The post-COVID19 world offers a lot of opportunities for India to emerge as the new factory of the world as more and more manufacturing firms move out of China. Many Chief Ministers in India have already started making the right noises to woo foreign investment. It is heartening to see that the Chief Minister of a +predominantly agricultural state such as Uttar Pradesh has sensed an opportunity amidst the chaos and gloom prevailing globally. According to news reports, the state has promised a range of incentives to corporate giants such as Fedex, UPS, Cisco, Adobe, Lockheed Martin and Boston Scientific among 100 others. The state has promised them tailor made incentives if they set up shop in Uttar Pradesh. However, before we get excited about possibilities of these companies setting shops in India, a reality check is in order. The father of political economics, Adam Smith, identified Land, Labour and Capital as the three factors of production and these factors continue to be recognized till date with the addition of a fourth factor, entrepreneurship. Although the government of Prime Minister Narendra Modi has taken progressive steps to make India a business friendly country (India has jumped to the 63rd position in the Global ease of doing business rankings in 2019) a lot more needs to be done to transform it into an industrial economy from a predominantly agricultural one.
The first item on the agenda should be to initiate a slew of legislative reforms. The current set of laws, especially when it comes to labour and employment, need an urgent check. For the most part they work as tools of harassment. Former Niti Aayog chairman Arvind Panagariya best captured the complexities of India's labour laws in these words: "The labour situation is incredibly complicated, when you go from six workers to seven in a firm, the Trade Unions Act kicks in. When you go from nine to ten, the Factories Act kicks in. And when you go from 19 to 20, something else kicks in, as happens again when you go from 49 to 50 and 99 to 100. The biggest killer is the Industrial Disputes Act, which says that if you are a manufacturing firm with 100 workers or more, you cannot dismiss any of them under any circumstances unless you get prior approval from the government. This is rarely given and it applies even if you go bankrupt, in which case you still have to pay your workers. This has important consequences because investors are not going to enter into an industry if they can't exit. So India has a very pernicious set of labour laws and that really, to me, is the reason why Indian firms have remained so small on average."
Although the Modi government has embarked on the arduous task of reforming these laws and consolidating them into 4 codes, the ride ahead is bumpy because of the political resistance it will have to face. The Code of Wages 2019, the first in the series of 4 codes was introduced and passed by the Union Parliament in 2019 and the second one relating to occupational safety, health and working conditions is pending before the Standing Committee for deliberations. The third code, which is also the most contentious one, the Industrial Relations Code 2019 has been introduced in the Lok Sabha. Although it is a repeat of the 2017 code (with some exceptions) which had to be withdrawn in view of the stiff opposition, it is extremely important to project India as a favorable investment destination. The government must speed up the passage of the code to expedite investment proposals coming to India.
The doing away of criminal prosecutions for wrongs that are essentially civil in nature will also help boost investor confidence. The withdrawal of criminal prosecution for non-compliance with the CSR regulations was a correct step. However, there are various other laws including the Companies Act, Employees Provident Fund Act and so on, which contain provisions that hold the highest management criminally liable for acts which are in essence civil wrongs. The government must ensure that such provisions are suitably amended and monetary penalties are introduced in place of criminal liability.
The next issue which needs consideration from both the Central and the State government is the issue of land acquisition. There are more than 1,200 land laws in 29 states of India, and together they create a maze which is extremely difficult for any investor to traverse. Accompanied by high rates of stamp duty and other charges related to land, it becomes a serious obstacle for growth of industries. The Land Acquisition Act 2013 imposes extremely stringent conditions and makes land acquisition a very complicated ask.
Although the Modi government had in 2015 tried to amend the said act and undo some of the wrongs that the 2013 Act had caused, stiff resistance from both within and outside the Parliament forced its hand and led it to shelve the proposal. The fact that land is a subject mentioned in the State List of the VIIth Schedule of the Constitution has added to the agony as the states are free to amend the central laws if they wish. Murmurs of industrial units willing to relocate from China should make the Indian political class smell blood and jump on the opportunity. In this regard, the achievements of the Yogi Adityanath government in Uttar Pradesh needs to be applauded. The ease with which land has been acquired for the expressway project and the industrial corridor projects are shining examples of how political will power can sometimes ease the way for industries and bring development and prosperity to the state. Considering the fact that a large majority of states in India are currently ruled by BJP or its allies, a signal from the top should do the trick in terms of land acquisition. But the government through a proper legislative amendment must impose a ceiling on the time taken to resolve a land acquisition dispute through courts of law. The various fora for appeal (including the High Court and the Supreme Court) mean that a particular dispute may take almost 20 years to be finaly resolved. The Modi government must ensure that even if there are disputes pertaining to land acquisition, they are resolved in a timely and efficient manner. Setting up of a separate tribunal consisting of experts from relevant fields for deciding such cases can ease the burden and provide speedy and effective relief besides creating a more business friendly environment. Mandatory conciliation or arbitration proceedings before approaching the court of law can be another step to speed up the process.
