India: Law As A Catalyst of Economic Change

Last Updated: 8 September 2005
Article by Hemant Batra

Article by Hemant Batra*


The notion and concept of `Law and Economic Change’ needs to be understood in context of the cogent controls which law exerts on the fiscal and economic policies and directs the course of its development. One need not forget that management of economy by law may be extensive or limited and passive but it has to have one prime objective and that is to attain certain social objectives and economic development through the instrumentality of law, conducive to the situation. In other words, economic change and liberalization are intended to serve the purpose of efficiency.

In today’s civilized society life and law run side by side. No one can live without law, without being affected by law. Any society’s ethical values, attitudes and future aspirations are reflected by its law and legal system. Greater the respect for social manner and civil culture and lesser would be the need for formal systems of law.

While most basic principles and ethical values are common across societies and nations, yet attitudes and practices do show differences among the countries. They may also be different in the same country at different points of time. A nation aspiring to bring in rapid re-distribution of existing wealth and income would tend to emphasize laws that would restrict the individual's right to acquisition of property and hence the individual initiatives. On the other hand, a nation aspiring for the rapid creation of wealth would tend to have fewer laws, so as to unleash individual and collective energies and remove any restrictive barrier that may arise in the process of growth.

Laws and Reforms: Siamese Twins

Laws and reforms are inseparable, laws bring about reforms and reforms bring about new laws. One cannot make out as to which of the two comes first. The process of liberalization entails creation of new ambience where some of our old laws have been rendered either redundant or incompatible and many more laws needing to be re-written. But, if the legal fabrication and handling are not geared up to the economic change that is sought to be brought about, the pace of economic change will be stifled and consequently failing to achieve the desired results. In a society governed by the rule of law, it is the law, which must ensure the proper framework in which the economic change can be brought about smoothly and without any abrasion. The law cannot survive in vacuum, it has to change, re-interpret and recast itself so as to meet the changing norms and values of the society. Law charged with basic values of life does play a vital and driving role in contribution towards social well being by bringing about social and economic change. All of us have to play an important role in bringing about socio-economic changes in our society by facilitating and creating new structures and institutions that help in the process of the said changes. Law has to move forward and keep pace with the changing times.

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

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.

Good Law does not require interpretation

Despite richness of any language and precision of its grammar, language has a tremendous potential for vagueness, ambiguity, imprecision and even nonsense. And, along with visuals, it has high potential for creating appalling degrees of misleading information and impressions. Hence, it is necessary that the laws that we draft should be very precise for the people, who in bad faith are always intending to abuse the intent of the law. Our courts are known to be courts of law, but we would like that they become increasingly courts of justice.

Indian Para-legal & Economic Analysis

India, the world's largest democracy, is the 7th largest country in the world and the 5th largest economy in terms of purchasing power parity. India's richness and diversity of culture, geographic and climatic conditions, natural and mineral resources are matched only by few other countries in the world. India's enduring institutions, rooted in the principles of democracy and justice, ensure a transparent predictable and secure environment for domestic and foreign private investment. The existence of an independent judiciary, strong legal and accounting system, a free and vibrant press, reservoir of highly skilled manpower, and the use of English as the principal language of business and administration are some of the attractive features of the Indian business environment.

A highly regulated business environment, a pervasive license system and high tariff barriers characterized the Indian economy, until 1991. Sweeping reforms, introduced in 1991 and continued by successive governments, have radically changed the course of the Indian economy. Today, a new spirit of economic freedom is stirring India, bringing sweeping changes in its wake and unleashing the vast potential of the Indian economy. The Government's policies are now relatively simple, transparent and geared towards promoting domestic and foreign private investment. There exists a strong political consensus on the economic liberalization policies at the central and state government levels. This augurs well for the continuation and progressive strengthening of investor friendly policies that have created a sea of opportunities for domestic and foreign investors particularly in the infrastructure sector.

General – Foreign Direct Investment (FDI) Policy - Foreign direct investment is freely allowed in all sectors including the services sector, except where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the automatic route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government Approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

With a view to injecting the desired level of technological dynamism in Indian industry and for promoting an industrial environment where the acquisition of technological capability receives priority, foreign technology induction is encouraged both through FDI and through foreign technology collaboration agreements. Foreign technology collaborations are permitted either through the automatic route under delegated powers exercised by the RBI, or by the Government. However, cases involving industrial licenses/small scale reserved items do not qualify for automatic approval and would require consideration and approval by the Government. Automatic route for technology collaboration would also not be available to those who have, or had any previous technology transfer/trade-mark agreement in the same or allied field in India.

