Saturday, September 5, 2009

Current Economic Crisis

The students leading the discussions this week had the following opinions to offer on the current economic crisis (in the session discussions, we focused not only on the current economic crisis and regulatory failure, but also used the crisis as a context to look at how courts respond to changes in economic regimes. In particular, we looked at another epochal economic turmoil-the Great Depression- and the New Deal that followed. We examined the US Supreme Court's response to the New Deal, and the lasting impact this has had not only on US, but also Indian, law and political setup. In this context we also examined the approach of the Indian Supreme Court to the post-91 economic order, and analysed the changing jurisprudence of the Indian SC in this period-Aparna) :

1. On the recent economic crisis
In hindsight, the global economic crisis can be seen as a ticking time-bomb that went off, but which went undetected in an atmosphere of irrational exuberance and confidence in financial instruments in light of quick and unrealistic returns. The recent financial crisis has three primary identifiable causes: poor regulatory oversight, inadequate modelling of risks, and inefficient institutions for trading and managing complex financial instruments.

The loose monetary policy and low interest rates led to a sharp increase in housing prices. Basically, banks have the potential of earning huge sums from loans, but generally, loans are tied up for decades. To mobilize credit, these loans were pooled and converted into ‘securities’ and off-loaded to others. Securitization, originally created for the purpose of reducing risk, unfortunately ended up concentrating risk. The idea was that out of the pool of loans, even if some defaulted, the returns from the recovery of the other loans would offset the losses from the defaulting loans. The riskier the undertaking, the higher was the returns from interests. Therefore, institutions indulged in what is known as ‘subprime’ mortgages. The risk undertaken by these institutions was assessed by credit rating agencies. However, often, institutions were paying for risk on margin, and the actual extent of the risks failed to be captured. This, along with the conflict of interest of credit rating agencies and the ever-increasing complexity of these financial instruments, sent out a distorted picture of economic utopia, or the housing bubble. There was far too much debt and not nearly enough capital in the system. When the mortgages became non-performing, these securitized assets collapsed, affecting the entire worldwide financial system. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007, refinancing became more difficult. With high default rates on subprime mortgages and adjustable rate mortgages (‘ARM’s), the inflated housing bubble burst.

Most importantly, there was loss of confidence in financial institutions. Because of the critical role banks play in the current market system, the effects were on everyone. This, coupled with a globalized system, led to a credit crunch, the shock of which spilled over a global financial crisis. In the wider economy, this credit crunch and higher costs of borrowing will affect many sectors leads to cutting down on consumption, leading to businesses struggling to survive and further, to job-losses. For the developing world, the rise in food prices as well as the effects of the financial instability and uncertainty in industrialized nations are having a compounding effect. To the extent that the Asian economy is decoupled from the Western financial systems, the subprime mortgage crisis has not affected Asian nations as severely as the West. However, many Asian nations have heavily invested in Western countries. In addition, there was increased foreign investment in Asia, mostly from the West. In an increasingly inter-connected world means there are always knock-on effects. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses.

The million dollar question now, is, whether regulation could have prevented this? It must first be noted that government policies and government supported enterprises like Fanny Mae and Freddie Mac were largely responsible in giving rise to the financial crisis in the first place. The Clinton and the Bush administration went to lengths to increase the national homeownership rate. It promoted paper-thin down payments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. The regulations to the Community Reinvestment Act made it possible for banks to turn home mortgages into securities. The Securities and Exchange Commission relaxed lending rules enabling investment banks to substantially increase the level of debt. Further, the Glass-Steagall Act, enacted after the Great Depression to separate commercial banks and investment banks to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter, was repealed. The most recent legislation was the Commodity Futures Modernization Act of 2000, which exempted derivatives from regulation. This enabled creation of special purpose non-banking financial institutions with limited liability to be formed for dealing in mortgage backed securities in secondary market, which did not come within the scanner of regulation. The cumulative effect of these measures was increasing the liquidity of the mortgage market, and freeing up capital to lend to homebuyers that otherwise would have been tied down to protect the banks from the risk of loan default. And this was stretched to form the speculative bubble.
At this juncture, the Basel Accords seem to be a tempting solution to prevent such situations from arising in the future. The core of the idea is to have international standards (implemented through domestic rule-making) on risk and capital management requirements to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.