Lastly, the one issue that is close to our hearts and is a huge dampener for any potential investor is the lack of a robust and efficient dispute resolution mechanism. Commercial disputes are bound to occur in any thriving economy. It is incumbent upon the justice delivery system to effectively and speedily resolve the lis, as the absence of the same leads to loss of investor confidence and creates a perception of being trapped in the minds of the investors.
As in most other developed countries, the government in India should promote Alternate Dispute Resolution mechanisms such as arbitration or mediation. Though the Modi government has amended the 1996 Arbitration Act to fine tune it to the needs of the changing times, the cost of arbitration is still extremely high, which makes it out of bounds for the smaller corporates. The lack of an institutional framework for promoting arbitration such as the LICA (London International Court of Arbitration) or the SICA (Singapore International Centre for Arbitration) is a primary cause for the lack of confidence in ADR mechanisms. The government should, via legislative fiat, impose a condition of mandatory ADR before approaching courts in cases of commercial disputes. The same would help ease the burden on the system besides providing speedy relief to the parties.
As regards the formal process of law followed in the courts, it is about time that a time limit be fixed and adhered to, especially while dealing with commercial disputes. The legal process in this country takes years to resolve a simple civil dispute involving contractual obligations. Coupled with the numerous opportunities to appeal before the appellate court, High Court and the Supreme Court, which means the process can go on for years on end, the legal process becomes a tool for harassment in the hands of the defaulting party and acts as a strong disincentive for any foreign investor. Such a slow and unresponsive system cannot ensure investment protection which is a prerequisite any investor would insist on. The Economic Survey presented before the Parliament in 2019 had mentioned the issue of judicial reforms. It pointed out that a major reason for the slow disposal of cases can be attributed to the lack of judicial officers. According to the Survey around 87% of the backlog of pending cases are before the Lower courts. It further mentions that this is primarily because of the vacancies of judicial officers in the lower courts and specially mentions the three states of Uttar Pradesh, Odisha and West Bengal that need special attention in improving the state of lower judiciary. Apart from filling up the vacancies, the Economic Survey also emphasises the need for increasing the productivity of the judicial officers. Introduction of technology in administration of the courts and increasing the number of working days for the High Courts and the Supreme Court are few other suggestions that were mooted in the Survey.
Another issue which has caused grave concerns in the past has been the problem of judicial overreach. One is reminded of the verdict in the 2G scam or the Coal scam wherein the Supreme Court went ahead and cancelled the licenses of the investors who had invested huge sums of money in critical sectors of the economy. A more recent example of judicial overreach is the issue of payment of AGR dues by the telecom companies. This has come as a huge shock to the telcos as they were already reeling under financial stress in a market like India. A far more prudent approach could have been to take a middle path whereby the economy would not have been impacted so gravely and the guilty could have been booked. This problem of judicial overreach in matters affecting the economy can be addressed by creating an all India judicial service just like the civil service. The creation of such a service would enable the state to condition and train the judicial officers in a manner where they also understand the economic ramifications of their decisions and not merely the legal and the constitutional aspects of the case.
Before parting, I am reminded of a historical incident which succinctly captures the current scenario. In 1588, during the reign of Queen Elizabeth I, a Spanish armada was dispatched to destroy her Protestant regime. However, Britain, with a smaller fleet, both in terms of the number of ships and their size, successfully managed to fend off the attack and destroyed the naval supremacy of Spain once and for all. Till then, Spain was considered to be the pre-eminent colonial power in Europe. However, after the destruction of the Spanish Armada, the balance of power shifted irrevocably. India today, even with its smaller economy and structural and institutional problems, has an opportunity to replace the People's Republic of China as the 'factory of the world' given the manner in which trust in the Chinese system and government has eroded, as far as the Communist regime's current trading partners are concerned. Whether or not we are able to seize this opportunity, remains as the big question.
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Mr. Lohitaksha Shukla is a graduate of the NALSAR University of Law and practises law before the Supreme Court of India. He is also a ...
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Mr. Raghav Awasthi is a graduate of the NALSAR University of Law and practises law before the Supreme Court of India. He is also a ...
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