Economic Liberalisation and Response of Indian Judiciary

By Yamini Rajora, National Law University Jodhpur

Editor’s Note: Economic liberalisation and respect for human rights are both highly topical issues. Both fields of law protect certain freedoms: economic development could lead to higher human rights standards and be used to secure compliance with human rights agreements. However the interaction between trade liberalisation and human rights protection is complex. The Indian judiciary has in its judgments consistently preserved as unassailable the economic and industrial policy of the Government of India. A study of the same has been made by the author in the following paper.

Introduction

This project deals mainly with the introduction of economic reforms in India and their repercussions on the society. The reform process in India had been initiated with the aim of accelerating the pace of economic growth and eradication of poverty.

Since independence, India had followed the mixed economy framework by combining the advantages of the market economic system with those of the planned economic system. India’s economic reforms began slowly in the 1980s, and then accelerated under the pressure of an external crisis at the beginning of the 1990s.  But over the years, the economic policy enacted in 1991 resulted in the establishment of a variety of rules and laws which were aimed at controlling and regulating the economy and instead ended up hampering the process of growth and development.

This project aims at understanding that how the governmental policies affect the citizens of the country that is whether the policies bring about changes in the interest of the country as a whole or whether there is infringement of people’s rights and only a certain section of the population benefit from these policies. It also examines that whether the exercise of power by the government in view of these reforms does not an unreasonable restriction on the rights and freedom of others.

The process of economic liberalization in India began in the year 1991 with the objective of introducing  the new neo-liberal policies including opening of international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures but over the years the overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.

The aim of the economic reforms and the policies should be to increase the Gross Domestic Product and as well as ensure that there is equal distribution of national income among the population of the country. Unequal distribution leads to a development of disparities among the different sections of the society, thus resulting in creation of a feeling of inferiority among some people. Citizens would start believing that the rights granted to them by the Constitution of the country are being denied to them and there is favourable behaviour noticeable among the policy makers of the nation.

However there are serious questions about the credibility of these reforms since people have alleged that these reforms, instead of harbouring collective good, favour the higher strata of the society only, thus resulting in denial of rights and advantages of such provisions to others. There are also grave concerns as to till what extent the courts have the power to adjudicate the economic matters coming in the courts regarding the policies adopted by the government for the betterment of the economy.

Economic Liberalization in India

 The process of economic liberalization in India includes the ongoing economic reforms in the country that began in the year 1991. This process can be traced back to the late 1970s. In the 1980s, partly through fresh ideological influences, and partly through the observation of faster growth in many East Asian economies, India’s economic policymakers began to seriously attempt some changes in the overall approach to the role of government in the country’s economic development, introducing some liberalization in the trade regime, loosening of domestic industrial controls, and promotion of investment in modern technologies for areas such as telecommunications. Growth accelerated past 5 per cent, but this came at the cost of macroeconomic imbalances which worsened at the beginning of the 1990s.[i]

However, the reform process began only in July 1991 when the economy was facing severe problems of declining foreign exchange, growing imports without matching rise in exports and high inflation. It was only in 1991 that the Government signalled a systemic shift to a more open economy by changing its economic policies due to a financial crisis and pressure from international organizations like the World Bank and IMF. There was greater reliance upon market forces, a larger role for the private sector including foreign investment, and a restructuring of the role of Government.

In 1991, India faced a severe balance of payments crisis, and this circumstance became the occasion for a substantial advance in the pace and nature of economic reforms that were being attempted. In particular, the major steps taken were further trade liberalization, in the form of reductions in tariffs and conversion of quantitative restrictions to tariffs, and a sweeping away of a large segment of restrictions on domestic industrial investment. These two changes in the early 1990s have come to symbolize or coin the term ‘economic reform’ in India.

Since the economic reforms of 1991, the liberalisation of the Indian economy has continued the same barring a few questions that have been constantly raised regarding the control over exercise of power by the government as well as about the rights of the citizens.