However, the issue remains if regulation is the answer, and if it is, how much regulation is desirable? Basel 2 contemplates that banks must have eight per cent of their exposures in capital. But if asset prices fall by 50 per cent as has been the case with the current financial crisis, this seems to be fall behind by a long shot. In fact, new regulatory standards in the form of Basel II accords are being debated with the unfolding of the limitations of the Basel II accords (The Basel requirements of capital standard as they stand do not take account of hedging, diversification, and differences in risk management techniques, especially portfolio management, and banks inevitably resort to regulatory capital arbitrage to structure the risk position in a manner that allows it to be reclassified into a lower regulatory risk category)

On the other hand, it cannot be denied that increasing minimum capital requirements will increase the cost of credit, and affect liquidity. Therefore, regulations aimed at being ‘fool-proof’ can backfire.

On an optimistic note, although the history of bubbles shows that the impact on the law can sometimes be adverse, the law can be changed for the better, for improvements that are needed. At present, the focus is only on bail-out plans, which are more in the nature of a shot-in-the arm, rather than a policy to address the root of the problem. From where we stand, the law can be a double edged sword. It can be used to prevent similar situations, for instance, by regulating credit rating agencies, implementing stricter restrictions on lending policies to ensure that the economy operates along a realistic assessment of risks rather than unfounded optimism. However, it is a very real fear that the law itself can lead to further situations of euphoria and crisis.

2. On the Great Depression and the changes it caused
The supreme court in the 1930’s went through three basic phases, first when Justice Hughes entered the court and along with Justice Roberts swung decisions towards upholding statutes that provide for certain regulations, etc.

The second stage was a relapse into the time of Justice Taft’s Supreme Court, with the cases of Adkins, etc striking down minimum wage legislations as unconstitutional. This was also the phase of cases like Panama and Schechter, which held dealt with delegation of power from the legislature to the executive. The Court held that the standard for delegation is that the policy must be decided by the Court and only the implementation of the policy could be delegated.

The third stage was from the beginning of Roosevelt’s second term in office (and it is fitting that this phase of the Supreme Court is defined in terms of an executive term). In light of (or coincidentally with) Roosevelt’s plan to add a judge each for all the judges of the Supreme Court above a particular age, Justice Roberts’ position on a number of issues, including minimum wage legislation, changed. From this point on, starting with the Parrish case, the Court holds 5-4 that minimum wages are unconstitutional, and proceeds to devalue economic due process entirely, moving away from the strict scrutiny earlier placed upon such restrictions. This phase is followed by the introduction of justices Hugo Black, Stanley Reed, Felix Frankfurter, William O. Douglas, and Frank Murphy in the place of Justice Brandeis, Justice Cardozo (who had replaced Justice Stone and decided the same way) and three of the Republican Justices Van Devanter, McReynolds, Sutherland, and Butler.

The three kinds of cases discussed are cases dealing with the legislative competence of the federal government, the delegation of power, and economic right violations. All three go through the same three phases. As far as the competence of the federal government is concerned, the effect of the widening of the scope of the federal government’s competence is felt even in the civil rights cases of the 1960’s with the federal government imposing laws on enterprises in states on the basis of extremely flimsy connections to it.

Thus basically the question is whether the economic crisis changed the mindset of the judges and therefore caused the change in the policy of the Court (even though Courts aren’t really supposed to have a policy) or whether there was merely a change in personnel. Since the major changes started before the change in personnel, it is reasonable to assume that some other change was caused. The impact of the depression was clear at least in terms of the popular support to Roosevelt and his plans, and it is possible that the Court bowed to this public opinion, or to the threat of court-packing.

The other questions that arise from this particular era are concerned with the impact of these decisions on future relations between the federal government and the states, between the senate and the president and between economic rights and welfare measures. The answer provided by the Court towards the end of this time period was resoundingly in favour of the federal executive in all three of these relationships, and the executive has been the strongest of the three organs since then.

The Court of this time did this for a few reasons. The first was provided by Justice Holmes in his seminal dissent in Lochner. He critiques the jurisprudence of the time as it was intrinsically connected with pushing a particular economic policy. The second is provided by Justice Stone in Carleone Products and Justice Brandeis in Hartford Fire Insurance Co., where the presumption of constitutionality is referred to. Both these basically refer to a level of respect for the other branches of government as well as a level of acceptance for the fact that their personal beliefs could be wrong.

