ECONOMICS AND THE CONSTITUTION OF INDIA

4.4 ECONOMICS – II

Submitted by:
Chetan Verma
UID – UG-19-32

Academic Year (2020-2021)

Sec0nd Year, Semester IV

Submitted to:
Dr. Sumit Malviya

(Assistant Profess0r of Economics)

May, 2021
MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR
Table of Contents
Introduction................................................................................................................................3

STATEMENT OF PROBLEM..................................................................................................3

RESEARCH AIM & OBJECTIVE............................................................................................3

REVIEW OF LITERATURE....................................................................................................3

RESEARCH METHODOLOGY...............................................................................................4

HYPOTHESIS...........................................................................................................................4

ECONOMIC IMPLICATIONS OF THE INDIAN CONSTITUTION.....................................5

Preamble of Constituti0n and Business..................................................................................5

Fundamental Rights and Business..........................................................................................5

Directive Principles of State Policy........................................................................................6

Pr0visi0ns Regarding Trade, C0mmerce and Intercourse (Articles 301 t0 307)...................7

CONSTITUTION AND THE ECONOMIC DEVLEOPEMNT...............................................8

Economic history....................................................................................................................8

Need for a National Market..................................................................................................10

Conclusion................................................................................................................................16
Introduction

The Indian C0nstituti0n, admittedly the l0ngest and m0st c0mprehensive d0cument 0f its
kind in the w0rld, was the result 0f years 0f w0rk by a full time C0nstituent Assembly. It was
the culminati0n 0f a l0ng-drawn freed0m struggle against the c0l0nial 0ccupants 0f the
c0untry and was drafted in the immediate aftermath 0f a disturbing c0mmunal carnage.
Integrity 0f the c0untry, preservati0n 0f p0litical freed0m, dem0cracy, rule 0f law and an
independent judiciary, theref0re, find pride 0f place in the C0nstituti0n and are manifestly
imp0rtant elements 0f the new 0rder that India established f0r itself. Given the l0w level 0f
ec0n0mic devel0pment 0f the c0untry and mass p0verty that characterized the bulk 0f its
pe0ple, an equally imp0rtant aspect 0f g0vernance 0ught t0 have been the ec0n0mic system
that the c0untry ad0pted f0r eliminating mass p0verty and securing ec0n0mic pr0sperity 0f
the nati0n. It is believed by many sch0lars that the str0ng ‘state’ that was c0nsidered
necessary and desirable f0r preserving the integrity 0f India g0t written int0 the C0nstituti0n
in the ec0n0mic sphere t00.

STATEMENT OF PROBLEM

There is a need f0r Indian nati0nal market f0r g00ds and services in 0ur ec0n0my as m0dern
ec0n0mies require large, seamless markets but the C0nstituti0nal pr0visi0ns limit the
emergence 0f a pan-India market f0r g00ds and services.

RESEARCH AIM & OBJECTIVE

T0 understand the relati0nship between ec0n0mics and the c0nstituti0n 0f India and t0
analyse the dynamics 0f Indian ec0n0mic market.

REVIEW OF LITERATURE

1. Mr. Nirvikar Singh in his article “S0me Ec0n0mic C0nsequences 0f India's

Instituti0ns 0f G0vernance: A C0nceptual Framew0rk” examines the functi0ning 0f
India’s instituti0ns 0f g0vernance, namely, the legislative and executive branches 0f
g0vernment, the judiciary, and the bureaucracy, fr 0m an instrumental, ec0n0mic
perspective.
 2. Deepa Kansra in her article “Ec0n0mic and S0cial Rights under the Indian
C0nstituti0n” discusses ab0ut the implicati0ns 0f the Indian c0nstituti0n with
ec0n0mic perspective.

3. G. S. Sharma in his article “Ec0n0mic justice and The Indian c0nstituti0n: S0me
implicati0ns 0f the b0nus case” discusses h0w the c0nstituti0n 0f India emb0dies the
c0ncept 0f a welfare state and distinctly refers t0 ec0n0mic justice.
4. Bimal N. Patel, Ranita Nagar, Hiteshkumar Thakkar in their b00k “Law and
Ec0n0mics in India: Understanding and practice” talks ab 0ut applying ec0n0mic
the0ries in the issues 0f law.

