Constitutional economics and its relevance for contemporary constitutional structures

Correspondence between Pranav Tanwar and Ayan Gupta (students at the National Law University – Delhi)

Dear Ayan,

The theme that I propose for our research project is titled ‘CONSTITUTIONAL ECONOMICS AND ITS RELEVANCE FOR CONTEMPORARY CONSTITUTIONAL STRUCTURES’. This is a summary of what I have already written (HERE) but I have always wanted to develop it further.

For centuries, the relationship between control and laissez-faire has been at the centre of all economic regulation debates. On the one hand, there have been schools, such as erstwhile liberalism and now neoliberalism, which argue for complete autonomy of economic activities, on the other hand, there have been schools of thought, such as socialism, the welfare state or now third-world studies, which argue for limits to such autonomy. In modern nation-states, the international legal order, such as the UN system which provides first and priority space for ‘the people’, no action by states and their governments can go unaccountable. This has become much more important today when, after the advent of Bretton Woods institutions and the rise of neoliberalism, states are becoming the sole and active medium for global trade and investment in economically struggling ‘resource lands. The question arises: Are national resources in the form of money, natural resources or human resources being pooled for priority sectors such as health, education, social security, employment, infrastructure development or any such sector necessary for that particular national economy and its people? This paper will argue that economic decisions of governments, especially in the South or third world or developing countries, should comply with certain ‘ground norms’. This ground norm for the present context is the duly formulated and recognized constitutional standards.

For most countries, economic decisions are about balancing discretionary spending and policy/statutory mandatory spendings. For instance, the Chilean protests of 2019 were motivated by their constitutionally mandated liberalism and its impact on other important areas such as Education. Recently in India, the government has ventured into the field of disinvestment, whereby it is selling off important Public Sector Undertakings (PSUs) to generate more income for itself, or a state government’s involved in developing one religion’s God’s statue. One can question such moves on the grounds of constitutionally mandated ‘socialism’ and ‘secularism’ in India. Even globally, the rising problem of inequality of income among classes makes one wonder how all the dream-rousing aims of international and national legal instruments and policy fail to control these misdirected economic decisions.

Such constitutionalism over economic discretion is not something new, but is rare. In Russia, there is both economic and constitutional scrutiny attached to budget allocation. Though mandated, the US School of Constitutional Economics has made major strides in promoting constitutionalism for economics and political actors. Professor Richard Posner, the leading theorist in this field, in his article entitle The Constitution as an Economic Document argues that ‘economics may provide insight into questions that bear on the proper legal interpretation’ and ‘the limits of an economic approach to deciding constitutional cases [are] set by the Constitution’. Further, he argues that ‘effective protection of basic economic rights promotes economic growth’. Though Posner has presented a two-way flow in the relation, we are primarily concerned about the constitutional interpretation of economics alone. Similarly, there is the example of China, where academics have argued for constitutional guidance in order to create an open and more competitive market.

As a cursory look, India has a long history of discretionary economic decisions and policymaking. At the time of the constitution-making process itself in 1947-1949, there were discussions on goals to be achieved by different economy-oriented provisions, such as the fundamental right of trade and profession or financial emergency, but they neglected the principles or the very methods which administrations of future may need for certainty. Most of the bodies for economic policymaking established over time were ad hoc or formed by the bureaucracy. The only constitutional body, that is, the Financial Commission, is a toothless body. The two important factors steering Indian economic decisions have been politics and populism.

The present idea does not zero in on the economic investigation of government choices through time but rather endeavours to concentrate on how these choices point to an absence of a long-haul fixed approach and, in addition, do not conform to essential standards and ultimately negated the intrinsically ensured fundamental norms (in an expansive and non-specialized sense). Is it time that we centre ourselves around rules of choices as much as we do on the choices themselves? As Fukuyama in Origins of Political Order has said, due to the way the aggregate democratic order provides an incentive structure for the political class (through re-elections), there is a tendency to make legislation against the long-term ‘will of the nation’ for short-term gains. Is there an opportunity for introspection and to present a straightforward and lasting institutional system or at least assured standards of economy to protect established/lawful rights related to these choices?

Best regards

Pranav Tanwar

30-APRIL-2021, Delhi

Dear Pranav,

Thank you for your letter. It was a pleasure to read it. I do agree with the spirit of your analysis, and I will attempt to trace the outlines of constitutionalism in the Indian context. Of course, as you noted, it must and should regulate policy making just as much as legal adjudication.

I think the most interesting part about the role of constitutionalism in democracies is that, while the connection intuitively makes sense, to outline its specific role can often be a painstaking exercise. In my opinion, what strikes at the heart of the fulfillment of constitutional aspirations is that the constitution must be read in a manner cognizant of the values that it upholds. This approach to statecraft, which in constitutional interpretation is referred to as ‘transformative’, is what I understand as ‘constitutionalism’.