       I.            India’s Economic Reforms

The New Economic Policy announced on July 24th 1991 by the Congress Government included structural adjustment measures including-

  • the devaluation of rupee,
  • increase in interest rates,
  • reduction in public investment and expenditure,
  • reduction in public sector food and fertilizer subsidies,
  • increase in imports, and
  • foreign investment in capital intensive and high-tech activities.[ii]

An important feature of India’s reform programme is that it has emphasized gradualism and evolutionary transition rather than rapid restructuring. This approach was adopted since the reforms were introduced in June 1991 in the wake a balance of payments crisis that was certainly severe. However, it was not a prolonged crisis with a long period of non-performance.[iii]

    II.            Effects of the reforms

The policy changes can be reviewed in five major areas covered by the reform program: fiscal deficit reduction, industrial and trade policy, agricultural policy, infrastructure development and social sector development.

The economic reforms initiated in 1991 introduced far-reaching measures, which changed the working and machinery of the economy. These changes were pertinent to the following:

  • Dominance of the public sector in the industrial activity
  • Discretionary controls on industrial investment and capacity expansion
  • Trade and exchange controls
  • Limited access to foreign investment
  • Public ownership and regulation of the financial sector

The reforms have unlocked India’s enormous growth potential and unleashed powerful entrepreneurial forces. Since 1991, successive governments, across political parties, have successfully carried forward the country’s economic reform agenda.[iv]

The most visible and  important component of the reforms so far has been the relaxation of various internal and  external controls on private economic activity, the “license-permit-quota raj”. A significant objective of this liberalization has been achieving greater efficiency in resource allocation, and re-integration of India’s economy with that of the rest of the world.[v]

The economic reforms introduced in India in the year 1991 focused on  Trade Policy/External Sector; Industrial Policy; Infrastructural Sector Policies; Divestment/Privatization Policies; the Financial Sector; and on Policies for Attracting Foreign Direct Investment. However, due to the political economic dimensions of the reforms, there was less percolation of reforms to the state level.

Response by the Indian Judiciary

The economy of a country must include an interpretation of public good which is based on the conception of justice. It should guide the reflections of the citizen when he considers questions of economic and social policy.[vi] An economic system is not only an institutional device for satisfying existing wants and needs but a way of creating and fashioning wants in the future. This idea was put forth by economists such as Marshall and Marx.

The reforms of 1991-1993 were not just about macroeconomic stabilisation. It was about taking the first step towards freeing India from its old isolationism. For the first time in a millennium, India had the courage to face the real world—to compete in global export markets, to attract foreign investment, and to allow the messy hustle-bustle of free markets. Even more importantly, it opened itself intellectually and culturally to the outside world—a precondition for economic prosperity as well as a socio-cultural renaissance.

After the adoption of the new economic policy in 1991, there were problems faced by the importers in the country mainly due to the Liberalization of trade and foreign investment – the ‘globalization’ aspect of India’s reforms –has not been sufficient to promote widespread competitiveness, nor to overcome or rectify the poor state of India’s infrastructure. Thus the economic reform agenda in India remained lengthy as well as complicated.

It is interesting to note the rather conservative approach of the Supreme Court of India while interpreting the economic policy of the Government of India. The most celebrated case in this context is Balco Employees Union vs. Union of India and others[vii]; the relevant extract is quoted hereafter: “47. Process of disinvestment is a policy decision involving complex economic factors. The Courts have consistently refrained from interfering with economic decisions as it has been recognised that economic expediencies lack adjudicative disposition and unless the economic decision, based on economic expediencies, is demonstrated to be so violative of constitutional or legal limits on power or so abhorrent to reason, that the Courts would decline to interfere. In matters relating to economic issues, the Government has, while taking a decision, right to “trial and error” as long as both trial and error are bona fide and within limits of authority. There is no case made out by the petitioner that the decision to disinvest in BALCO is in any way capricious, arbitrary, illegal or uninformed.

       I.            Collective Interest- Power and Right Relationship

The courts observed that in order for the policy to be adopted and enacted successfully, it should be designed in a way such that it results in the collective good of the citizens rather than focusing on the individual interests of a particular section of people in the country, for example, decreasing the custom duty such that it benefits the companies who largely import their products. The result of such legislation would be such that people would prefer to buy the imported products and the local companies would start incurring losses. This would then eventually result in the local companies accusing the government of restricting their right to carry on trade. Therefore, it is necessary that the legislations are passed keeping the rights and collective good of the people in mind.

