Tackling litigation delays to boost India’s economic growth

A business environment that is free of litigation paves the way for innovation, development, and production, critical for value-added growth in the country.

By Sanjay Jain

The relationship between law and the economy in India unfortunately goes unnoticed, despite being pivotal to the nation’s economic growth. The major burden is absorbed by the infrastructure sector, which is invariably plagued by litigation delays that typify the Indian legal system. Other layers of transactions are no exception. With over 45 million cases pending at various levels, these delays stifle business transactions, impacting the ecosystem of trade and commerce. A business environment that is free of litigation paves the way for innovation, development, and production, critical for value-added growth in the country. Thus, the country can ill afford the luxury of any long-term remedial regime implemented in a staggered manner. What is needed is the swift implementation of a robust reform code on a fast track.

Economic Impact of Litigation Delays

One of the most evident impacts of litigation delays is the chilling effect on investments. Investors prioritise jurisdictions with efficient and predictable legal systems where the enforcement of contracts and resolution of disputes occur within a reasonable timeframe. Unfortunately, India ranks poorly in this regard. According to the World Bank’s Ease of Doing Business Report 2020, resolving a contractual dispute in India takes an average of 1,445 days, placing our country among the least efficient globally in this category. This inefficiency discourages foreign direct investment and hampers domestic business growth, especially in sectors that require substantial capital upfront. Prolonged legal battles diminish returns on investment and increase uncertainty, driving potential investors to seek opportunities elsewhere.

Additional Layer of Laws Has Failed to Shield the Shivers

Historically, banks and financial institutions have been the biggest losers on account of delays. Despite the advent of several special legislations, the recovery of non-performing assets (NPAs) has remained unsatisfactory. To illustrate the point, the legislature introduced the Insolvency and Bankruptcy Code (IBC) in 2016 to treat the malaise; however, what was intended to have the effect of steroids has been overshadowed by the side-effects of more delays, inefficiency, and irregularities, about which the stakeholders prefer to remain silent. As of September 2024, over 12,000 insolvency cases were pending before the National Company Law Tribunals (NCLTs).

Small and medium enterprises (SMEs) operating on tight margins also bear the brunt of these inefficiencies and succumb to the unaffordable costs of prolonged litigation. The collapse of SMEs creates a domino effect on the entire chain of economic activity, driving away investors and annihilating employment opportunities.

Government-related disputes, ranging from land acquisition to tax litigation, account for nearly half of the pending cases in India. These unresolved disputes tie up billions of rupees that could otherwise be allocated to developmental activities. Additionally, infrastructure projects delayed due to legal battles exacerbate the problem and directly impact the public exchequer, stalling economic growth and depriving citizens of essential services.

Conclusion and Suggestions

For an economy to thrive, the legal regime must act as a cheerleader rather than a gloomy bear. Delayed verdicts in commercial matters undermine market sentiments and create an environment of uncertainty that disincentivises entrepreneurship and innovation. Such systemic failures are unacceptable in a country aspiring to become a $5 trillion economy.

To address the challenges caused by litigation delays, India must focus on expanding the court network with a larger number of well-trained judges who are sensitised to the growing dimensions of the commercial ecosystem. We also need to build a strong pool of commercial arbitrators, commanding faith not only for possessing impeccably chiselled domain knowledge on par with global standards but also for conducting themselves with unimpeachable integrity and core discipline.

The Government, being the largest litigant, must play a proactive role in reducing unnecessary litigation, particularly in matters relating to direct and indirect taxation. An integrated strategy, sound in law, practical in approach, and aimed at securing a healthy balance between the expectations of stakeholders on the one hand and the need to safeguard lenders on the other, ought to be the prime concern of the Government. Blended with an appropriate revamp of policies, a judicial system that is transparent, efficient, and responsive can certainly build the desired environment. The time to act is now, for every day of delay extracts a cost that India can no longer afford.

(Sanjay Jain, Senior Advocate and Former ASG of India.)

Views are personal and do not represent the stand of this publication.