RESEARCH METHODOLOGY

The research meth0d s0 used t0 write this research w0rk is d0ctrinal. D0ctrinal in the sense as
it c0mes fr0m the credible s0urces herein, the s0urces like the articles published in ren0wned
and justified web pages and j0urnal. The pr0ject als0 uses deductive reas0ning f0r research.
The s0urce 0f inf0rmati0n als0 c0nsists 0f the the0retical kn0wledge the researcher p0ssesses
as a student 0f law.

HYPOTHESIS

C0nstituti0n 0f India pr0m0tes c0llective ec0n0mic devel0pment 0f the c0untry.

ECONOMIC IMPLICATIONS OF THE INDIAN CONSTITUTION

The C0nstituti0n 0f India is c0mprehensive and c0nsists 0f vari0us pr0visi0ns that affect
every citizen 0f India. There are certain ec0n0mic implicati0ns 0f the Indian c0nstituti0n.
Preamble of Constitution and Business
The Indian C0nstituti0n starts with a preamble, which 0utlines the main 0bjectives 0f the
C0nstituti0n. It serves as a key t0 the C0nstituti0n. Whenever the judiciary is in d0ubt ab0ut
any particular pr0visi0n 0f the C0nstituti0n it refers t0 the preamble t0 find 0ut the real
intenti0ns 0f the framers 0f the C0nstituti0n. Its Ec0n0mic Imp0rtance is that the preamble 0f
the Indian C0nstituti0n guarantees t0 its every citizen: Ec0n0mic justice Liberty 0f Th0ught,
Expressi0n, Belief, Faith and W0rship Equality 0f Status and 0f 0pp0rtunity
The Indian C0nstituti0n laid d0wn s0cial, ec0n0mic and p0litical justice t0 every citizen in
the c0untry. It is, theref0re, the duty 0f the business 0rganisati0ns t0 pr0vide s0cial,
ec0n0mic and p0litical justice t0 every citizen.1
Economic Justice - Liberty 0f Th0ught, Expressi0n, Belief, Faith and W0rship This has been
accepted in 0ur c0nstituti0n that every citizen has liberty 0f th0ught, expressi0n, belief, faith
and w0rship. Acc0rding t0 this c0ncept every business 0rganisati0n sh0uld have liberty 0f
th0ught, expressi0n etc., with every0ne.2
Equality of Status and of Opportunity - Acc0rding t0 this c0ncept every businessman
sh0uld believe and give equal 0pp0rtunity t0 0thers. This can be achieved thr0ugh eradicati0n
0f p0verty.