Today, only two industries are reserved for the public sector i.e., Atomic Energy and Railway transport. Even Arms and ammunition industry and allied items of defence equipment, defence aircraft and warships have been opened up for private investment.

Today, there are very few industries for which industrial licensing is compulsory and these include Distillation and brewing of alcoholic drinks, Cigars and cigarettes of tobacco and manufactured tobacco substitutes, Electronic Aerospace and defence equipment: all types, Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and matches, Hazardous chemicals, Drugs and Pharmaceuticals.

Today, use of foreign brand names/trade marks for sale of goods in India is allowed.

Today, Indian capital markets are open to foreign institutional investors.

Today, Indian companies are permitted to raise funds from international capital markets.

Today, India has entered into agreements for avoidance of double taxation with over 45 countries.

Today, India has signed several bilateral investment protection agreements.

Today, special investment and tax incentives are extended for exports and certain sectors such as power, telecommunications, electronics, software and food processing.

India since 1991 is undergoing revolutionary fiscal and economic reforms and is undoubtedly moving away from the doctrine of State control, towards a free market economy. Permits, sanctions and controls are giving way to de-regulation, de- centralization, de-nationalization and dis-investment. The notorious restrictions of the past are being cleaned up by a popular will driven with logical and legal mechanism. The reform packages having been introduced in the past and as being introduced now appear to be moving away from restrictions on the movement of foreign exchange in and out of the country. The changing investment climate in the region has swept aside the centrally planned and regulated economies. The agenda of privatization in India or for that matter in almost all the South Asian countries now covers a wide spectrum like industries, banks, development financial institutions, telecommunications, airlines, shipping and road construction and power generation. And, in each of these sectors, law is playing an important role, because it is entering to the privatization of each of these units.

Challenges to the Indian Economic Growth

On the Joint Initiative of EU and India a survey was conducted in December, 2001 for enhancing Trade and Investment. The basic object of the survey was to better understand the European Investors’ perception of investment in India. The said survey was conducted on European-invested companies in India and to European companies’ head offices in Europe.

The outcome of the said survey was as follows:

§ 1. Overall perception of EU investors

The first point aims at measuring the overall perception of EU investors from their experience in India. 48% of the surveyed companies say that they have been successful when their achievements are confronted with their expectations, of which 32% say they have been very successful. Conversely, only 6% are telling that their operations have been either unsuccessful or a failure. Overall, a little less than 50% of EU invested companies intend to increase their investment in the short term (one to two years), with a small 10% declaring that their intention is to reduce it. Over a longer horizon, close to two thirds of the surveyed companies intend to increase their investment (three to five years), while almost none is intending to reduce it on this time frame.


India and for that matter any developing country needs to identify causes in the form of laws and subordinate legislation, which are responsible for economic slowdown. Some of the causes, according to me, are as detailed briefly below –

  1. There is no synchronization between provisions relating to amalgamation and mergers and acquisitions as found under the companies related laws and the laws relating to the securities acquisition. There are too many restrictions operating against the concept of mergers and acquisitions, which are unrealistic in nature and scope.
  2. The system of borrowing of funds needs to be specifically codified defining clearly the commercial terms of relationship between lender and borrower. Today it is like an unguided ship, which goes in any direction as stipulated by the creditor.
  3. There are a plethora of rules and regulation in the form of subordinate legislation, which go to undo the object of the statute under which they are framed. The subordinate legislation needs to be streamlined and one needs to understand that one should resort to the same as a measure of procedure not policy.
  4. It is high time (after terrorist attacks on WTC, USA) that the concerned Governments change their current FDI policy. Today, Government needs to identify, in view of global terrorism and money laundering, right at the entry level the real source of funds and credential of the promoters. Vigilance is need of the hour.

* Hemant BATRA is a Corporate, Commercial & Business Lawyer. He is the Director-Legal Services of Kaden Boriss Consulting Pvt. Ltd., a legal consulting, legal services and legal BPO Company operating from India. He is the elected Secretary General of SAARCLAW (South Asian Association for Regional Co-operation in Law). He is Member of high-powered national legal affairs Committee of Indo-American Chamber of Commerce.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.