The draft policy comes at a time when the government is party to nearly 46 per cent of the 3.14 crore cases pending in courts.
The draft also states that departments and ministries should take a cue from the income tax department which reviews the performance of its lawyers every six months.
The draft, which the law ministry will take to the Union Cabinet for final approval, also suggests that the departments and ministries should hire only the number of lawyers actually needed and not hire them overlooking actual requirement.
The ministry plans to replace the 2010 national litigation policy brought out by then law minister M Veerappa Moily with this policy.
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The 2010 policy could not take off and be adopted by various government departments.
The National Litigation Policy seeks to reverse the trend of government being the biggest litigant.
The proposed policy will bring in a mechanism to reduce the number of government litigations.
The policy will also help all the Union ministries and departments define types of cases to be pursued in courts and those which need to be dropped after review.