The command and control economy was, in a sense, easier to govern. The State controlled most economic activities through licenses and permits. In granting or refusing licenses (in truth, largesse) the State acted sometimes fairly and sometimes arbitrarily. Its actions were questioned in the established courts of law. The superior courts evolved the principle of judicial review of administrative action. Very often, the State received a rap on its wrist. But the State did not care because there were external as well as self-imposed restrictions on the power of judicial review. Most administrative actions were not reviewed at all. Besides, since all players in a command and control regime were rent-seekers of one kind or another, they accepted many arbitrary decisions in the hope that some of them will eventually go in their favour.
The loser was the economy. The economy simply limped and carried on at a desultory rate, leaving behind millions of people who were born poor and who died poor. Judicial intervention was seen as an expensive (and unaffordable) corrective of some of the grossest abuses that usually came too late and achieved too little. The judicial system was not intended to and hence did not add any value to the economy. Sometimes judicial intervention made matters worse and increased the economic loss to the country as for example when the Courts attempted to run sick or closed industries or created an imbalance between the rights of the landlord and the rights of the tenant.
The established system
In a command and control economy, the established system of courts appeared to be sufficient. Judges only required legal training. In fact, judges freely confessed to a lack of knowledge or expertise in matters relating to the economy and usually gave the benefit of doubt to the government.
Sometimes they leaned so heavily in favour of the government that even outrageous from an economic point of view violations of the Constitution were condoned in the name of a Welfare State. Two examples come to mind one, the virtual emasculation of Article 301 which mandates that Trade, commerce and intercourse shall be free throughout the territory of India and the second, the levy of so-called regulatory fees, without rendering any service whatsoever, that merely enriched and emboldened the State.
In a democracy there was no alternative to a well-defined legal system. An authoritarian State had the advantage of rejecting a proper legal system and vesting all decision-making powers in the executive. Such a structure will appear to work for some time, but eventually discretion will be abused and the authoritarian model will not deliver justice or equity. China was able to do with a discretion-based model as long as its growth was driven by export-oriented foreign direct investment. But when it became necessary to encourage domestic entrepreneurs, China is paying the price for the absence of a rule-based system.
India is also paying a price for the lack of adequate understanding of economic principles within the legal system. There is no point in blaming the judges. They were trained in civil and criminal law. While other laws were also on the statute book such as laws relating to patent, trademark and copyright they were rarely invoked and even more rarely interpreted. Besides, Indian laws in this behalf did not keep pace with changes in technology or international business practices. For instance, the law on Arbitration was invoked by domestic disputants and such disputes usually raised issues that were well within the comprehension of the judges.
Building legal capacity
The failure to build legal capacity in matters concerning the economy is as grave a the failure to build capacity in our roads, railways, ports and airports. As India integrates itself with the global economy, the inadequacy of the legal system has become more glaring.
Indias instant response to this need was to set up tribunals or regulatory bodies. But who will man these bodies We had perforce to call upon retired judges and retired civil servants to do the job. At one point of time there was a retired banker heading TRAI, a retired civil servant heading SEBI and a retired judge heading MRTP. Such anomalies continue even today. The next question was, how do we integrate these tribunals and regulatory bodies into the legal system We had perforce to provide for an appeal to the high court of the State or, where the tribunal or regulator was established at the national level, an appeal to the Supreme Court. As was to be expected, the high courts and the Supreme Court confessed to a lack of knowledge or expertise in economic matters, and usually declined to interfere with the decisions of the so-called expert bodies.
Furthermore, the perennial ills of the legal system have also affected the dispensation of justice in disputes that have large economic consequences. The case of Cogentrix, leading to its exit from India, is well known. The Dabhol Power Company disputes are being agitated in several courts, regulatory bodies and arbitral tribunals. A simple dispute over the appointment of a presiding arbitrator could be dragged through the courts for many years. Arbitral awards, domestic and foreign, given by eminent arbitrator-judges can be challenged before the lowest-rung civil court. Complicated questions concerning patents or designs or integrated circuits are raised before judges who have not received training in these matters and who have little assistance in arriving at a decision.
A world class legal system is absolutely essential to support an economy that aims to be world class. India needs to take a hard look at its commercial laws and the system of dispensing justice in commercial matters. A beginning needs to be made at both ends creation of a commercial court division within each high court and the training of judges in the civil and criminal courts. There is no shame in admitting our inadequacies. Lawyers and judges need training in economic and commercial matters. Likewise, economists and subject-matter experts need training in legal principles. Together, they will constitute the legal infrastructure that will have the capacity to deal with the myriad problems that will arise in a growing and globalised economy.
(The author is a former Union finance minister)