3. On the regulatory state
What is the New Deal?
The New Deal was the name that United States President Franklin D. Roosevelt gave to a complex package of economic programs that he brought into effect between 1933 and 1935. The basic aim of the New Deal was to (i) give relief to the unemployed and badly hurt farmers (ii) reform business and financial practices and (iii) help the economy recover.

Impact of the new deal – Rise of Regulation
The New Deal increased Government regulation of the economy. The Great Depression had popularised the belief that an unregulated free market was the entire cause of the country’s grief during that period. FDR’s administration’s response was to insist on the need for countervailing governmental power that would be administered by ‘disinterested expert regulators’ as a means to discipline the market and stabilize the economy. Consequently, there was an expansion of administrative authority and the rise of the administrative state. Regulatory agencies were established to cover all aspects of the economy. (Some of these persist even today such as the Social Security System, Securities and Exchange Commission (SEC), and Fannie Mae. In India there regulators for Electricity, Insurance, Petroleum, Telecom and SEBI)

These were unprecedented both in terms of number of agencies and their scope of power. The agencies covered areas previously governed by State or local agencies or none at all. At the forefront of this change was the office of the President who had greater authority over agencies within the executive branch.

This burgeoning of regulatory agencies raises many issues concerning due process, federalism and separation of powers. The main issue concerns the extent to which legislative powers can be delegated to the executive. Additionally, importance must also be given to the gradually erosion of State autonomy and the creation of a centralised Government. This is important given that residuary power under the US Constitution lies with the State and not with the Centre.

The American Constitution has a strict principle of separation with the Legislature, Executive and Judiciary performing their respective functions. However, with the arrival of the administrative state, the executive headed by the President was vested with unlimited discretion in framing laws.

It is interesting to note that proponents of the New Deal believed that the existing the system of separated functions prevented the government from reacting flexibly and rapidly to stabilize the economy and to protect the disadvantaged from market fluctuations. They also believed that the distribution of powers among the three branches of government created political struggles. All this achieved was to hinder executive’s power to make regulatory policies. They also believed that judges did not possess the expertise to understand the issues addressed by the administrative agencies. Thus they sought to remove judicial review as well. Consequently, the creation of regulatory agencies and their ability to control different aspects of the economy and citizens lives raises questions about the impact of the burgeoning of regulatory agencies and the administrative state on separation of powers.

This view was reflected in the opinion of the Court in Cromwell v. Benson wherein the Court approved conferral of broad fact-finding and adjudicative authority on administrative agencies as consistent with the requirements of both due process and the separation of powers. Administrative agencies, Justice Hughes said, were necessitated “by the increasing complexities of our modern business and political affairs.” Later, in Humphrey’s Executor v. US and Myers v. US, the Court held that with respect to independent agencies exercising legislative and judicial functions, Congress might constitutionally restrict the President’s removal power as it had in the Act. Interestingly, the obiter stated that the President had sole power to remove purely executive officers in any manner he chose.

Role of the Judiciary

This brings us to the next aspect which is the importance of the role played by the judiciary during the New Deal reforms. It issued landmark judgment on many aspects such as the scope of federal power, the separation of powers, and constitutional protections for property rights. The judiciary’s contribution to New Deal reform can be analyses in two stages.

In the first stage (1935-1937), the Judiciary became a protector of ‘civil rights and liberties.’ The conservative majority of the court struck down many of FDR’s proposed reform legislations. The basis behind their decisions was (i) that the due process clause limited the power of the Government to regulate and (ii) that delegation of power to the executive could not be arbitrary and excessive.

Panama v. Ryan – authorized the President to prohibit the interstate shipment of “contraband” or “hot” oil produced in violation of quotas imposed by the state of production. The delegation of powers to the president was excessive as there was nothing in the section that guided the President concerning the circumstances under which he was to prohibit interstate transportation of hot oil. He had been conferred an unlimited legislative authority.

Schechter Poultry Corp. v. United States, the famous “sick chicken” case – section authorized the President to prescribe codes of fair competition to govern various trades and industries, and to approve codes proposed by trade and industry representatives. The section prescribed neither rules of conduct nor any meaningful standard to guide the exercise of the President’s “virtually unfettered” discretion to prescribe and approve codes. Additionally, it held that the Congress might authorize the executive branch to promulgate subordinate legal rules, so long as the legislation established standards sufficient to guide and confine the discretion of the executive in carrying out the declared legislative policy. But Congress could not alienate the essential legislative functions with which it was vested.