The courts also criticised the purported change in the economic policy which provided short term advantages to the indigenous industry/business, as well as globalised the Indian economy. It was against the policy of the Govt. especially in the context of the then economic reforms. It was a contradiction that Government was succumbing to the pressure of vested interests. This had caused serious repercussions in the Indian economy and would have totally jeopardised the exports.

In the case of Shri Hari Exports v. Director General of Foreign Trade[viii], the petitioner challenged the validity of the two notifications dated 25-1-1994 and 29-1-1994, effect of which was to transform Polypropylene Moulding powder/granules as goods in the sensitive test for the purpose of its importation, though, when the value based license issued to the petitioner, no such restriction was imposed. Petitioner was issued with the Value Based license on 6-7-1993. As per this license, if the petitioner exports the particular goods (Cassettes) he was entitled to import the goods described in the license without any restriction as to their quantity. It is not necessary to refer to other benefits available to this license holder. After the issuance of this license dated 6-7-1993, “goods in question” was added to the ‘sensitive list’, on 14-9-1993. According to the petitioner, this addition did not affect the pre-existing licensees. However, this was altered by the two impugned Notifications dated 25-1-1994 and 29-1-1994.

In a dispute over change in import policy, it was contended that the change in import policy had affected the public interest. Prior to change in the policy, the exporter was issued with value based license to import the goods, mentioned in the license, with no restriction in respect of the quantity to be exported but due to change in policy, the goods in question were shifted to sensitive list.

It was held that the two notifications are invalid to the extent they operate as an unreasonable restriction on the rights of a citizen and that the courts cannot at all exercise judicial control over the impugned notifications. In cases where the power vested in the Government is a power which has got to be exercised in the public interest as it happens to be here, the Court may require the Government to exercise that power in a reasonable way.

It was observed that the source for the exercise of power requires that it has to be exercised in the public interest by itself does not confer any immunity to the said exercise; the power shall have to be exercised in a reasonable way. The reasonableness has to be tested in the light of the Constitutional provisions. Further, reasonableness of any particular action could be gathered only by considering the circumstances under which it is exercised, the evil sought to be eradicated by the action in question or the public purpose sought to be projected by it

Thus, the exercise of power is considered to be reasonable when it does not infringe upon the legal rights of any citizen. Legal rights are essentially interests recognized and administered by law and belong to science of law rather than to law and are a complete idea. It may mean the legally recognized and defined human wants, demands, or some conceptions by which the recognized interests are given form in order to be secured by a legal order.[ix] If the power is exercised in such a way that the legal rights of citizens are being violated, then the government is held to be acting out of the collective interest.

Therefore, it can be said that the economic policies of the government are valid till the time they do not infringe upon the rights of the citizens. Rights correspond to attaining four goals of legislation; subsistence, abundance, equality and security for the citizen. By security, it is meant that a man’s person, his honour, his property and his status must be protected, and his expectations in so far the law has produced them, be maintained.

 With reference to the economic policies of the country, they should be adopted in such a manner that the basic rights of the citizens such as the right to freedom to carry on trade should not be restricted upon. The restriction on the right should be reasonable in all aspects even when the policy seems to infringe upon the right. For example, putting restrictions on trade through waterways can be considered a reasonable one since smuggling is most common through the seaports. This cannot be considered an infringement of right as the government had taken such an action by keeping in consideration the collective good of the people.

Jurists advocated utilitarianism as they believed that nature has placed mankind under the governance of two sovereign masters, pleasure and pain. The law and legislation must provide for the greatest happiness of the greatest number as that is the measure of right and wrong.[x]

The collective interest of the people must always be given first preference while passing any new law or enacting a legislation. The ongoing economic reforms of India put focus on the above said point. It is up to the government to make sure that the enacted legislations do not in any way deny the rights to the citizens. Such an economic policy should be adopted that treats all the individuals on an equal scale and does not discriminate among the different sections of the society.