India has been a constitutional democracy since 1950. We were subject to colonial rule for about 200 odd years before gaining independence in 1947. Colonialism, as is its nature, was brutal and reprehensible. In 1947, our founding fathers decided to break from the culture of state brutality and began drafting a progressive constitution.[1]

The constitution accepted the Universal Adult Franchise as its formative feature. It embraced the right of equality (including recognizing affirmative action policies to combat the scourge of caste), the right to freedom of speech and expression and freedom of religion among other things. The essence of the constitution was that it respected Human Dignity in its function. This is the ideal it aimed to achieve.

Nevertheless, while the founding fathers aimed for India to be a progressive and inclusive society, the reality of life was in stark contrast to this ideal. Dr BR Ambedkar, the chief draftsman of our constitution, articulated this dilemma well in his final speech to the Constituent Assembly. He said:

On the 26th of January 1950, we are going to enter into a life of contradictions. In politics we will have equality and in social and economic life we will have inequality.
In politics we will be recognizing the principle of one man one vote and one vote one value.
In our social and economic life, we shall, by reason of our social and economic structure, continue to deny the principle of one man one value….We must remove this contradiction at the earliest possible moment or else those who suffer from inequality will blow up the structure of political democracy which this Assembly has so laboriously built up

If the Indian experiment in democracy wants to reach its fullest extent, we need to fill the gap that lies between recognized rights and reality on the ground. However, to do that, it is important that governments act not just with the bare text of the constitution in mind but also the aspirations or values that the constitution represents. These values are, after all, the whole point behind wanting an independent future for ourselves, free from oppression. Thus, it is not only important that the state should treat men and women equally, as no different from one another. To be true to equality, the state must also recognize that women so far have been oppressed by a patriarchal system and they must account for that difference while making laws and policies.

Similarly, while the right to vote has been granted to everyone, it is not necessarily true that everyone has the social capability to do so and do so freely. For instance, in India, people from the so-called ‘lower caste’ are often prohibited from voting by the so-called ‘upper caste’. Thus, only after recognizing the value of UAF – I mean that everyone should have a say in the country – can the state really uphold the right to vote. What I mean to say is that the state must actively encourage voting, including by making sure that safe circumstances are available, and that discriminatory practices are not taking place.

Both these examples hint at the concept of ‘substantive equality’. The idea is to take into account the differences that persevere in our society, and undo the disadvantages they reflect, instead of being blind to these differences and oppression. While this logic is sometimes seen in the debate around affirmative action, it is time to ask why our economic and budgeting decisions are not influenced by substantive equality and constitutionalism. Why can our economic policymaking not be guided by this approach, one which recognizes the essence of our constitutional project?

There is a lot more to say, but one can only hope that the spirit of constitutionalism takes over governance, in the hope that the nation never has to gasp for oxygen on footpaths ever again.

I leave you with this brilliant and incisive analysis of the consequences of the lack of constitutionalism by Prof. Tarunabh Khaitan.

I hope I have been able to get my point across, and I apologize for what may seemingly be a lack of nuance or detail. I look forward to your response.

Best, Ayan

7-MAY-2021, Delhi

Dear Ayan,

Thank you for your letter. As you will understand the dreaded deadline pressure of assignments, exams and dissertation, I apologize for a late reply.

In my first letter I argued for constitutional guidance on economic actions, both policy and law. You very well picked on it and extended such guidance in the form of constitutionalism.

The substantive part of my second letter is:

A continued interactive reading of Constitutional Economics and Constitutionalism results in what may be termed as “Economic Constitutionalism”.[2] This Economic Constitutionalism can be explained to entail following major concepts:

  1. The constitutional (to give sense of legally valid if not always binding or righteous) norms of economic decision making.
  2. Economic freedom of individuals under constitutional framework.
  3. Limits on state intervention in economic freedom of individuals.
  4. Proactive measures by the state for substantive economic equality.

As you rightfully pointed out, with the Constitution of India, at least in text, the country breaked away from its non-sovereign status and moved away from the shadow of a regressive state. The empowerment of people of India meant the new economic legislations or policy were to be guided in the new constitutional ecosystem. But the situation can differ when the idealism of text meets the pragmatism of the government. For instance, the first amendment to the Constitution came as early as 1951 where the government of that day, which in the past was a vocal supporter of individual liberty, let their insecurity of state control subdue such liberty. The fundamental right to trade and profession was subjected to “interests of the general public” which meant nothing but government interest in nationalisation of certain sectors. Further, Article 31A and 31C were introduced as part of the agrarian reform, which later became the starting point of what could be termed as “essential history of Indian constitutional law development”.[3] Further, there are scholars like Rohit De who in his book The People’s Constitution[4] has dealt in detail over state control on liquor trade, cotton manufacturing, beef production and prostitution and how such control crossed the constitutional limits to violate individual economic rights. Though these two examples may not form part of macro-economy or budgetary decisions as such, they in culmination will or at least serve as an example how not only there are limits on economic decision making but further, how the state’s unjust reach over individual economic liberty has been struck down by the constitutional courts, which furthered the cause of human dignity.

Hence, it can be argued that not only are there past examples of Economic Constitutionalism in India but it holds much more relevance today.

