India ranked respectable 63rd in 2020 in ease of doing business across the world among 190 countries, improving its rank from abysmal 142 in 2014.
This was definitely phenomenal. We saw a major improvement in FDI flow into India that coincided with this surge.
Unfortunately, the easy win reforms are over. Progress has now slowed down in the last 2 years.
FDI slowed down in 2023. In the January-September period this year, Foreign Direct Investment (FDI) into the country declined 22 per cent to ₹48.98 billion. The inflow was at ₹62.66 billion in the year-ago period.
The World Bank will come up with a new rank list in 2024 after discontinuing the previous index. Will we see a major improvement for India?
The Modi government now faces the toughest reforms if India has to become more attractive for foreign capital.
One of the toughest reforms is the speed of our dispute resolution system and enforceability of contracts.
Can a country really move forward and become an economic superpower if it has one of the worst contract enforcement systems in the world?
India’s contract enforcement system is measurably one of the worst in the world, which scares away many potential investors.
In 2015, India ranked 186 out of 189 countries in terms of enforceability of contracts. This means we had the distinction of being one of the absolutely worst in the world. By 2020, we moved to rank 163.
We are still in the bottom 10% in the world 😂
Naturally, that makes foreign investors very nervous while investing in India.
The Prime Minister no wonder is talking about Ease of Justice in his speeches. But it is indeed extremely difficult to make a difference on this front even for him.
After all, it’s not like nobody benefits from these delays.
The Indian legal and judicial fraternity has cultivated and made the system this slow over the years precisely because those in control benefit from this extreme slow pace of dispute resolution.
Some litigators love that they can charge millions for an injunction hearing.
Some love it that they can milk a client for 20 years.
Retired judges love that they can become arbitrators and charge crores in fees. They have no problem if those proceedings drag on.
In the rulebooks, arbitration is supposed to be time bound, and in reality it almost never happens.
Can Modi take on these powers and get urgent arbitration reforms done?
He has succeeded on one count already. Powerful Indian law firms fought tooth and nail to prevent entry of foreign law firms into India, while foreign investors said they want to bring their trusted international multi-jurisdictional law firms.
Sure, the powerful Indian law firms are still very much capable of hampering the entry of foreign law firms by creating obstacles along the way at every step, and indeed not many foreign law firms have chosen to announce their India office yet, but I had given up on any hope that even this much regulatory reform will happen in my lifetime.
A major power centre in our country, de facto and constitutionally so, is the judiciary. The justice system could not be as slow as it is without the blessings of our judicial class.
Arbitration was introduced in India with much hope and fanfare. But judges soon realised that arbitration is a honeypot for them if they can control it. They turned arbitration into a retirement scheme for judges. As a result, arbitration became slow, expensive and viable only for matters involving hundreds of crores.
Only recently, with a push from Niti Ayog, we have got some sort of cost effective and fast online arbitration process. Yet, even this will not really work without cooperation from judges. After all, the arbitration awards are almost always challenged before courts! Even routine stuff like appointment of arbitrators gets challenged.
If judges do not refuse to intervene, final resolution does not come through. Arbitration becomes just an expensive intermediate step in court litigation.
Our arbitration law says that arbitrators have to decide matters in a time bound manner, ideally within a year.
Yet, the World Bank found that on an average it took a commercial dispute in India over 1000 days to resolve in commercial districts of Mumbai and New Delhi (you can assume its worse in the rest of the country), while the acceptable limit would be about 300 days.
Why has the government failed so far to tackle this issue?
Of course, it is difficult for the government to step on the toes of the judiciary. Too many feathers will have to be ruffled in order to make real changes to how fast arbitration is done.
Stock markets and global investors are assuming that Modi will come to power in full force after the next general election. There is no doubt that whether India can keep bringing more people out of poverty depends on our ability to attract increasingly more FDI.
In 2023, FDI into India has shrunk rather than growing. FDI inflow so far has been lesser than 2020, 2021 or 2022. It is true that the international monetary environment was tight in 2023, but India would want to do more to attract a bigger share in global investments nonetheless.
Interestingly, if you compare our situation with that of China, India looks to be placed in a far better position. In 2023, net FDI to China turned negative for the first time, which means more capital left China than what came in.
India seems to be winning the FDI competition with China at the moment, but this could be temporary.
India is now backed into a corner as far as reforms are concerned.
Arbitration reforms are inevitable.
Retired judges will have to release their grip on arbitration.
Rather than just judges being arbitrators and few arbitrations happening at a slow pace, we will see a massive expansion of fast-paced arbitration.
Arbitration market itself is likely to become 10-20x bigger within the next 5 years compared to the entire current litigation market.
Way more lawyers will be working in arbitration rather than in courts. They will be delivering results to clients, and the public will have far more trust in arbitration as a dispute resolution process than we have today.
But do we have enough qualified lawyers to move the wheels of the huge arbitration machinery needed to make India a great economic power?
It turns out that soldiers don’t only fight on the border. All of us have a role to play every single day in making our country great and invincible. Arbitrators and arbitration lawyers too.