Carter v. Carter Coal Co. – The Bituminous Coal Act regulated the price at which bituminous coal moved in interstate commerce. It was struck down as the delegation of legislative power, not to a government official, but to private parties having interests possibly and often actually adverse to the competitors over whom they would wield such power, was “clearly arbitrary” and thus a denial of the rights safeguarded by the Fifth Amendment’s Due Process Clause.

Adkins v. Children’s Hospital – The Court invalidated a congressional statute authorizing the prescription of minimum wages for women working in the District of Columbia. Such a restriction could only apply to businesses that affected public interest. If it was applied to private businesses, it infringed their liberty of contract.

The end of the earlier obstruction to New Deal reforms posed by the judiciary came in West Coat Hotel v. Parrish, where the Court upheld a minimum wage law for women. This is called the switch in time that saved nine because the crucial turn was by Justice Owen Roberts who had earlier sided with the majority in striking down minimum wage laws, who now sided with the majority in upholding them. The decisions following Parrish systematically repealed all the previous decisions hindering New Deal reforms. The result was that virtual demolition of not only the judicially created doctrine of substantive due process but also of the Constitution's own basic principle of limited federal power. The Judiciary began to defer to the executive citing non expertise in understanding issues dealt with by administrative agencies.

(i) What are the limits of regulation? Can the judiciary place limitations on the executive’s power to legislate the ‘private sphere’?
(ii) Can the judicial deference to the executive in cases of regulatory agencies be reconciled with due process and rule of law?

Impact on Civil liberties
At the end, the Congress and the federal administrative state exercised virtually unlimited authority over the nation’s economy. Constitutional dual federalism had been supplanted by fiscal cooperative federalism, as the ballooning federal budget bore witness to the national government’s commitment to guaranteeing economic security, promoting public works, and placating powerful constituencies. Substantive due process and related doctrines no longer posed a threat to state and federal regulatory programs, yet the federal judiciary increasingly invalidated government restrictions on the exercise of non-economic civil rights and civil liberties.

In Brown v. Mississippi, the Court overturned the murder conviction of a black man who had denied commission of the offense until subjected to a severe beating by police. The unanimous Court held that the brutal extortion of this confession, which constituted the principal basis for the conviction, was “revolting to the sense of justice.”

In Missouri v. Canada, the held that furnishing legal education within the state to whites while not doing so for its black citizens denied them equal protection.

Similarly, statutes were struck down for violating other civil liberties such as Due process of law, the right to Legal counsel etc. It also struck down legislations that prohibited illiterate people from voting.

Thus, while upholding economic regulation, the federal judiciary increasingly invalidated government restrictions on the exercise of non-economic civil rights and civil liberties

4. On freedom of trade and economy-based restrictions
In this section we will discuss the exact scope of the rights granted under Article 19 1 (g) of the Constitution and the scope of regulatory power given to the state under Article 19 (6).
Article 19 1 (g) grants the right, “to practice any profession, or to carry on any occupation, trade or business”.

Article 19 (6) – Nothing in sub-clause (g) of the said clause shall affect the operation of any existing law in so far as it imposes, or prevent the State from making any law imposing, in the interests of the general public, reasonable restrictions on the exercise of the rights conferred by the said sub-clause, and, in particular, nothing in the said sub-clause shall affect the operation of any existing law in so far as it relates to, or prevent the State from making any law relating to, -
i) The professional or technical qualifications necessary for practicing any profession or carrying on any occupation, trade or business, or
ii) The carrying on by the state or by a corporation owned or controlled by the State, of any trade, business, industry or service, whether to the exclusion, complete or partial, of citizens or otherwise.

Three kinds of regulations permitted by judiciary:
a) Res Extra Commercium –Some trade and businesses are not considered trade or business at all. Liquor trade (Cooverji, Krishan Kumar, Khoday Distilleries), In fact in such cases restriction standards can be very strict (Mcdowell). Betting and gambling etc. are also not considered and hence are not protected. (State of Bombay v. R.M.D.C) Restrictions amounting to complete prohibition can also be imposed. However, Income Tax Act stipulates that these concerns can be taxed. State machinery exercises very strong control over these concerns.