Further, you have pointed out how it may take proactive intervention of the state to ensure constitutional rights are lived in spirit. One instance of such an approach is the introduction of free legal aid as a principle in the Directive Principle of State Policy via Article 39A. The specificity and then its enforceability through The Legal Services Authorities Act, 1987 showcase how the governments can actually transform the substantive economic equality into a reality.

I conclude by stating that the recent landmark cases of Swiss Ribbons Pvt. Ltd. v Union of India (constitutionality of Insolvency and Bankruptcy Code),[5] Dharani Sugars And Chemicals Ltd v Union of India (constitutionality of RBI orders under S. 35AA of Banking Regulation Act),[6] Keshavlal Khemchand and Sons Pvt Ltd & Ors v. Union of India & Ors.[7] (Constitutionality of Amended Definition of NPA) highlights how in a modern post liberalisation India, the citizens’ concerns on economic legislation or policy are getting very real. There is a legitimate expectation of not only procedural propriety but also substantive one; substantive in the form of specific contextualised economic rights derived from broad fundamental rights.

Best, Pranav

30-MAY-2021, Delhi

Dear Pranav,

I hope this letter finds you in the best of health. I too apologize to you for the slight delay in my response, which happened partly due to the ongoing exams.

I wholeheartedly enjoyed reading your response, and I’m quite intrigued by the idea of economic constitutionalism. Substantive and procedural due process in economic decisions does indeed seem pervasive, even if it is not couched in that language by the judiciary. Yet, the existence of such a doctrine, to my mind, increases the urgency of fixing India’s due process confusion rather soon.

Specifically, my concern is twofold.

First, I fear that in the absence of well-defined judicial standards, especially under the equality code (and specifically Article 14), there is a real danger of replicating Lochner v New York-like jurisprudence, where the SCOTUS struck down progressive labour regulations by holding that they violated an individual’s ‘freedom to contract’.[8]

It is perhaps thankful that the SC recently struck down regulations requiring excessive working hours.[9] Nonetheless, I believe that the problem of undefined substantive due process standards such as arbitrariness allow courts to misapply or misuse economic constitutionalism to the benefit of the few.[10] It does not help, as Abhinav Chandrachud points out, that Indian jurisprudence on due process has been a mess from the very start.[11]

Second, I fear that in the absence of the Supreme Court granting the State less leeway in policy matters, economic constitutionalism may remain only a limited dream. I can only think of the Migrant Labour crisis and the Supreme Court’s initial response being to not only believe the Government’s lies that no migrant was on the road (despite clear evidence to the contrary), but also to hold that reviewing the Government response (or lack thereof) is outside their purview.

Where do we go from here? How do we define the limits of judicial review under Economic Constitutionalism? To my mind, if we are to accept this doctrine, then policy decisions must also necessarily form a part of judicial review, with the government being given much less leeway. Perhaps the Supreme Court’s recent insistence on the Government’s discriminatory vaccination policy being ‘arbitrary and irrational’, and on requiring the Government to submit all documents on which the policy is based for the Court’s review, is a step in the right direction?

As I conclude, Pranav, I would like to thank you for your patience and time. A huge thanks to the team at USOS, and especially Janus, for facilitating this conversation. It is a joy to have a structured (and what I presume is also substantive) discussion.

It is immensely saddening, Pranav, that we may not get the chance to meet on our beautiful campus here at the National Law University, Delhi this year. Nonetheless, I do hope that such a meeting happens, if not now, then in the near future.

Best, Ayan

3-JUNE-2021, Delhi

[1] For a brilliant analysis of this process and how it impacts constitutional interpretation see Gautam Bhatia, A Transformative Constitution: A Radical Biography in Nine Act (HarperCollins 2018).

[2] David J. Gerber, “Economic Constitutionalism and the Challenge of Globalization: The Enemy Is Gone? Long Live the Enemy: Comment,” Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift Für Die Gesamte Staatswissenschaft, vol. 157, no. 1 (2001), pp. 14–22. JSTOR, Accessed 30 May 2021. Also see, F. Shan, “Economic constitutionalism: Path for state to intervene in the economy.” Front. Law China 1 (2006), pp. 372–392.

[3] See development of law from 1st Amendment up to Kesavananda Bharati Case, AIR 1973 SC 1461.

[4] Rohit De, A People’s Constitution: The Everyday Life of Law in the Indian Republic (Princeton University Press 2018).

[5] 2019 SCC OnLine SC 73.

[6] 2019 SCC OnLine SC 460.

[7] 2015 4 SCC 770.

[8] Lochner v New York 198 U.S. 45 (1905).

[9] Gujarat Mazdoor Sabha v State of Gujarat W.P(C) No 708 of 2020.

[10] See, for e.g., Prof Anup Surendranath’s explanation of arbitrariness in The Courts and the Constitution, Panel on Developments in Equality Jurisprudence, pp. 14–17.

[11] See generally Abhinav Chandrachud, Due Process of Law (EBC 2011).