INDIAN INSTITUTE OF MANAGEMENT – TIRUCHIRAPALLI (CHENNAI CAMPUS)

POST GRADUATE PROGRAMME IN BUSINESS MANAGEMENT

TERM V / 2018-20
“INDIAN ECONOMY & POLICY” – Mahesh Sundar N (1803017)
Parameters that hold back higher ranking for India in Doing the Business report of World
Bank
 The Doing Business Report (DB) is a report started by Simeon Djankov and
elaborated by the World Bank Group since 2003. The aim is to measure the costs to
firms of business regulations in 190 countries. The study has become one of the
flagship knowledge products of the World Bank Group in the field of private sector
development, and has claimed to motivate the design of several regulatory reforms in
many countries.
As the World Bank ranks 190 countries, investors have a comparable template to
make cross-border investment decisions. The ranking provides a significant input to
their decision-making process.

India’s rank is below 100 on five parameters: “starting a business" (137), “enforcing
contracts" (163), “registering property" (166), “paying taxes" (121) and “resolving
insolvency" (108). In this the two main parameters which needs urgent improvement
are

1. Registering Property.
The Government has launched The Digital India Land Records Modernisation Programme
(DILRMP)—the erstwhile National Land Records Modernisation Programme—seeks to
improve the quality of land records in the country, make them more accessible, and move
towards government-guaranteed titles. The DILRMP is being implemented across all states
with differential progress. Nineteen states/Union territories have started issuing digitally
signed record of rights (RoRs), a record that shows how rights on land are derived for the
landowner, and records the property’s transactions from time to time. These states have also
started linking RoRs to cadastral maps (a record of the area, ownership and value of land).
Out of these, three states (Goa, Odisha and Tripura) have almost completed this process.
While the scheme so far has looked at the digitization of land records, it has not addressed
issues around land ownership. It is well known that land records in India are unclear and do
not guarantee ownership. Such unclear land titles are there because of a variety of reasons,

First, in India, we have a system of registered sale deeds and not land titles. The Transfer of
Property Act, 1882, provides that the right to an immovable property (or land) can be
transferred or sold only by a registered document. These documents are registered under the
Registration Act, 1908. Therefore, the transaction is registered, and not the land title. This
implies that even bona fide property transactions may not always guarantee ownership, as
earlier transactions could be challenged.
Second, land ownership is established through multiple documents maintained by different
departments, making it cumbersome to access them. For example, sale deeds are stored in the
registration department, maps are stored in the survey department, and property tax receipts
are with the revenue department. Further, these departments work in silos and do not update
the data in a timely manner, which results in discrepancies. One has to go back to several
years of documentation to find any ownership claims on a piece of property, which causes
delays.

Third, the cost of registering property is high and, hence, people avoid registering
transactions. While registering a sale deed, the buyer has to pay a stamp duty along with the
registration fee. In India, stamp duty rates across states vary between 4% and 10%, compared
to 1% and 4% in other countries. Further, registration fee is an additional 0.5% to 2%, on an
average.

Fourth, under the Registration Act, 1908, registration of property is not mandatory for
transactions such as acquisition of land by the government, property leased for less than one
year, and heir ship partitions. Thus, several property divisions are not recorded and, hence, do
not correctly reflect the ownership of the property. This often leads to litigation related to
rightful ownership. Unclear land titles impede development on several fronts. In urban areas,
disputed land titles lead to lack of transparency in real estate transactions. Any infrastructure
created on land that is not encumbrance-free can be potentially challenged in the future,
making such investments risky.

2. Enforcing Contracts

India’s score in contract enforceability score is extremely bad to the slow judicial system.
The civil justice system has been given the step-motherly treatment over the years although it
is many times slower than criminal justice system. Despite the massive growth in economy,
which has at least quadrupled in last 20 years if not more, there has been no proportionate
increase in the strength of judges or courts. According to the data published by National
Judicial Data Grid for 2016, two crore cases were pending in district courts in India, one-third
of which were civil cases. At the time, analysts said that at the current rate of clearing, the
district civil courts would never finish the backlog of cases.

