Thursday, February 02, 2006

Rule of Law in India and its Economic Implications

If one were to look at the factors of production (land, labour, capital and enterprise) and look at the corresponding cases pending in Indian courts, one can have a very good understanding of the performance of the institutions arranged around these factors. It is no wonder that any task of economic reforms will have to take cognizance of the improvement of the legal institutions. But it is sadly under-rated. As of now, there are no standards for determining the quality of judgments passed by courts. Case pendency itself is taken as a sign of performance though I would argue that it is not a good enough indicator.

Read Wolfgang Koehling’s study on Economic Consequences of a Weak Judiciary: Insights from India for an elaborate study. An user-friendly abstract is stated below.

This paper examines the empirical relationship between the quality of the Indian judiciary and the economic development of the Indian States and Union Territories…The data indicate that a weak judiciary has a negative effect on economic and social development, which leads to: (i) lower per capita income; (ii) higher poverty rates; (iii) lower private economic activity, (iv) poorer public infrastructure; and, (v) higher crime rates and more industrial riots. The results are robust and the correlations are strong and negative.

You can also read Matthieu Chemin’s study Does the quality of the judiciary shape economic activity? Evidence from India.

There were 3.1 million cases pending in India’s 21 High Courts and 20 million in its subordinate courts in 2000. This paper examines the consequences of a slow judiciary on the contracting behaviour of firms in India…I [then] examine how the case pendency rate in state courts in India affects the contracting behaviour of 170,000 small non-agricultural informal firms. … My estimates suggest that a slow judiciary implies more breaches of contract, discourages firms from undertaking relationship-specific investments, impedes the access of firms to formal financial institutions, and favours inefficient dynasties. The negative implications of having an inefficient judiciary are large - moving a firm from the highest to the lowest pendency state would result in a 10% improvement in firm performance.

According to Amir Ullah Khan of the India Development Foundation, “the Government is a litigant in most of the cases. In a study carried out by the National Law School in 1993, it was found that the Government is the single largest litigant in Indian civil courts. The Government is plaintiff, defendant, appellant or respondent to appeals in 60% of the suits. Bulk of the civil litigation pertains to just five areas - taxation, credit, rent control, urban land ceiling and labour relations. … Government here includes central, state and Government owned institutions. That there is confusion on the definition of the State is another story for another study to tackle. … In any case the success rate of Government appeals is said to be as low as 5%. And cases that involve Governments on both sides of the table are by and large futile and time wasting exercises. The incentive to Government appointed lawyers to prolong cases and earn a bit more leads to further delay.”

Need more be said?

Cross-posted on the Indian Economy blog.

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