    II.            Interpretation of Fiscal legislations

In the case of Commissioner of Income-Tax and Another v United Breweries Limited [xi], the respondent-assessee was a public limited company essentially carrying on the activity of manufacture and sale of alcoholic beverage “beer”. The respondent-company was a regular assessee under the provisions of the Income Tax Act, 1961 and was being assessed in the status of a resident-company. In the returns filed for the assessment year 1996-97 and for the assessment year 1997-98, the assessee had claimed various deductions in the course of computation of the profits of the business which profit becomes taxable as income under the provisions of the Act. The assessee had in the course of its activity of manufacture and sale of beer had furnished guarantee for repayment of certain loans and advances which its subsidiary companies and other business associates to the subsidiary companies had raised from banks and other financial institutions and on the failure of subsidiary companies or its business associates to repay the amount on the premise that they have become incapable of repayment, had reimbursed the guarantee amount to the creditors and had claimed that amount as an expenditure.

Though the agreement for the repayment was finally signed with some foreign collaborator in February, 1989, but due to the foreign exchange crisis in 1991 and also due to the new policy of economic liberalisation and consequent reduction in the import duties in line with the international standards, made the agreement unviable and thus had to be given up.

Hon’ble Justice D. V. Shylendra Kumar held that the cost should be paid within four weeks from failing which the Revenue can realize the amount as part of recovery on its own.

Courts always bear in mind that judicial review is not concerned with matters of economic policy, and that the problems of government are practical ones and may justify, if they do not require, rough accommodations, illogical, it may be, and unscientific.

Legal rules that are technical, that is mostly concerned with business and finance cannot easily be linked to notions of morality. It is possible, though, that because individuals understand such technical rules to have been designed for the promotion of the common good in some way, however indirect and ramified. There does exist a refined sense in which individuals feel a duty to obey the technical rules.[xii] For example, registration of securities increases trade in securities, which allows firms to raise capital and individuals to invest, which leads to more economic activity and ultimately to greater welfare of the society.

The principle of law is that in interpreting fiscal legislation, the Court is guided by the plain language and the words used. The Court would not ignore a legal relationship which arises out of a business transaction in search of substance over form or in pursuit of the underlying economic interest.[xiii] This, however, does not preclude the Legislature from legislating otherwise. In certain areas of the law, legislation may adopt a look-through provision which mandates a rigorous scrutiny to trace subjects and sources. This is a legislative function. Courts do not assume jurisdiction to themselves to create legislative policy or to legislate by interpretation for that does not lie within the realm of judicial power. In matters involving the interpretation of economic and fiscal legislation, Courts follow interpretative techniques which promote certainty in the application of law.

 III.            Correctness of Judicial Review

In Shri Sitaram Sugar Company Ltd v. Union of India[xiv], the petitioners were owners of sugar mills operating in the State of Uttar Pradesh in areas classified for the purpose of determining the price of levy sugar as West and East Zones. They challenged the validity of notifications dated 28th November, 1974 and 11th July, 1975 issued by the Central Government in exercise of its power under Sub-section (3-C) of Section 3 of the Essential Commodities Act, 1955. By the impugned orders, the Central Government fixed the prices of levy sugar for 1974-75 production. Prices were determined with reference to the geographical-cum-agro-economic considerations and the average cost profiles of factories located in their respective zones.

The Apex Court considered the nature, extent and scope of judicial review of administrative actions formulating the economic policies regarding fixing the price of sugar observed that the Court in exercise of judicial review is not concerned with the correctness of the finding of fact on the basis of which the orders are made and held:

“Judicial review is not concerned with the matters of economic policy. The Court does not substitute its judgment format of the Legislature or its agent as the matters within the province of either. It is a matter of policy and planning for the Central Government to decide whether it would be, on adoption of a system of partial control, in the best economic interest of the sugar industry and the general public that the sugar factories are grouped together with reference to geographical-cum-agro-economic factors for the purpose of determining the price of levy sugar. Sufficient power has been delegated to the Central Government to formulate and implement its policy decision by means of statutory instruments and executive orders. Whether the policy should be altered to divide the sugar industry into groups of units with similar cost characteristics with particular reference to recovery, duration, size and age of the units and capital cost per tonne of output is a matter for the Central Government to decide. What is best for the sugar industry and in what manner the policy should be formulated object of the statute, viz., supply and equitable distribution of essential commodity at fair prices in the best interest of the general public, is a matter for decision exclusively within the province of the Central Government. Such matters do not ordinarily attract the power of judicial review.”