The other option is to go through an alternative dispute resolution process. Some cases
may be solved through mediation. However, lack of a credible legal alternative through
which one could enforce a contract emboldens parties to breach contracts, as they know
they can get away with it scot-free. In such cases mediation is unlikely to help. Arbitration
is one possible option, but even arbitrations in India has been plagued by high costs and
terrible delays, which keeps arbitration out of the reach of common citizen. Big
corporations prefer to take their arbitration to jurisdictions like Dubai and Singapore as in
India for these reasons. The recent passage of The Arbitration and Conciliation
(Amendment) Bill 2019 provides for a time-bound settlement of disputes as well as
accountability of the arbitrator.

The threat of enforcement stops people from opportunistically breaching contracts, thus
keeping the business ecosystem reliable and trustworthy. According to the Ease of Doing
Business Index Report, enforcing a contract in India can take 1445 days and 30% of the
claim value as cost. The report also gives 10.3 points out of 18 to India’s quality of
judicial process, which is quite poor.

The economics of enforcing a contract demands that the cost of enforcing the contract
must be lower than the profits one expects to make from execution of the contract. If the
cost is too high, it may not make sense for a contract to be enforced at all. Then parties to
any contract depend on either benevolence, or good relationship etc. to recover their dues.
This increases the number of breaches as parties are not afraid of legal consequences. This
can lead to a breakdown in large number of deals, causing a lot of loss to businesses and
individuals across the entire economy.

There is a huge uncertainty cost attached to doing business in India due to uncertain
enforceability of contracts, and it makes Indian businesses globally less competitive. It
also makes India a difficult place to do business in; therefore silently working as a major
force that deters investment, both domestic and foreign. It also prevents companies that
would have been otherwise successful from becoming viable, thereby hurting the much
talked about start-up industry as well as the entire economy.

There are two aspects to solving India’s contract enforcement problem. One is reforming
India’s sagging civil justice system, which has lost credibility to the extent that the people
who are supposed to seek justice through it have begun to avoid it altogether as far as
possible.

However, reforming the system can be a resource intensive and difficult task.
The government has promised to address a part of the problem through institution of
commercial courts. On March 9, the Cabinet passed an amendment to the Commercial
Courts, Commercial Division and Commercial Division of High Courts Act, 2015, making
some very important changes to the law. For one, disputes worth at least Rs 1 crore could
be referred to these commercial courts. The proposed amendment will bring down the
floor to Rs 3 lakhs, thereby opening up the benefit of these specialised courts, which are
expected to be faster and better in terms of expertise in commercial matters, thereby
directly affecting the time taken to enforce contractual claims worth over Rs 3 lakh.
Further, in major cities, commercial courts are being introduced at the level of district
judges.

This is likely to have a long-term positive impact provided that judges in larger numbers
are actually appointed in these courts rather than just giving additional duties to existing
judges who are already overburdened with cases for optical purposes, as has happened in
the past. In addition, this government has attempted to make a structural change to how
arbitration, the other major avenue to resolve disputes and enforce contracts, in conducted
in India. It has attempted to introduce time limits on how long arbitrators may take to
render decisions, and tried to push the market away from ad-hoc arbitration, which
happens to be the norm now, towards institutional arbitration. To empower, recognise and
at the same time keep arbitral institutions in check, it is also creating a regulator of
arbitrators and arbitral institutions, and has named it Arbitration Council of India.

All of these are major structural developments that are much awaited and are likely to have
very positive impact on enforceability of contracts in India. If enforceability problem is to
be solved, sufficient number of judges must be recruited and vacancies in courts must be
quickly filled. Investment in the judiciary is also in a desperate need of enhancement.
While developed countries have over 50 judges per million population, and USA has about
100 judges, we have around 15.