Businesses Prosper in States with High Judicial Quality: Study

Indian businesses are increasingly seeking legal recourse to settle disputes, finding success in states where courts are receptive while facing delays in regions with less robust judiciary systems. Consequently, the number of companies approaching courts for legal remedies is soaring in some states while declining in others.

A study titled “Do Judicial Reforms Deliver Economic Outcomes,” published by the Social Science Research Network (SSRN) and based on two World Bank surveys (2005 and 2014) and Annual Survey of Industries panel data (from 2001 to 2020), notes: “Compared with 2005, where 23% of firms sought judicial intervention, this number nearly doubled to 44% by 2014. This shows the critical role played by the judiciary in the day-to-day operations of firms.”

This paper, authored by economists Rajesh Raj and Prabin Chhetri, however, offers a caveat: “While states like Gujarat and Maharashtra witnessed a surge in firms approaching the judiciary, others like West Bengal and Odisha registered a decline.”

The study highlights the quality of the domestic legal system and its connection to business performance. It adds that well-defined property rights reduce contract disputes and boost the economy, and that strong legal institutions lower production costs, enhance firm efficiency, and expand market access. They also ensure fair distribution of funding to industries in need and foster business growth and entrepreneurship. According to a key takeaway from this paper, investors and lenders are more willing to support businesses when they are convinced that their rights are protected by the legal system.

The paper delves into the context that inspired such a study: “In the last few decades, the judiciary has witnessed countless judicial reforms like eCourts, Fast Track Courts, Nyaya Vikas, and Nyaya Mitra, particularly to address issues such as high pendency rates, backlogs, inadequate infrastructure, and staff shortages.” The researchers add that the enforcement of laws varies significantly across Indian states due to differences in implementation, corruption, judicial quality, and administrative efficiency. It adds, “We exploit one such judicial reform, the Case Flow Management Rules (CFMR), which saw staggered implementation across states. While some states implemented the CFMR at all levels (the High Court, civil courts, criminal courts), others implemented the rules partially (either in the High Court or subordinate courts).”

This study analysed the impact on businesses and their performance due to the staggered implementation of CFMR. It reveals that between 2005 and 2022, the percentage of firms considering the poor quality of courts as a significant obstacle increased from 22.745% to 39.845%. It emphasises, “Local protectionism in some regions often discourages firms from conducting business outside their home regions or resorting to legal systems in other regions to resolve disputes.”

On average, says the paper, around 28% of cases in India were solved within one year over the past two decades. “This indicates that more than two-thirds of cases take more than one year to resolve, highlighting a substantial backlog, especially in the subordinate courts,” it states.

According to the study, the major hurdle here is the shortage of judges. For every 1 million people, India has about 20.39 judges.

The study also identifies states that are leaders and laggards. Quick trials were seen in states such as Andhra Pradesh, Karnataka, Kerala, Madhya Pradesh, and Tamil Nadu—which were able to resolve more than 40% of cases within one year, on average. “In contrast, states like Bihar, Jharkhand, Chhattisgarh, and Uttar Pradesh resolved less than 10% of cases within the same timeframe, on average.” According to the paper published recently, Delhi, Himachal Pradesh, and Uttarakhand have a healthy judge-population ratio, higher than the national average. Conversely, states like Andhra Pradesh, Uttar Pradesh, West Bengal, and Bihar have an unviable judge-population ratio.

Quick trials and a higher judge-population ratio ensure firm performance across all measures, including fixed capital and labour productivity, the study concludes. It notes, “On average, a 1% increase in the judge-population ratio results in increases in fixed capital, GVA (Gross Value Added, which measures the value of goods and services produced), and labour productivity by 0.09%, 0.10%, and 0.98%, respectively. Similarly, a 1% increase in quick trials is associated with a 0.001% increase in fixed capital and labour productivity, and a 0.002% increase in GVA.”

The study stressed the positive impact of the implementation of CFMR. “To be specific, firms in states that adopted CFMR experienced higher levels of fixed capital, GVA, and labour productivity compared to their counterparts in states that did not adopt these rules.”

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