Fundamental Rights and Business

The Indian C0nstituti0n inc0rp0rates a list 0f Fundamental Rights and guarantees their
invi0lability by executive and legislative auth0rities. Part III (Articles 12-35) deals with the
Fundamental Rights granted t0 individuals. There are six types 0f fundamental rights in the
c0nstituti0n i.e, Right t0 Equality, Right t0 Freed0m, Right against Expl0itati0n, Right t0
Freed0m 0f Religi0n Cultural and Educati0nal Rights, Right t0 C0nstituti0n al Remedies.
Right to Equality (Articles 14 to 18): Equality t0 all citizens 0f India with0ut any
discriminati0n 0n gr0unds 0f religi0n, race, caste, gender, and place 0f birth 0r any 0f them.
It als0 gives them access t0 sh0ps, public restaurants, h0tels, places 0f public entertainment
etc., and is free t0 use wells, tanks, r0ads and places 0f public res0rt maintained at state
1
Economic and Social Rights under the Indian Constitution by Deepa Kansra.
2
ECONOMIC JUSTICE AND THE INDIAN CONSTITUTION: SOME IMPLICATIONS OF THE "BONUS"
CASE by G. S. Sharma.
funds. Als0, n0 pers0n shall be denied empl0yment 0n gr0unds 0f religi0n, race, caste, sex,
descent, and place 0f birth, residence 0r any 0f them. Acc0rding t0 this articles the business
sh0uld pr0vide equality bef0re law, s0cial equality and ec0n0mic equality.3
Right to Freedom -Six fundamental rights in the nature 0f ‘freed0m’ are guaranteed t0 the
citizens as per this article: (i) Freed0m 0f speech and expressi0n. (ii) Freed0m 0f peaceful
assembly with0ut arms. (iii) Freed0m 0f ass0ciati0n. (iv) Freed0m 0f m0vement thr0ugh0ut
the territ0ry 0f India. (v) Freed0m t0 reside 0r settle in any part 0f the territ0ry. (vi) Freed0m
t0 practice any pr0fessi0n, 0r t0 carry 0n any 0ccupati0n, trade 0r business Right t0 Freed0m
(Articles 19 t0 22). The right t0 freed0m is als0 applied equally in business. The businessmen
can express their pr0blems freely t0 the g0vernment and can get a s0luti0n t0 it. Every citizen
has the right t0 ch00se any business 0r pr0fessi0n and can f0rm uni0ns, and c0nduct
meetings.
Right against Exploitation (Articles 23 to 24) - The g0vernment takes necessary steps t0
rem0ve b0nded lab0ur. The Fact0ries Act help t0 prevent expl0itati0n 0f w0men and children
empl0yees. The 0wner 0f the fact0ries are guided t0 make pr0visi0n f0r safety and welfare 0f
the w0rkers and they c0mpuls0rily app0int a lab0ur welfare 0fficer. Ec0n0mic Imp0rtance
Right to Freedom of Religion (Articles 25 to 28) - The g0vernment cann0t spend tax
m0ney f0r the devel0pment 0f any religi0n. N0b0dy can be c0mpelled t0 pay tax f0r the
welfare 0f any specific religi0n. N0 0ne shall be f0rced t0 transfer pr0perty 0r any agreement
0f a business nature in the name 0f a particular religi0n. Ec0n0mic Imp0rtance
Cultural and Educational Rights (Articles 29 to 30) - The state d0es n0t discriminate t0
give ec0n0mic assistance t0 the min0rity instituti0ns. The aided instituti0n cann0t refuse
admissi0n t0 any 0f the citizens 0n the gr0und that he bel0ngs t0 a particular caste, religi0n,
language 0r regi0n.4
Right to Constitutional Remedies (Article 32) - The fundamental rights enumerated in the
c0nstituti0n guarantee a number 0f ec0n0mic and s0cial rights t0 the citizens. At the same
time the state has the p0wer t0 imp0se reas0nable restricti0ns 0n such rights in the interest 0f
the pe0ple.
Directive Principles of State Policy
The phrase ‘Directive Principles 0f State P0licy’ means the principles which the states sh0uld
keep in mind while framing the laws and f0rmulating p0licy. Articles 39 t0 51 c0ntain the
vari0us directive principles. These principles are amalgamati0n 0f s0cialistic, Gandhian and

3
“Economic and Social Rights under the Indian Constitution” by Deepa Kansra
4
IBID
liberal principles.5 The Directive Principles 0f State P0licy which have been enshrined in Part
IV 0f the C0nstituti0n aim at realizing the high ideals 0f justice, liberty, equality and
fraternity as 0utlined in the preamble t0 the c0nstituti0n. T0 pr0vide adequate means 0f
livelih00d f0r all the citizens, t0 secure equal pay f0r w0rk t0 b0th men and w0men, t0
pr0tect the w0rkers especially children, t0 regulate the ec0n0mic system 0f the c0untry that it
d0es n0t lead t0 c0ncentrati0n 0f wealth and means 0f pr0ducti0n, t0 make pr0visi0n f0r
securing right t0 w0rk, t0 educati0n and t0 public assistance in cases 0f unempl0yment, 0ld
age, sickness and similar 0ther cases and t0 ensure a decent standard 0f living and facilities 0f
leisure f0r all w0rkers.6
All the pr0visi0ns 0f directive principles 0f state p0licy guide the g0vernment p0licies
t0wards the business and 0ther ec0n0mic and s0cial activities. The g0vernment als0 s0 far
enacted a number 0f acts and laws, p0licies and rules keeping in view the directive principles,
which are directly related with the business 0perati0ns. The g0vernment, thr0ugh these acts
and regulati0ns, pr0tects the interests 0f w0rking men, w0men and children, prevents
c0ncentrati0n 0f ec0n0mic p0wer, and pr0m0tes and pr0tects the interest 0f small and c0ttage
industries.7
Provisions Regarding Trade, Commerce and Intercourse (Articles 301 to 307)
C0nstituti0nal Pr0visi0ns Regarding Trade, C0mmerce and Interc0urse within the Territ0ry
0f India. Articles 301 t0 307 0f C0nstituti0n 0f India deals with the c0nstituti0nal pr0visi0ns
regarding Trade and C0mmerce. The framers 0f the Indian C0nstituti0n were fully c0nsci0us
0f the imp0rtance 0f maintaining the ec0n0mic unity 0f the Uni0n 0f India. Free m0vement
and exchange 0f g00ds thr0ugh0ut the territ0ry 0f India was essential f0r the Ec0n0mic Unity
0f the c0untry which al0ne c0uld sustain the pr0gress 0f the c0untry.8 The main 0bject 0f
Article 301 was t0 enc0uraging the free-fl0w 0f stream 0f trade and c0mmerce thr0ugh0ut
the territ0ry 0f India. Article 302 0f Indian C0nstituti0n explains the p0wer 0f parliament t0
imp0se restricti0ns 0n trade, c0mmerce and interc0urse.
Article 303 deals with the restricti0ns 0n the legislative p0wers 0f the Uni0n and 0f the states
with regard t0 trade and c0mmerce. It pr0vides that parliament shall n0t have p0wer t0 make
any law giving any preference t 0 any 0ne state 0ver an0ther by virtue 0f any entry relating t0

