to be that way.
Our governments, in all their various manifestations — Central government departments, state government departments, district offices, municipal authorities, autonomous government boards, public sector corporations and so on — account for the bulk of the civil litigation, and quite frequently both the parties in a legal conflict are government entities. For the individual government official involved, litigation and its attendant delays appear to be “costless”. In fact, not litigating can be quite costly personally in the bizarre ecosystem of our government. An official can be casually accused of being corrupt, if he or she chooses not to litigate. As a result, every employee of our great government is constantly fighting cases ferociously on behalf of their little turfs. No one is held accountable even if the litigations are frivolous or even if it is known in advance that the litigation will fail.
On the other hand, no one can be blamed for implementing a court order. I have actually met a senior official from a public sector company that had lost a case in a lower court and who admitted to me that their case was weak and not worth fighting, but — aye, there’s the rub — they were going to keep appealing again and again, because otherwise, he could personally get into trouble. He would not get into trouble for wasting his company’s time and resources. But he could, and would, get into trouble for not appealing even in a lost cause. A chairman of a public sector company once told a supplier (a friend of mine): “I know that we owe you money. But it is best that you go to court. Once the court orders us, it is easy for us to pay you.” It is in this area that I believe the government can and should start legal process reform on a war footing. As a beginning, in disputes between two government entities, can we agree that no appeals will be preferred? That the very first judgment will be gracefully accepted by both parties. Surely in these cases, one cannot keep pointing fingers at officials that they are corrupt. The winner is another government entity and not a private party. This one decision will remove a large number of cases out of the courts and help accelerate the process for other cases.
As far as disputes between private parties or private parties and government entities are concerned, we need a drastic change in procedures so that we focus on the content of justice, not on the form. We need to abandon our present methods, which allow endless disputes on procedures without application of the judicial mind to the substance of the dispute. We need to ensure that we have processes for “continuous hearings” with a ban on adjournments. We need to punish frivolous and vexatious litigants not only with harsh fines, but also with strict prohibitions, not allowing them to mindlessly litigate in the future. We should stop having a nanny State where an individual who has done nothing to protect his or her rights (e.g., not getting his or her name registered in title records for 20 years) can block economic activity, or in more sinister terms, be used by others to block economic activity. We need to ensure that small businesses and entrepreneurs are not victimised by larger corporations and powerful government bodies. Because this will either kill this critical engine of growth or drive it into dangerous criminal areas.
Our present legal system is largely an inheritance from our erstwhile British rulers. The oft-insulted Thomas Macaulay authored most of our codes. The fact is that they have moved on in Britain. Disputes in their country are resolved quickly, fairly and efficiently. It is easy even for Indians to do business in Britain. It is we who are stuck in the quicksand of history, piling one inane procedure on top of another banal one — to the benefit of nobody, and to the detriment of our collective prosperity. It is high time we changed and gave ourselves a legal system characterised by celerity, efficiency and predictability, a system that encourages economic activity, particularly among dynamic new entrants, not one that stifles risktaking, impoverishing all of us in the process.
One of India’s foremost right-wing economic thinkers, Jaithirth Rao is founder and chairman of Value and Budget Housing Corporation, a company in the affordable housing space.