Ease of doing business : Enforcing Contracts

Ease of doing business : Enforcing Contracts
The Economic Survey 2017-18 has made a compelling argument that addressing pendency, delays and backlogs in the appellate and judicial arenas is the next frontier for improving Ease Of Doing Business (EODB) in the country.
Why is this an Issue?
  • In the latest EODB report by the World Bank, India ranked a dismal 164 in the category of enforcing contracts.
  • It takes, on average, almost four years to enforce a standard sales agreement in a local court, and costs up to 31% of the claim’s value.
  • This is much higher than the average for South Asia (three years) and China (a year and four months), and has crippling effects on the dispute resolution mechanism of the economy.
  • India’s poor ranking in enforcing contracts relates directly to its judicial capacity.
  • A slow judiciary forces participants to adopt loss-minimizing strategies that are not always efficient.
  • The most intuitive result is that the cost structure of the entire economy to go up.
  • Second, the threat of hold-ups can dissuade efficient investments, and could even rule out exchanges that are potentially valuable.
  • Research on 25 Indian states and Union territories from 1971 to 1996 found that a weak judiciary (defined by the speed and predictability of the trial outcome) has a negative effect on economic and social development, which leads to: lower per capita income; higher poverty rates; lower private economic activity; poorer public infrastructure; and higher crime rates and more industrial riots.
What strategies do the firms follow?
Firms and industries have developed ways around this problem.
  • In many industries, firms vertically integrate in order to align their incentives in the different stages of production, or sellers require a security amount from the buyer.
  • Integration, however, increases the cost of starting a business and makes the industry less competitive.
  • Vertical integration also reduces the focus on becoming more competitive in their development and achieving economies of scale.
  • Firms also rely on repeat business and reputation norms to discipline the actors, and these norms work fairly well.
  • Lastly, some industries follow private rules and use private tribunals to solve disputes.
So the present government which has been vocal about improving India’s EODB ranking should involve all stakeholders and take steps to help reduce pending cases by reviewing the existing legal Process.

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