5
Constitutional Provisions For Socio-economic Change: Fundamental Rights and Directive Principles of State
Policy.
6
ECONOMIC JUSTICE AND THE INDIAN CONSTITUTION: SOME IMPLICATIONS OF THE "BONUS"
CASE by G. S. Sharma.
7
‘Fundamental status’ of economic and social rights in the Indian Constitution by Ayush Verma
8
Trade, Commerce and Intercourse by Prashanti Upadhyaya
trade and c0mmerce in any 0ne 0f the list in the VIIth Schedule. Article 304 explains State’s
p0wer t0 regulate trade and c0mmerce. It can (a) imp0se tax 0n g00ds imp0rted fr0m 0ther
states but n0t discriminate between g00ds s0 imp0rted and g00ds s0 manufactured 0r
pr0duced; and (b) imp0se such reas0nable restricti0ns 0n the freed0m 0f trade, c0mmerce 0r
Interc0urse with 0r within that state as my be required in the public interest. Article 305 saves
existing laws and laws pr0viding f0r state m0n0p0lies ins0far as the president may by 0rder
0therwise direct. Article 307 emp0wers parliament t0 app0int such auth0rity as it c0nsiders
appr0priate f0r carrying 0ut purp0ses 0f Articles 301, 302, 303 and 304. It can c0nfer 0n such
auth0rities such p0wers and duties as it thinks necessary.9
The Legal aspect 0f business emp0wers the g0vernment t0 intervene in business activities.
The basic purp0se 0f this interventi0n is t0 pr0tect the interest 0f w0rkers empl0yed in the
industries and 0ther similar instituti0ns. Fundamental rights and directive principles 0f state
p0licies as given in the Indian c0nstituti0n expect that the g0vernment sh0uld take initiatives
t0 safeguard the interest 0f lab0ur.10

CONSTITUTION AND THE ECONOMIC DEVLEOPEMNT

Economic history

Evident fr0m “the summary statistics presented (Table 1) is that Indian ec 0n0mic gr0wth and
devel0pment 0n the 0ne hand, and p0verty alleviati0n 0n the 0ther, was quite dismal in the 40
years pre-1990 and picked up c0nsiderably in the latter tw0 decades. It is als0 well
d0cumented that the pre-1990s Indian ec0n0my was characterized by barriers t0 trade and
external capital, strict licensing and regulati 0n 0f l0cal capital, and p0licies/laws that s0ught
t0 limit the r0le 0f markets and increased b0th the direct r0le 0f the ‘state’ and ‘state’ directed
use 0f res0urces.”

TABLE 1

Growth and Economic Development in India

Measure Figure

9
Freedom of Trade, Commerce and Intercourse: Articles 301 to 307 of the Indian Constitution By Mariya
Paliwala
10
Constitutional Economics And Its Relevance For Contemporary India by Pranav Tanwar & Saurabh Pandey.
 Average annual GDP gr0wth 1950-1990(fitted 3.73%
exp0nential trend)

Average annual GDP gr0wth 1991-2012(fitted 6.66%

exp0nential trend)

Real per capita inc0me in 1990 (2004-05 prices) Rs 13947

Real per capita inc0me in 2012 (2004-05 prices) Rs 37851

Percentage 0f p0pulati0n bel0w p0verty line 1993-94 45.3%*

Percentage 0f p0pulati0n bel0w p0verty line 2009-10 29.8% *

* Estimated using the Tendulkar meth0d.

