Enforcing Contracts – Biggest hurdle to Ease of Doing Business in India!

Hurdles

Its great to see the improvement India has made in the ranking of World Bank’s Ease of Doing Business. Moving up by 12 ranks (from 142 to 130) is not substantial, still a good start for the new government. But we should definitely hope that it’s a beginning towards greater improvement in years to come.

Now that’s the good part of the story. However, the biggest point of botheration is the parameter, which drags us down the most – Enforcing Contract. On this one parameter India ranks a measly 178 out of the 189 countries (unchanged from last year) and this is simply unacceptable! Any country that intends to be a major global economic power cannot perform at this level for such a crucial parameter. In India, it takes 1420 days (~4 years!) to get a judgment on a contractual disagreement. Compared to that, its only 538 days (<1.5 yrs) in OECD countries. China, at an overall rank of 84, scores a fantastic 7th rank on Enforcing Contracts. Success of China as a business destination probably indicates the criticality of the factor in the overall scheme of things.

The implications of this factor are severe. One, the longer it takes to resolve disputes, lower is the implied value of the contracts. This fosters an environment of mistrust among parties, which impacts the business environment in the country. Second, lower contract enforceability also means greater cost to dispute resolution. Hence, most businesses build-in this higher cost into their cost structure, thereby making it more expensive to do business in India. And finally, the biggest cost to this is that it restricts respectable businesses from operating in a fair and just environment. For example, number of large, global companies shy away from operating in the real estate and infrastructure contracts space in India. One of the key reasons is the week enforceability of contracts in India. The nature of work typically leads to Contractual disputes, which linger on for years and increase the cost of doing business for these companies. As a result, it leads the companies to either make money by cutting corners or increase the contract price. An increase in price will automatically make them uncompetitive in the bidding process and hence most projects are only left with contractors cutting corners! The story repeats itself in sector after sector.

That said, I am optimistic about things improving henceforth. For one, it is already quite bad so the only way forward is up. Secondly, I continue to be optimistic about the current government. It has already made some progress with draft bills like Arbitration Act Amendment Bill 2015. Also, this government and many of its ministers, understand the challenges businesses are facing far better than their predecessors and look committed to solving their problems. That said, the challenge would continue to be posed by the inertia in the bureaucracy and judiciary, which have shown a continued resistance to change and have generally refused to evolve. But then when was the last time a ranking like this was taken so seriously in India? Rising aspirations should force all institutions to play their role a little more efficiently. Modi Government has set itself a target of breaking into top 50 and it is impossible to achieve that with such abysmal record on Contract Enforceability.

Anshul Gupta

A tech enthusiast and big votary of technology to transform the way businesses operate. Prior to Okutech, he founded businesses in Edu-tech and enterprise solutions. He founded and sold venture by name PrivilegeCorner.com, an enterprise HR solution platform. Anshul is an alumnus of Delhi College of Engineering and the Indian School of Business (ISB), Hyderabad.

1 Comment

  1. “Really enjoyed this blog.Really looking forward to read more. Keep writing.”

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