b) Reasonable Restrictions in public Interest. – Some rights are not guaranteed under Article 19 1 (g); like a right to government contracts (Ram Jawayya – there was no right of private publishers to have their books selected as school text books, Krishan Kakkanth – government could specify conditions on purchase of pump-sets on government loans and private parties can not claim a right to sell their pumps). Similarly taxing is not considered restriction unless confiscatory even if it diminishes profits. (Federation of Hotel, Nazeeria Motor Service). Discriminatory taxes are not allowed. In Chintaman Rao and Krishnan Kakkanth the court explained the meaning of reasonableness required for Article 19 (6) and stated that the restrictions should . Narendra Kumar case – restriction might mean prohibition. Some cases where restrictions were held to be reasonable: Minerva Talkies – limit of 4 shows a day, Laxmi Khandsari – shortage of white sugar so ban on manufacture of khandsari for a few months. Cases where restrictions were held to be unreasonable: Chintaman Rao – absolute ban on bidi manufacture, sale of wheat within 15 days (Pratap Singh v. State of Punjab). Strict regulations are permissible on trading in essential commodities because regulations differ from trade to trade. In all the cow slaughter cases the courts have recognized economic interests as a standard of reasonableness (Quereshi).

c) Under Article 19 (6) (i) and (ii) – specific reference to State Monopoly - Akadasi Pradhan v. State of Orissa (1963) – presumption of reasonableness, The state is not required to justify its monopoly. Parliament can create trading monopolies in states under entry 21 in Concurrent list. However the monopoly should be for carrying on that particular trade and only to the extent that trade can be carried out in a monopolistic manner and not to facilitate such trade. Monopoly only for benefit of state not for third parties. And monopoly so created can be absolute or partial (Indian Drugs and Pharm Ltd.).

As far back as the first Constitutional amendment, 1951 the Parliament had its eye on regulation, state monopolies and nationalization. The reasonable restrictions under 19 (2) were not present but 19 (6) was present. One of the major things that was reiterated at the beginning of the amendment was that resources could be controlled by the government and can be nationalized if need arises.

In this light it is pertinent to ask; what is the nature of Indian economy? What prompts courts to give such wide ranging powers of regulation of businesses to the State? Looking at the preamble, the directive principles of state policy (Article 38 (1), 38 (2), 39 (b) and Article 39 (c)) it can be said that India does not follow a laissez faire economy. Directive Principles of State Policy assume importance because the operation of Article 19 is determined by directive principles by virtue of Article 31 C in 1971.

Article 38 (1) – socio-economic justice.

A 38 (2) – to minimize inequities in income.

Article 39 (b) and Article 39 (c) - Distributive Economic System .

Taking over administration of sick industries etc. is permitted under these Articles.

In State of Karnataka v. Ranganatha Reddy it was held that, “Material resources include all resources which can create wealth for the community and include all properties whether moveable or immoveable, whether privately owned or under public possession”. Individuals being members of community, individual property can also be considered the property of the community. Furthermore the court held in another case that “Nationalization can be one mode of distribution as well as prevention of concentration of wealth” (Maharashtra State Electricity Board).

Of Article 39 (c) Jaganmohan Reddy in Keshavananda Bharti said that the purpose is to prevent concentration of wealth to the common detriment.

Some examples of use of these provisions by the State include – nationalization, taking over management of public utilities from private hands, taking over mining of natural resources, taxing capital and wealth, land reforms, land acquisition, ceilings on land holdings etc. Also indicative of the fact that state can carry on business or trade and it is a legitimate function of the state.

It will be right to say that the government enjoys power to regulate and order the economy in any way it pleases.

Then in 1978, 44th Constitutional Amendment we have the introduction of the word ‘socialist’ into the preamble.

What is the impact of such introduction? The court considered this question in Excel Wear v, UOI – 1979. They opined that “Private enterprises create wealth which is essential for growth of national economy and this should not be sacrificed in favor of rigorous social control”.

Thus, we see that even in the presence of jurisprudence that suggests state power is absolute in terms of regulation; the courts have sought to modify their views slightly in favor of private enterprise. This position became more clear post 1991 liberalization when courts acceded to the government’s policy of privatization and disinvestment.

5. On federalism and economic relations
One view of the role of the state in a market economy is “markets whenever possible, state when necessary”. The general prescription that emerged from this observation was that markets should be left alone to do what they do well - allocate private, while the state should provide public goods, correct externalities, and regulate monopolies. Neoliberalism says that the classical idea of state intervention is based on an unrealistic model of a benevolent state. The state also intervenes for the same reason as everyone else – self-interest. Here lies the fundamental dilemma of economic liberalism: "The economist recognizes that government can do some things better than the free market can do but he has no reason to believe that democratic processes will keep government from exceeding the limits of optimal intervention". Posner also said "a government strong enough to maintain law and order, but too weak to launch and implement ambitious schemes of economic regulation or to engage in extensive redistribution, is probably the optimal government for economic growth."