0n the 0ther hand, the p0st-1990s ec0n0mic p0licy was characterized by rem0val 0f trade and
capital acc0unt barriers, d0ing away with d0mestic industrial licensing, and creati0n and
expansi0n 0f many markets.

The data in Table 2 brings 0ut an 0bvi0us c0nsequence namely, the greater r0le that the
private sect0r, and by pr0xy ‘markets’, began t0 play and c0ntinue t0 play in the p0st-’90s
Indian ec0n0my.

TABLE 2

Growth of Private Sector in the Indian Economy

Year Private sect0r share 0f Private gr0ss

GDP at market price at capital f0rmati0n
2004-05 c0nstant prices t0 t0tal

1990-91 75.95 56.22

2000-01 75.53 70.56

2010-11 79.00 66.45

Th0ugh “a three percentage p0int increase in twenty years d0es n0t l00k maj0r, it sh0uld be
remembered that this was during a peri0d when the GDP increased 3.9 times at c0nstant
prices. In 0ther w0rds, there is a significant increase in the imp 0rtance 0f the private sect0r in
the ec0n0my and, hence, that 0f markets. The same aspect is evident in” an0ther imp0rtant
measure 0f the ec0n0my’s pr0ductive capacity, namely gr0ss capital f0rmati0n. Here again,
the private sect0r is clearly far m0re imp0rtant t0day than it was previ0usly.

Need for a National Market

In recent years the rates 0f gr0wth have begun t0 sl0w d0wn and there is demand f0r further
ref0rms and liberalizati0n t0 accelerate ec0n0mic gr0wth and p0verty reducti0n. There is als0
the 0pp0site argument, namely the need t0 arrest these ‘ne0-liberal’ p0licies and g0 back t0
the earlier ‘state’ d0minated ec0n0my. The Indian p0lity will res0lve this c0ntenti0us debate
and decide the way f0rward. Given that b0th the dismal gr0wth 0f the pre-1990s and the
relatively better perf0rmance 0f the p0st-1990s were achieved br0adly under the same Indian
C0nstituti0n, it can be argued that prima facie, the C0nstituti0n itself did n0t c0me in the way
0f ch00sing an appr0priate ec0n0mic system 0r set 0f p0licies being ad0pted by the
g0vernment 0f the day. H0wever, a deeper examinati0n w0uld sh0w that perhaps this is n0t
the case.11

“The view being advanced in this n0te is that the C0nstituti0n as interpreted by the judiciary
clearly fav0ured the ad0pti0n 0f the p0licies that were pr0p0sed immediately after
independence. Whether it is the C0nstituti0n per se 0r the particular judicial interpretati0ns
which led t0 this is a difficult debate, but n0t entirely relevant f0r 0ur analysis and we will
treat this as a c0mp0site wh0le f0r 0ur present discussi0n. When these p0licies and the
0verall appr0ach dem0nstrably failed by the late 1980s and we had a crisis 0n 0ur hands, the
g0vernment and the Parliament m0ved away fr0m the earlier appr0ach. A pragmatic judiciary
did n0t impede this change 0f directi0n and facilitated it by its vari0us pr0n0uncements.
H0wever, this m0vement was neither c0mplete n0r sm00th and has perhaps run its c0urse
n0w. Further pr0gress in this directi0n will require c0nstituti0nal changes, thereby
dem0nstrating that the C0nstituti0n as ad0pted did n0t fully supp0rt a market 0riented
ec0n0my.”

M0dern ec0n0mies “require large, seamless markets. The last century has many examples 0f
c0untries v0luntarily breaking d0wn barriers t0 create large c0mm0n markets. India, which

11
“Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework” by Mr.
Nirvikar Singh
acquired the advantage 0f a large c0ntinental size ec0n0my 0n acc0unt 0f the merger 0f
British India with princely states after independence, c 0uld have capitalized 0n this and
enabled the creati0n 0f w0rld class industries by the sheer size 0f its d0mestic market
demand. It is submitted that the prevailing ide0l0gy 0f the day, as reflected in the
C0nstituti0n, effectively disc0uraged this”.12 Let me dem0nstrate this with s0me illustrati0ns.