Judicial review of economic policies of the government provides with an opportunity to understand and delve deep into the policies of the State concerning any field. This helps in the proper application of the laws and the provisions of the policies to a real-life situation.

 IV.            Delegation of power to the legislature

The case of Agricultural Market Committee v Shalimar Chemical Works Ltd.[xv] Deals with the issue of delegation of power to the legislature and its consequences on the general public. The facts of the case are that Agricultural Market Committee (for short, ‘the Committee’) which is the appellant before us is a statutory body created under the Andhra Pradesh (Agricultural Produce and Livestock) Markets Act, 1966 while the respondent is a licenced trader dealing in “Copra” (dried coconut kernel) which it imports from various places in the State of Kerala for manufacturing coconut oil.

Delegated Legislation has been defined by Salmond as “that which proceeds from any authority other than the sovereign power and is therefore dependent for its continued existence and validity on some superior or supreme authority.”[xvi]

Delegated Legislation is not a new phenomenon. Ever since the Statutes came to be made by Parliament, the Delegated Legislation also came to be made by an authority to which the power was delegated by the Parliament. It is no use going back into the pages of history or to look to the Statute of Proclamations 1539, under which Henry VIII was given extensive powers to legislate by proclamations, what is intended, to be emphasised is that there has always been, and continues to be, need for delegated legislation. The exigencies of the modern State, especially the social and economic reforms, have given rise to the making of Delegated Legislation on a large scale (by authorising the Government, almost in every Statute passed by Parliament or the State Legislature to make Rules) so much so that a reasonable fear could have arisen among the people that they were being ruled by the Bureaucracy.

The delegation of power to the legislature in terms of deciding the economic matters related to the governmental policies focuses mainly on the response of the public to such a step. This transfer of power leads to the creation of a belief in the minds of the people that they would not be cheated with and that there is assurance from the judiciary that the rights granted to them would not be infringed upon. This results in the protection of human rights in events of an economic crisis.

    V.            Power of the Court to adjudicate economic Matters

The case of Commissioner of Income Tax, Udaipur v. Hindustan Zinc[xvii] Limited discussed the jurisdiction of Court to interfere in economic matters under Articles 226 and 14 of the Constitution of India.

In the present case, the petitioners are exporters, registered with respondents No. 2, M/s. Apparel Export Promotion Council, (n short “AEPC”) and are engaged in the manufacture and export of garments and claim to have turnover of Rs. 300 crores. They are grieved with the notification dated 20.8.2002, notifying that the Government vide its letter No. 1/1/2002-Exports-I dated 19.8.2002, has decided that respondent No. 2/AEPC may immediately release 10 per cent additional quantities in the categories 338/339-USA under the FCFS, i.e. first cum first served quota, after giving usual notice to the trade. Further, it was notified that transfers of quota in the above categories would be permitted only up to 30.8.2002.

Petitioners had impugned the above notice, as not being in public interest. The notice is also assailed as imposing unreasonable restriction on the right to carry on business of exports which is an infringement of Article 19(1) (g) of the Constitution of India.

It was adjudged that when in economic matters, convincing explanation for the exercise of administrative discretion is available, then the Court cannot replace it by its own decision, unless the same was shown to be arbitrary.

The concept of welfare economics as given by Amartya Sen is applicable in this case. Welfare economics refers to a term used for general framework of normative analysis, that is for evaluating different choices that society may make. Considerations regarding equity in distribution of income can be expressed in the measure of welfare economics. Distribution of income affects distribution of utilities which in turn affects social welfare.

