Judicious economics – Time to consider the economic impact of recent SC judgments

Over the past two years, a number of judgments have, notwithstanding their rectitude, had enormous macroeconomic impacts. The banning of iron ore mining in Karnataka and Goa significantly reduced exports of ore, which declined by over $4 billion over a two-year period. The coal imbroglio led to the Supreme Court cancelling all the licences that were issued to private entities, making the country dependent on imports for the foreseeable future. India, with its enormous thermal coal reserves, is now importing over $8 billion worth of coal – mainly to run power plants, which, ironically, were set up close to domestic coal beds. Likewise, the 2G telecom scandal, which resulted in the cancellation of several licences, disrupted the plans of several major foreign telecom companies, which had seen India as an attractive market for expansion. Potential foreign investors will now be extremely wary of entering the country with the risk that supposedly legitimate agreements and contracts are suddenly declared illegal. All these instances have contributed to an enormous increase in the economy’s external vulnerability, with the first two making a huge dent in the current account deficit and the third likely to make India a less attractive destination for foreign direct investment.

A number of fundamental questions arise here. First, whatever the legal merits of each instance of judicial action, should the Supreme Court not routinely consider the potential economic consequences of its decisions? It is clearly not required to do so now, but it would be reasonable to argue that the rule of law and economic well-being are important determinants of social welfare. If indeed the Supreme Court had considered the economic consequences, would its rulings have been somewhat different – perhaps allowing for a tightly monitored but phased compliance with environmental regulations in the case of iron ore, and an assessment of the genuineness of parties in the licence allocation processes? From a larger perspective, though, there is a particularly troubling question. Did the Indian economy achieve its best ever growth performance during 2003-08 on the basis of widespread violations of various laws and regulations? As compliance is more strictly enforced, is slower growth an inevitability? Only time will answer this question. Meanwhile, while there can be no compromise on regulatory compliance and the rule of law, a balance between this objective and its economic consequences needs to be worked out so that it can be achieved without too high a price being paid. It would be good practice for the Supreme Court to commission a rigorous economic impact analysis on key issues coming up before it while making a final ruling.