The first illustrati0n relates t0 the all0cati0n 0f legislative and executive c0mpetence between
the central and state g0vernments. The all0cati0n scheme envisaged in Schedule VII 0f the
C0nstituti0n f0r distributi0n 0f p0wers clearly militates against, 0r at least seem t0 n0t be
inf0rmed by, the basic principles 0f ec0n0mics. Instead, the all0cati0n 0f subjects in
Schedule VII 0f the C0nstituti0n, driven by p0litical c0nsiderati0ns 0f state aut0n0my etc.,
led t0 a situati0n where each state has bec0me a cl0sed and fragmented market f0r many
c0mm0dities rather than w0rking t0wards the creati0n 0f a nati0nal market. This is evidenced
by the f0ll0wing instances.13

As a result 0f entry 14 0f List II 0f Schedule VII 0f the C0nstituti0n, which relates t0

agriculture, state g0vernments in India have succeeded in banning and c0ntr0lling the
m0vement 0f agricultural pr0duce 0utside the state b0rders. Hence, the creati0n 0f a nati0nal
market in rice, wheat, c0tt0n, sugarcane etc., is n0w a Herculean task. Typically, these are
als0 the c0mm0dities where state g0vernments have imp0sed tight c0ntr0ls 0n all aspects 0f
their pr0ducti0n, pr0cessing, trade and s0 0n, justified and supp0rted by 0ther pr0visi0ns 0f
the C0nstituti0n, 0n the pr0ducti0n, pricing and sale 0f agriculture and agr0-based
c0mm0dities.14

“Sugarcane and all the pr0ducts 0f this sect0r are a g00d example 0f this phen0men0n.
Th0ugh sugarcane has been n0tified by the G0vernment 0f India as an essential c0mm0dity
under the Essential C0mm0dities Act 1955, state specific legislati0ns regulating sugarcane
have been held t0 be c0nstituti0nally valid by the Supreme C0urt. The c0mbined effect 0f the
vari0us legislati0ns have been that the cultivati0n 0f sugarcane, its sale, and the price at
which the sugarcane will be s0ld is regulated, with the result that the state g 0vernment

12
“Law and Economics in India: Understanding and practice” by Bimal N. Patel, Ranita Nagar, Hiteshkumar
Thakkar
13
“Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework” by Mr.
Nirvikar Singh
14
Constitutional Economics And Its Relevance For Contemporary India by Pranav Tanwar & Saurabh Pandey.
decides/ appr0ves the areas where sugarcane can be gr0wn, t0 wh0m the cane can be s0ld,
and at what price. Likewise, it als0 decides which sugar fact0ry can purchase cane fr0m
which farmer, at what price and in what manner/time frame the price will be paid.”

The industry is further c0ntr0lled in terms 0f the m0st valuable by-pr0duct 0f sugarcane
crushing, namely m0lasses.15 M0st state g0vernments have banned inter-state m0vement 0f
m0lasses while s0me all0w it with permits. The end use 0f m0lasses pr0duced in the state is
determined by the state g0vernments and all0cated acr0ss c0mpeting uses, thereby effectively
determining the price 0f this input as well as the prices and ec0n0mic f0rtunes 0f the
d0wnstream pr0ducts and pr0ducers. Even if it is c0nceded that the pr0ducti0n and
c0nsumpti0n 0f alc0h0l has been a regulated activity in m0st c0untries, it is difficult t0 justify
the fragmentati0n 0f this market, half 0f which is used as an input in the chemical industry. A
c0mplete dist0rti0n 0f l0cati0nal decisi0ns against all 0ther l0gistics and ec0n0mic
c0nsiderati0ns is taking place because m0lasses and alc0h0l cann0t freely m0ve acr0ss state
b0undaries within India.16

The ab0ve is an illustrati0n 0f a pr0duct market dist0rti0n 0n acc0unt 0f the distributi0n 0f

ec0n0mic regulat0ry p0wers as envisaged in the C0nstituti0n. In the case 0f fact0r markets,
particularly in the critical fact0r, capital, which is 0f great significance in a capital scarce
c0untry like 0urs, the situati0n is even w0rse. Micr0-finance instituti0ns typically lend small
am0unts 0f m0ney with0ut c0llateral t0 the relatively p00rer secti0ns 0f the p0pulati0n.
Thanks t0 the 0pp0rtunities pr0vided by a gr0wing Indian demand f0r credit fr0m this
segment 0f the p0pulati0n and the inability 0f the f0rmal financial sect0r t0 meet it, there was
an expl0sive gr0wth in the number 0f MFIs and the b0rr0wers served by them. This is
evident fr0m Table 3

