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194 Economic Survey 2020-21 Volume 1

(c) Build resilient ex-post resolution mechanism

6.31 When outcomes are uncertain, it is important to have a resilient ex-post resolution
mechanism. Despite having all regulations in place and best efforts to deal with effective
supervision ex-ante, devising a robust ex-post resolution mechanism is imperative. Grossman
and Hart’s (1986) work on “incomplete contracts” demonstrates that the contracts are contingent
on future states and it is not possible to write complete contracts, and by extension regulations,
for every future state. Thus, adding ex-ante complexity to contracts and regulations, or risk
analysis cannot resolve this issue.

6.32 Hence, there is a need for efficient legal systems (i.e., courts and institutions) such as
Insolvency and Bankruptcy Code (IBC), Debt Recovery Tribunals etc. However, the court system
remains the single most important way for ex-post resolution. The performance in the area of
dispute resolution and contract enforcement in India remains a concern and needs to be focused
on. As per the World Bank’ Ease of Doing Buisness report (2020), it takes 1445 days to resolve a
commercial contract in India as compared to 589.6 days in OECD high income countries and 120
days in Singapore. The report also shows that the cost of litigation in India is around 31 per cent
of the claim value. This is significantly higher than in OECD countries (21 per cent) and Bhutan
(0.1 per cent). The performance of India is enforcement of contracts is also seen in its ranking in
World Rule of Law Index for 2020, where India ranks 69 out of 128 countries. Our performance
is the worst in the category ‘Civil Justice not subject to unreasonable delay’ where we are
placed at rank 123 falling just behind Venezuela, Guatemala, Peru, Bangladesh and Columbia
(Table 7).
Table 7: India’s rank in the World Rule of Law Index (2020)

Particulars India Rank out of 128

World Rule of Law Index 69
People can Access and Afford Civil Justice 115

Civil Justice is not subject to unreasonable delay 7 123
Civil Justice is effectively enforced 102

Alternative dispute resolution mechanism is accessible 88
Source: World Justice Project (2020)

6.33 The “Rule of Law ” indicator of the World Governance Index reiterates the same story.
8
India is lagging behind with score ‘0’ as compared to 1.6 and 1.5 in the UK and US respectively
(Figure 7). All these points towards the need for reforming the legal structure to have an efficient
ex-post mechanism for dispute resolution and contract enforcement in India.

7 It measures whether civil justice proceedings are conducted and judgements are produced in a timely manner
without delay.
8 Rule of Law captures perceptions of the extent to which agents have confidence in and abide by the rules of
society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as
the likelihood of crime and violence. Estimate ranges from approximately -2.5 to 2.5.