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Effect of Legal Framework on India's Economy

Legal System with respect to Indian Economy:

We all know that the legal system of a country significantly affects the economic development of that particular country. India is also not separated from this fact. We have been experiencing that the Indian legal system is having a consistently negative impact on the economic growth of the country.

There is a huge pendency of cases in the courts, there are strict trade regulations, and the judiciary is not analyzing or comprehending any of the economic aspects of their decision which are causing huge barriers to economic growth in India.

India always had very diverse economic trends in the country itself. Economic growth especially in India is both, geographically and sector-wise, concentrated. The data, as collected, shows that between the years 1970 and 2004, fastest growing states are namely Andhra Pradesh, West Bengal, Gujarat, Karnataka and Maharashtra, which grew over two times as fast as slow growing states.

The five richest states have received disproportionately very high share of capital, which is about 55% of the total stock, whereas the poorest five have only 15%. Almost half of total FDI approvals goes to the five most prosperous states. The growth in the economy is also sector-wise concentrated in only the high skill and service related industries. Hence, this shows that legal institutions and the legal policies are having a huge impact on the economic growth of India.

Why do we need a legal system which enforces economic growth?

The judicial system of India is extraordinarily slow. These slow functional courts in India indirectly affect the output and the employment growth in manufacturing sector, also the fact stated that there are certain industries who rely on contract enforcement more than others, thus having a negative impact.

We see that this inefficiency of the courts of India is a big obstacle in the economic growth. Furthermore, these courts also have to make sure that their rulings are not having any adverse impact on economy of India. The Supreme Court of India is interpreting the economic policy matter, but that has not been able to keep up the pace with changing policy regime, which on immediate basis needs to be placed under light.

The indifferent attitude of legal policy makers is also a hindrance in economic growth. These policy makers intend to over protect the industries of India, from their foreign competitors, which is affecting the quality of service to be given to the consumers and also the economy on a larger scale.

The link between legal development and economic development is clearly visible. There is a constant need that the issues of legal development in the country are addressed, to ensure a sustainable and a stronger economic growth of India.

Courts are regarded as important in the functioning of markets, but there is limited evidence showing this. In my opinion, there is a causal role of judicial institutions in facilitating economic development outcomes. There are three key factors to this. First is the reducing marginal judge vacancy which reduces the court backlog by 6%. Secondly, it stimulates the bank lending in the local credit markets with improved liquidity from debt recoveries. Thirdly, it affects the credit availability, production, and the profitability of firms which are located within the court's jurisdiction.

The courts resolve various disputes that arise out of violation of contracts and violation of rights which are pillars for development of formal financial sector as well as a cause of increasing investment and economic growth. The lags made in timely resolution can introduce lead to uncertainty and transaction costs that can weaken not only the immediate outcomes of litigators but also have potential modifications on the functioning of the entire economy.

Keeping in mind a number of differences in history and the size of the economy between the USA and India, the fact that the growth of the legal institutions is an important factor in order to grow economically remains same for the country. The USA on one hand have realized the fact, and it has worked upon building a system with efficient courts and a legal environment which empowers trade, whereas India, on the other side still has to take cues and act accordingly.

The long list of pendency of cases is a major problem that has eroded the Indian courts for far too long now. High time has come that the policy makers should take note of this problem and take necessary steps to resolve the same.

The work of the policy makers is to create a trade friendly environment, which can attract foreign investment to the country. There is a huge amount of manpower and the rates of unemployment is very high, India is in a dire need of industries investing in India, to create jobs for the people. Economic growth of a country has the power to address a plethora of problems for the underdeveloped masses of India.

In conclusion, it is seen that the lack of a proper legal framework in India has significantly affected the growth of India's economy. It is of the opinion that with implementation of legislation which equally gives the nation what it seeks to serve, a development of the society will be seen. With strong legal foundations, the discriminations and inequalities which are present in India shall soon disappear and in the absence of inequality and discrimination we can develop an environment which is open to economic growth.

Award Winning Article Is Written By: Ms.Ishika Gautam
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