When judging the performance of public and private sector companies against each other, is it justified to apply the same set of standards to both? This is in light of the fact that the Indian state in particular operates with a welfare objective in mind. How do different sets of standards (if applicable) play out in the presence of disinvestment?

The current period of privatisation comes after a long period of nationalisation and growth of the public sector. Disillusionment with central planning set in in the 1960s and continued through the 70s and 80s. this was a consequence of criticism of price distortions, along with protectionist and import substitution policies. The idea was to reduce government intervention in economic affairs.

The struggle with disinvestment is best illustrated through the BALCO case. In 2001, the Union sold 51% of its stake to Sterlite. Then the Chhatisgarh govt tried to buy this stake, as tribal rights and the rights of the striking workers were at stake. One of the main grounds for Jogi's opposition to the Balco deal rests on the premise that the sale violates constitutional safeguards under Schedule V of the Constitution. The provisions prohibit the use of land acquired from tribal people for private gain. The government argues that since Balco's public character has changed with its sale to Sterlite, the acquisition violates multiple legal provisions that guarantee protection to tribal people. Arun Shourie’s response was that the area had not been notified as tribal land. But the State government claimed otherwise.

However, the recent economic crisis coupled with the privatisation of major mortgage companies in the US (Fannie Mae and Freddie Mac) and what looked like the possible government takeover of one of the world’s largest private banking institutions, Citigroup make clear that greater regulatory surveillance is required. The key is to devise regulations such that they do not become counter-productive.

Constitutional law in the financial relations context:
As per K.T. Moopil Nair v State of Kerala, the taxing power of a state can be exercised only by authority of law. Therefore, the tax proposed to be levied must be within the legislative competence of the legislature imposing it; it must also be subject to the conditions laid down in Article 13. However, the majority here also laid down the principle that the entries in the legislative lists must be read as widely as possible.

In the Kesoram Industries case, the Supreme Court says that the Central legislature has legislative precedence over State legislatures in matters of public interest and importance. Again, the limit is set be Article 13, as the laws need to be ‘as per the authority of law’. This begs the question – can the state justify interference in financial matters citing public welfare? To what extent is this admissible?

Atiabari says that Art. 301 provides that the flow of trade shall run smoothly and without any hindrances at the boundaries of the states, or within the states themselves. Free trade has been held as essential for sustaining the economy. The idea behind Art. 301 is that the economic unity of the country provides the bedrock for the cultural, social and political stability and progress of the country.

It has been acknowledged in India Cement v State of Andhra Pradesh that taxation is a deterrence to free flow. A necessary effect of taxation is that trade flow gets altered favourably or adversely. It was held in Atiabari that an indirect or inconsequential restriction on trade would not violate Art. 301. (Test of direct and immediate restriction). By saying this, the Supreme Court rejected the argument that all taxes should be brought within the ambit of Art. 301 in the Bank Nationalization case. Instead it applied a “rational and workable” test – “Does the impugned restriction operate directly or immediately on trade or its movement?”

For the American stand, the dormant or negative commerce clause doctrine has been chosen for perusal. The dormant commerce clause is a judicial doctrine that implies a converse of the power bestowed upon the Congress by the Commerce Clause - a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce. The restriction is self-executing and applies even in the absence of a conflicting federal statute. Came about in the landmark case Gibbons v Ogden. The basic premise of the doctrine is the exclusive grant of power over commerce to the Congress, even to the exclusion of state sovereignty and innovation.

Whether or not the framers intended for the Commerce Clause to be interpreted ‘negatively’ in this manner has been the subject of some debate. Critics of the doctrine, including Supreme Court Justices Clarence Thomas and Antonin Scalia, argue that it goes against the original intent of the framers, who wanted all power to rest with Congress. More recent jurisprudence (Tyler Pipe Indus v Washington State Dept. of Revenue ) suggests a deviation from the doctrine, making for a stronger federal government as the Commerce Clause grants power to the Congress by taking away from the states’ authority to do the same.

6. On the Impact of the New Economic Policy on judicial decisions in India
Before the liberalised, globalised and privatised era of the Indian economy, the judiciary tilted towards recognising the rights of the labour force in the country. After the New Economic Policy however, there has been an apparent change and the same judiciary now favours profit making objectives at the cost of the labourers’ rights. The change is reflective of a change from the social democratic period to the globalised period.