The above case talks about the power of the courts to interfere in the economic matters of the country. It was observed that the courts can pass judgements in economic matters in relation to only the legislation or the law but the court cannot govern the matters that fall under the purview of the legislations or the policies enacted by the Central Government.

There is a presumption that the law is constitutional in its origin and provides for only when the exercise of power by the state results in infringement of right of the citizens by the state.

Similar presumption is available to subordinate legislation as also to the exercise of the executive power of the State. However, there is a difference in the weight or the degrees of these presumptions. The presumption attached to a legislative enactment ought to be weightier than the presumption attached to the subordinate legislation or of the exercise of an executive power. Legislative enactment is preceded by debates in the legislature and the representatives of the public have a direct say while enacting a law.[xviii] That is not the case with a subordinate legislation or an executive order. Even in the case of a Statute to the fact that it was enacted by a competent legislature does not mean that the restrictions imposed by it reasonable and in the interest of public.

Conclusion

The reforms of the last two decades have gone a long way in freeing the domestic economy from the control regime. Economic liberalisation and respect for human rights are both highly topical issues. In theory, more trade should increase economic welfare and protection of human rights should ensure individual dignity. Both fields of law protect certain freedoms: economic development should lead to higher human rights standards, and should be used to secure compliance with human rights agreements. However the interaction between trade liberalisation and human rights protection is complex.

Human rights and liberal trade rules are based on the same values: individual freedom and responsibility (e.g. to adjust to competition); non-discrimination; rule of law; access to courts and adjudication to disputes; promotion of social welfare through peaceful cooperation among free citizens; parliamentary approval of national and international rules. Therefore, it is up to the state to recognise the intersection point of the two and come up with such an economic policy that the public as well as the trade of the country is benefitted and there is no infringement of any legal right during this period.

The Indian judiciary has in its judgments consistently preserved as unassailable the economic and industrial policy of the Government of India. It is evident from an analysis of these decisions that in the event of any mala fides, arbitrariness or gross illegality in any decision or order concerning FDI policy issued by the Government, investors have resorted to filing appropriate legal proceedings, including writ petitions in the High Courts and appropriate legal relief has been sought. It is hoped that some of the legal conundrums that do arise in the interpretation of the FDI policy and FEMA can and are resolved by a proper, just and fair interpretation and adjudication by the Indian Courts.

Edited by Kanchi Kaushik

[i] Nirvikar Singh, T. N. Srinivasan, ‘Indian Federalism, Economic Reform and Globalization’; 2002

[ii] Montek S. Ahluwalia, ‘Economic Reforms in India since 1991: Has Gradualism Worked?’

[iii] Supra note 2

[iv] Datt and Sundharam, ‘Indian Economy’, ed. 64, 184 (New Delhi: S. Chand & Co. Ltd.)

[v] Supra note 1

[vi] John Rawls, ‘A Theory of Justice’, 259 (Delhi: Universal Law Publishing Co. Pvt. Ltd., 2000)

[vii] 2002 (2) SCC 333 at page 362

[viii] AIR 1994 DEL 202

[ix] Roscoe Pound, ‘Jurisprudence’, VI, 80-81

[x] Autar Krishen Koul, ‘A Textbook of Jurisprudence’ (New Delhi: Satyam Law International, 2009) 302

[xi] (2010) 321 ITR 546

[xii] Steven Shavel, ‘Foundations of Economic Analysis of Law’ (London: The Belknap Press of Harvard University Press) 615

[xiii] Vodafone International Holdings B.V. v Union of India and Anr. (2010) 329 ITR 126

[xiv] AIR 1990 SC 1277

[xv] AIR 1997 SC 2502

[xvi]P. J. Fitzgerald, Salmond on Jurisprudence, ed. 12 (New Delhi: Universal Law Publishing Co. Pvt. Ltd.) 116

[xvii] (2007) 4 SCC 705

[xviii]M. D. A. Freeman, ‘Lloyd’s Introduction to Jurisprudence’, ed. 6 (London: Sweet and Maxwell, 1996) 1257

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