Law can be good or bad driver of nation’s Economy

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A prosperous society may be more concerned about piracy of the intellectual wealth. It may also show greater concern about environmental pollutions that affect the quality of life or about adherence to the highest standards of competence, which a professional is expected to observe. Laws and legal systems, in this manner, codify social values, attitudes and expectations of behaviour from members of the society. They have their own impact, good as well as adverse, on the economic activity of the nation, depending on how far they are consistent with actual conduct, habits and thinking of the majority of members comprising the society. Certain laws, like income tax rates, customs duties, prohibition, etc. are known more for creating certain values in society, which ultimately act as deterrent in the larger interest of the society itself. Similarly, laws relating to economic activity can have different impacts, depending on what their content are. The reason is that ultimately, a law consists of the intent of the law-makers and strategies to achieve this intent. The laws could become coercive, restrictive or highly facilitatory, depending on what the ideals have been accepted and how the drafting has been done. If the intent of the law and the contents of law are to facilitate growth in an unmistakable manner, law has to be drafted accordingly in an unambiguous manner. Dealing with foreign direct investment, first, basically it depends on real factors, interest rates, tax laws and Government’s other economic policies as well as their stability. Law and legal system can, at best, be one factor, but certainly not a major one (in determining the climate of investment). If laws relating to closure, transfer of management and labour appear to be “obstructive”, that obstructive character could be an act of design. If the very intention is to protect labour, then it is an act of design. There could be a wide gap between the intent of the law and the contents and the interpretation of the law. Larger the ambiguity, larger the scope for litigation. There is a need to ensure that a law must be drafted in an unambiguous manner so that it is identically understood by legislators (who approve the law), by administrators (who have to administer the law), by administrators (who have to administer the law) and society (which lives with it and is affected by it) and the judiciary (who has to interpret the law). Then only can the intent of the law be fully carried out.

Talking about liberalization, we are creating for ourselves new environments where some of our old laws have been rendered obsolete and many more laws need to be re-written. Liberalization is intended to serve the purpose of efficiency, namely, that whatever resources, are made available to us must be made most productive. Laws need to be under constant revision so that they meet the challenges of today’s environments, today’s thinking and today’s involvement in the global economy. Foreign investors need to be invited to participate under such environments in the spirit of efficiency-oriented growth that all these countries want to pursue. Such a participation pre-supposes the creation of environments which are more or less identical with the best available anywhere in the world. Then only can we attract more resources in quantity and more qualitative resources, to our countries. As to competitiveness, efficiency flowers best in competitive environment, for it impels all of them to make the best use of resources. An investor who comes from abroad would like to feel secure that this approach to liberalization and abiding commitment are administered in the form of legal framework in the country. He would also like to feel secure that there was an adequate statutorily backed regulatory framework for ensuring fairness and observance of all rules of competition. An investor, domestic or international, basically looks for returns on his investment. The logic of investment is identical across all the countries. Hence domestic as well as foreign investors have to be provided identical opportunities. A level playing ground is needed for all investors in the country in order to bring out the best efforts from both of them. Any discriminatory treatment to anyone can ultimately hurt the overall interest of investment in the economy. An economy, which is largely dependent on domestic savings for investments, cannot afford to discriminate in favour of foreign investors, or (to put it differently), against the interest do domestic investors. At the same time, knowing the need for foreign resources and having decided to invite foreign investment, the laws just cannot discriminate against foreign investment, in order merely to reflect patriotic sentiments. However, the legal system is essentially a domestic one, as there is no universally applicable commercial code for various countries. The philosophy of law may be universal, at least among similar political systems. But the language of legal systems across the countries are distinctly not so. This aspect required attention. Concentrating on the approach to be adopted by the legal system in regard to foreign investment, an environment of mutual trust between domestic investor and foreign investor is to be created. The legal system has to be such as created such a mutual trust among all the investors. An investor needs freedom of both entry and exits. He needs freedom to decide where to locate the industry, how much to produce, how much and where to purchase, how many persons he should employ, and at what prices to sell. He needs freedom to allocate and appropriate high profits after tax. He needs protection from unfair play and restrictive practices from other competitors, suppliers, utilities and tax collectors. He needs inexpensive access to a speedy system of justice and arbitration. He needs laws that reflect a new philosophy, a new business environment, new business requirements-laws that encourage initiative, speedy response, clearances and single-minded pursuit of efficiency, where there cannot be more barriers. Labour laws continue to remain highly contentious areas in many highly populated developing economies. The issues of exit policy transferability of resources to more productive, business and implementation of productivity-linked incentive structure have become highly essential issues in order to create investors’ friendliness about labour. Similarly, a free market for corporate control, that is, takeover and mergers, may be perceived by some as investment-friendly and some as hindrance. Corporate laws need to be re-worked to make them more investor friendly. The ultimate aim is to achieve free mobility of managerial resources and financial resources, with a view to the optimization of country’s resources in the long run and making them as productive as possible. And, all this should be in the interest of shareholders and consumers. Laws can be made simpler and complemented by transparent regulations, designed to facilitate a competitive market for corporate control. These can contribute significantly to the productivity of resources. It is only when a transparent regulatory regime could be established that it would become highly comfortable and attractive to the foreign investors.

Author: Hemant Batra*

*Hemant Batra is an Indian lawyer with nearly 24 years’ experience in diverse legal assignments. He is founder of a renowned international law firm and is also secretary general of saarclaw; he is recipient of mahatma gandhi seva award and is a visiting faculty to leading educational institutions; his profile can be accessed by clicking

New Delhi, India