Through a series of Supreme Court decisions, numerous rights of the labour force have been denied to them. A string of decisions have overruled the existing decisions, in order to promote the so called ‘economic development’ of the country, not realising that it is coming at the cost of the rights of the poorest masses in the country.

Taking the example of granting of back wages (for the period of time they were unemployed) to employees who have been wrongfully dismissed from the employment, by the employer, we find that unlike earlier when employees were given wages for the period of unemployment in circumstances where their termination of services was invalid or illegal, the court now adopted a different approach. The Court formulated a principle of ‘no work, no pay’ and the reasoning behind the same was that since during the period of unemployment the worker did not contribute to the production. The rationale behind this has been to prevent economic discomfort being caused to the companies. There have been many cases stating this principle, such as the case of Allahabad Jal Sansthan v. Daya Shankar Rai [(2005) 5 SCC 124]. Similarly, even in the case of Reserve Bank of India v. Gopinath Sharma [(2006) 6 SCC 221], the Court reaffirmed the principle of ‘no work, no pay’.

Another disaster for the labour force came with the judgment in the case of Steel Authority of India Ltd. v. National Union Waterfront Workers [(2001) 7 SCC 1]. A 5 Judge Bench in this case overruled an earlier 3 Judge decision of the Supreme Court in the case of Air India Statutory Corporation v. United Labour Union [(1997) 9 SCC 377], where the latter case had abolished the contractual labour system, and granted them rights of permanent employees. The significance of the same lies in the fact that permanent employees are entitled to higher wages, and a scheme of other benefits such as pension plans, PF, bonuses etc. The contention is that employers want hire and fire policy and they do not want to take upon themselves the economic burden of providing these benefits.

Even when it comes to Workmen’s Compensation, there has been a dilution in the interpretation of ‘accident arising out of and during the course of employment’. Over the years the Supreme Court has taken out of this phrase the time period of going to and coming back from the place of employment. Basically there has been a shift from favouring the employees to the employer. The case at hand is Assistant Director, ESIC v. Francis Decosta [1996 CLR P. 812], where a worker who died on the way to work was denied compensation. It is important to contrast this with cases before 1990 where a bus conductor sleeping in his bus died of a heart attack, was granted compensation. (United India Insurance Company v. Gopalkrishnan 1989).

In the area of environment protection, the Supreme Court has ostensibly taken a pro-environment stand wherein it has tried to preserve the forests land. The article by Sunita Narain, ‘Our quality of mercy’, effectively highlights the actual implications of the Supreme Court’s judgments. It has stated examples where the Court has favoured environment protection, and how a few years later, the same court, has compromised on its earlier position. The first is an example of a group of fisherman who were denied the right to dry their fish in the forest land as it amounted to a ‘non-forest activity’, despite their proposal to plant mangroves in the forest and create a ‘sustainable development’ plan for the forest. As a consequence, about 10,000 fishermen lost their livelihood.

In contrast is the case of T.N. Godavaraman Thirumalpad v. Union of India [(2008) 9 SCC 711], where the Supreme Court allowed a company (Sterlite Industries) to acquire 700 hectares of forest land for a bauxite mine project, in return for Rs. 55 crores, and in addition to Rs. 50 crores that they would have to pay for a Wildlife Management Plan and compensatory afforestation.

The Supreme Court in the past has repeatedly emphasised on not allowing non-forest activities to be carried out in forest areas, but recently the trend has shifted to allowing for development, and in return, asking the companies to pay for compensatory afforestation or bear the expenses for restitution of the environment and ecology. In fact in the case of Rural Litigation & Entitlement Kendra v. State of Uttar Pradesh [1989 Supp(1) SCC 504], the Supreme Court categorically said that mining activity in the concerned area would be against ecological interest, and ordered the shutting down of all the mining activity in the particular area.

We can observe the change in the attitude of the judiciary. It’s important to think about the role of the judge in implementing the law. We need to think about the extent to which the judiciary should be looking at the economics of the case, and decide accordingly. The role of the judges as people understand is the protection of rights, but through a change in economic policy of the country we have observed a dilution in the rights upheld by the judiciary.

- Preeta Dhar
- Yaman Verma
- Nishita Vasan
- Parag Mohanty
- Niharika Rao
- Ankita Kansil

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