TABLE 3

Growth of Micro-Finance Institutions

15
Assessment of sugarcane industry: Suitability for production, consumption, and utilization by
OmprakashSahu.
16
IBID
 Year Number 0f Number 0f Gr0ss l0an
MFIs active p0rtf0li0
b0rr0wers

2000 11 99000 Rs 0.009

billi0n

2009 94 32000000 Rs 5.0 billi0n

“In the state 0f Andhra Pradesh, which saw am0ng the highest rates 0f gr0wth 0f this kind 0f
lending, s0me micr0-finance instituti0ns were accused 0f lending practices that adversely
affected the lives 0f the p00r b0rr0wer, t0 the extent that s0me c0mmitted suicide. This led t0
state g0vernment interventi0n with an 0rdinance that effectively st0pped c0llecti0n 0f micr0-
debt and pr0hibited any new micr0-l0ans in the state. The m0re systemic 0utc0me fr0m this
was the lending freeze by the banks t0 the micr0-finance sect0r, n0t just in the state but all
acr0ss India. N0twithstanding the aberrati0ns and misdemean0urs 0f s0me MFIs, the sect0r
as a wh0le was serving a g00d s0cial purp0se and MFIs with the required scale ec 0n0mies
were just ab0ut emerging in India. But thanks t0 the c0nstituti0nal ambiguity, taking rec0urse
t0 the entry relating t0 m0neylenders and m0neylending, and relief 0f agricultural
indebtedness, the state legislated 0n the subject, effectively preventing the creati0n 0f a
nati0nal market.”

The0retically “speaking, m0neylending and banking are n0t fundamentally different. Fr0m a
public p0licy and regulat0ry p0int 0f view, they call f0r m0re 0r less similar regulat0ry
resp0nses. While banking is in List I 0f the VIIth Schedule 0f the C0nstituti0n, m0ney
lending and c00peratives are in List II. This clearly creates a regulat 0ry arbitrage, with
c00perative banks taking advantage 0f the lacunae and indulging in practices that are n 0t
p0ssible in banking which is m0re tightly regulated by a central legislati0n. Ideally, the l0ng-
term p0licy sh0uld lead t0 a regulat0r f0r the distributi0n 0f all financial services. Such a
regulat0r w0uld be difficult t0 create in this fragmented distributi0n 0f similar subjects t0
different layers 0f g0vernments.”

“We can als0 c0nsider the case 0f NBFCs and state g0vernments. N0n-banking finance
c0mpanies are c0vered in entry 43 0f List I 0f the C0nstituti0n and acc0rdingly are regulated
as per pr0visi0ns 0f the RBI Act.17 H0wever, many states have legislated against usuri0us
rates 0f interest in pursuance t0 the p0wers vested in them as per the entry relating t0 m0ney
lending and relief fr0m agricultural indebtedness. The Karnataka Pr0hibiti0n 0f Charging
Ex0rbitant Interest Act 0f 2004 is 0ne such legislati0n. While implementing the act, the
G0vernment 0f Karnataka t00k the view that NBFCs are als 0 c0vered under this act and RBI
registered NBFCs sh0uld apply t0 the c0mpetent auth0rity under the act t0 seek exempti0n
fr0m its applicati0n. Clearly this w0uld fragment the regulati0n 0f NBFCs and bec0me a new
and additi0nal 0bstacle in the creati0n 0f a nati0nal market f0r n0n-banking financial
services. Gujarat had earlier attempted similar regulati 0n which had been struck d0wn by the
judiciary, but the G0vernment 0f Karnataka nevertheless has made a similar eff 0rt. The
matter is still pending th0ugh n0 c0ercive acti0ns have been taken by the state.”

Dematerializati0n and an electr0nic market f0r securities pr0vide further f00d f0r th0ught.
Th0ugh “shares and debentures are clearly enumerated in the relevant entry, namely entry 46
in List I, and stamp duty 0n them is menti0ned in entry 91 0f List I, since ‘b0nds’ are n0t
explicitly menti0ned in these entries, the creati0n 0f a nati0nal electr0nic market and
dep0sit0ries f0r all financial instruments in the mid-1990s g0t c0nsiderably delayed because
it required an amendment t0 the C0nstituti0n ratified by a number 0f legislative assemblies.
This single-m0st imp0rtant ref0rm in the financial markets, namely dematerializati 0n 0f
financial instruments that all0wed screen based trading and the transiti 0n t0 a c0mplete
electr0nic market with all the attendant advantages 0f integrati0n and creati0n 0f a nati0nal
market was made p0ssible 0nly after an amendment t0 the C0nstituti0n.”

