Need fast resolution for trade edge | The Financial Express

Need fast resolution for trade edge

We have made progress, but global benchmarks set by Singapore and South Korea are still some distance away

Need fast resolution for trade edge
In the late 1980s, India and China exported less than $5 billion worth of textiles and apparel. Today, with exports of $320 billion, China has captured half the world trade in the sector, while India struggles at $40 billion. Weak contract enforcement is one of the crucial reasons for this disparity.

By Ajay Srivastava

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A department of justice (DoJ) report says that the time taken to settle business disputes at the commercial courts in Mumbai and Delhi has come down by 50%, from 1,445 days in 2020 to 626 days for Mumbai and 744 days for Delhi. The report, titled Reduction in Time Taken for Trial and Judgment in Dedicated Commercial Courts, calls for celebration. It also calls for greater resolve to better the results.

We know that delays in settling business disputes at the courts increase costs and deter investors. However, looking at the example of the Indian textile sector, it can be seen that delays have a much worse effect. They stunt the growth of the industry and prevent it from adopting global best practices. In the late 1980s, India and China exported less than $5 billion worth of textiles and apparel. Today, with exports of $320 billion, China has captured half the world trade in the sector, while India struggles at $40 billion. Weak contract enforcement is one of the crucial reasons for this disparity.

In the 1980s, Europe and America were the largest buyers of textiles, but they used to buy limited quantities through a country-specific quota system. The system changed in 1995 when developed countries agreed to phase out quotas in the next 10 years. India, China, and other developing countries were now free to export as much as possible. As the competition intensified, a new business model took shape where timely enforcement of contracts was paramount. European and American firms did not want to deal directly with Indian and Chinese textile firms. They worked through intermediaries known as buying agents. The buying agents would collect orders from European and American firms and distribute these to the sourcing agents located in the supplier countries, who would then distribute orders to local firms for textiles and apparel making.

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The system worked on three contracts—between the buyer and buying agent, the buying and sourcing agent, and the sourcing agent and production firms. The success of this system required timely deliveries of agreed quality products as specified in the contracts. In case of any dispute, the courts were to settle the dispute quickly, and this was our weak point. Without efficient contract enforcement and long delays at the courts, the sourcing agents could not enforce the quality and service levels of the production firms. The word was soon out, keeping big global agents away and thereby preventing buying and sourcing agents’ ecosystem growth in India. The results were disastrous. The garment firms had to contact buyers directly, but they could only reach a limited number of buyers. Most were unwilling to deal with unknown firms.

The absence of an agent ecosystem not only hurts exports but also increases imports. In a garment value chain, fibre is converted into yarn, yarn into the fabric, and fabric into the garment. With lakhs of firms for each stage, a garment-maker may not know the supplier producing the desired quality fabric. Such matchmaking is the task of the agent/aggregators. Since we did not have an efficient contract enforcement system, the ecosystem could not develop. The result?

Fabric-makers do not buy yarn as they do not get orders for the supply of fabric from garment-makers, so we export yarn, and our garment-makers import most fabric. With idle fabric-makers, the supply chain remains fragmented.

While India dithered in according priority to commercial disputes, China mastered the new rules. Chinese textile’s rapid growth in the 1990s is attributed to mastering the agent-aggregator system. The textile industry’s story applies to many other sectors. The Indian electronics sector remains similarly fragmented internally due to a lack of agents and matchmakers.

In all, more than one crore commercial cases are pending in courts, with over 40 lakh economic cases pending in five major high courts alone. Over 200,000 cases are pending in appellate tribunals that deal with high-stakes business issues. The key tribunals relate to telecom, environment, electricity, income tax, consumer disputes, customs excise, and service tax.

How was time cut in the disposal of cases? The digital transformation of commercial courts made this possible. The amendment in the Code of Civil Procedure, 1908, by the Commercial Courts Act, 2015, provided the legal basis. The new system allows for online filing of cases, e-payment of court fees, and issuance of e-summons. It also allows random allocation of cases to judges, hearing and pre-trial conferences, and the use of Electronic Case Management. Adjournments delayed the cases. These have been limited to three a case.

However, work needs to be done to reach global benchmarks—like that of Singapore (164 days) and South Korea (229 days). Adopting a computer-compatible contract format will cut time and cost, as the aggrieved party currently spends one-third of the claim value on the lawyer, court fees, etc.

Calcutta transformed from a sleepy village to a prosperous trading city in the mid-18th century when the British East India Company set up fast-track commercial courts for quick disposal of contract disputes. This attracted the most prosperous local and international traders to set shop in Calcutta. Data should be published for all commercial courts; now, data is available only for Mumbai and Delhi.

Cutting the time taken from the filing of a case to obtaining a judgment and enforcing a contract in India from 1,445 days to 700 showed that the government got the strategy right, but the textile industry’s example tells that we have a long way to go. India must go all out to improve the contract enforcement system. It will be a reform to unlock the full value of all other reforms.

The author is Former Indian Trade Services officer, writing on technology and trade

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