Courting economic failure

Improving contract enforcement in India will have large benefits for economic performance and cause India to rise further in the EoDB rankings

judiciary, judicial system
n 2016, Amrit Amirapu provided one of the first quantitative analyses of the economic costs of judicial delays in India.

India’s judicial system has many positive features. It is reasonably fair and impartial, and it has often acted to protect citizens against politicians or the powerful overstepping their bounds. Of course, there is considerable room for improvement in equal treatment under the law, especially in a country riven with social and economic inequalities as India is. And there have been instances of judicial corruption, which is always disturbing, even if rare.

A separate issue is the quality of India’s laws: do they adequately support ideals of fairness and protection of human rights, and, separately, do they promote economic efficiency? The deeper philosophical challenges of assessing India’s legal system are much greater than analysing their economic efficiency, and much progress has been made since pioneering efforts such as Project LARGE, headed by Bibek Debroy, a quarter century ago, to improve laws with a view to enhancing economic efficiency. The approach to reforming the legal code associated with the relatively recent Financial Sector Legislative Reforms Commission displayed economic sophistication and attention to detail, and one has seen improvements in areas such as bankruptcy law, which have been slowly taking root.

Yet another problematic aspect of the India’s legal system, however, is its slowness. The best laws in the world will not help if legal judgments are subject to lengthy delays. Again, as far back as the early 1990s, Dilip Mookherjee, building on the Malimath Committee Report from that period, had detailed the shortage of judges, the lack of effective management of caseloads, and poor work practices among lawyers as amongst the factors contributing to delays. These problems have persisted, despite the possibility of tackling some of them without significant new resources: the obstacles have reflected political economy factors, where politicians, lawyers, and, perhaps, judges too, all benefit from the current badly-run system. Another possible barrier to change may have been the difficulty of quantifying the costs of the current system

This gap has started to be addressed by new economic research. In 2016, Amrit Amirapu provided one of the first quantitative analyses of the economic costs of judicial delays in India. In particular, slow courts increase the costs of enforcing contracts, and may delay investments, or even lead to such investments not taking place at all. Amirapu utilised geographic variation in contract enforcement delays across India’s states for industries where such contract enforcement would likely matter, versus less “contract-intensive” industries. He found that court efficiency in civil cases (often involving property or other contracts) did matter quite significantly for industrial growth. The fact that court efficiency in criminal cases did not have such a growth effect made these results more credible. In 2018, Johannes Boehm and Ezra Oberfield carried out a similar study. Working with different industry data, but again using cross-state variation, they found that court delays distorted production decisions, and even the organisation of firms, resulting in significant productivity losses. These results complement and reinforce Amirapu’s results. The bottom line is that multiple ways of examining the data confirm that the inefficiency of India’s courts in the realm of contract enforcement has large negative consequences for economic performance.

Will studies such as the two highlighted here help in influencing policymakers? One place to start may be the World Bank’s Ease of Doing Business Index. The Indian government became very excited when the country’s ranking according to this index soared recently. The change was associated with improvements in the bankruptcy code (dealing with insolvency is one of the index components), although the index may have given more weight to the promise of those improvements than the reality of them. But India’s ranking on contract enforcement is a dismal 163rd. One weakness of the index is that it cannot ensure that components receive weights that properly reflect their importance for economic performance. If one could make the argument that improving India’s ranking in contract enforcement will cause it to rise further in the rankings (with the associated reputational benefits), as well as having large direct benefits for economic performance, this might be a starting point for improvements in court functioning.

Of course, changing massive bureaucracies such as the court system is much harder than rewriting legal codes. Here, another aspect of the quantitative studies may help. Since they exploit variations across states, there is scope for benchmarking and competition between states for improvements in judicial contract enforcement, just as states have competed to be recognised overall as attractive destinations for corporate investment. Quantifiable benefits of location choices may affect such decisions for companies, although infrastructure and access to supply chains and markets may be more decisive.

Interestingly, the 2018 academic study relied on data compiled in a report by Daksh, a non-profit based in Bengaluru, which aims “to promote accountability and better governance in India”. This may be a crucial part of the process for effecting change. Non-profits can enable and complement academic research, and both together can make the case for policy reform. The academic studies show that inefficient courts have high economic costs, but do not have specific policy recommendations. Organisations such as Daksh can use these studies to bolster arguments for institutional reform at the micro level, perhaps engaging with organisations representing lawyers and judges to fine-tune reform recommendations for India’s judicial system. We know for sure that delay in doing this will be costly.

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