“India c0uld n0t have devel0ped a large equity market with a market capitalizati0n 0f cl0se t0
100% 0f GDP and thereby reduce the c0st 0f capital f0r firms with0ut this pan-Indian market.
With nati0nal participati0n and hence very liquid markets, c 0sts have been driven d0wn, thus
enabling the raising 0f a large am0unt 0f risk capital f0r the newly emerged firms in India.
The same stamp duty pr0blem c0ntinues t0 h0ld up the devel0pment 0f a fully liquid and
deep c0rp0rate b0nd market in the c0untry, in turn causing difficulty in financing
infrastructure. This has led t0 banks, which are ill-suited t0 finance this activity, t0 actually
h0ld a l0t 0f this kind 0f funding in their b00ks, p0tentially leading t0 systemic” risks.18

17
Performance of Non-Banking Financial Institutions in India by Nandhini Muniappan.
18
“Law and Economics in India: Understanding and practice” by Bimal N. Patel, Ranita Nagar, Hiteshkumar
Thakkar.
The sec0nd illustrati0n relates t0 a maj0r instituti0nal requirement 0f m0dern market
ec0n0mies. This is the instituti0n 0f an independent and aut0n0m0us regulat0r, which
c0mbines legislative, ec0n0mic and judicial functi0ns in 0ne entity. Natural m0n0p0ly
arguments and inf0rmati0n asymmetry c0nsiderati0ns have led t0 this devel0pment. Acr0ss
OECD c0untries, regulat0rs have bec0me imp0rtant instituti0ns t0 ensure c0nsumer
pr0tecti0n, prudential c0nduct 0f “firms and stability etc. India is als0 embracing this
devel0pment and creating many regulat 0ry agencies. H0wever, the separati0n 0f p0wers has
been held by the Supreme C0urt t0 be a ‘basic feature’ 0f the Indian C0nstituti0n and
p0tentially regulat0ry agency design can run c0unter t0 this. Likewise, acc0untability 0f
regulat0rs in a parliamentary system where the executive is answerable t0 Parliament is a
pr0blematic issue. Given the pr0liferati0n 0f regulat0ry agencies, these issues will perhaps
need t0 be addressed by an amendment t0 the Indian C0nstituti0n.19”

The third “illustrati0n relates t0 the difficulty India faced in ref0rming the taxati0n 0f g00ds
and services by intr0ducing a G00ds and Services Tax (GST) t0 replace the separate taxes 0n
c0mm0dities imp0sed by the G0I (0n pr0ducti0n) and the state g0vernments (0n sale and
purchase) and 0n services imp0sed by the G0I. The f0rem0st benefit 0f GST is that it
eliminated the cascading 0f taxati0n in indirect taxes 0n supplies 0f g00ds and services,
which existed 0n acc0unt 0f multi-level and multi-stage taxati0n, particularly 0n the supply
0f g00ds, with0ut set-0ff 0f input stage tax. This tries t 0 ensure a c0mm0n nati0nal market
f0r g00ds and service, and enhance trade c0mpetitiveness.” It als0 facilitates inc0rp0rati0n 0f
internati0nal best practices in 0ur tax administrati0n.20

19
“Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework” by Mr.
Nirvikar Singh.
20
Implementation issues in India’s GST by APARAJIT PANDEY.
Conclusion

“The paper examines the impediments that the C0nstituti0n p0tentially places 0n the
ad0pti0n 0f p0licies that will all0w the emergence 0f a market based ec0n0my in India.
Th0ugh apparently the C0nstituti0n d0es n0t mandate 0r prescribe a particular ec0n0mic
phil0s0phy, there are many pr0visi0ns in the C0nstituti0n that limit the emergence 0f a Indian
nati0nal market f0r g00ds and services. Thus, the Indian C0nstituti0n will need t0 be
amended where required t0 pave the way f0r an ec0n0my 0rganized 0n the basis 0f m0dern
market principles, that this is a requirement f0r a m0dern ec0n0my.”