The policy will help various Union ministries and departments define types of cases to be pursued in courts and those which need to be dropped after review.
One of the aims of the policy is to ensure that good cases are won and bad cases are not needlessly pursued.
The policy was launched by then Law Minister M Veerappa Moily in June 2010, but it could not be formalised and implemented due to a variety of reasons.
The final draft of the policy is likely to be sent to various Union ministries and departments as part of inter- ministerial consultations by the Department of Legal Affairs soon.
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After receiving comments, Law Minister Ravi Shankar Prasad will take it to the Union Cabinet for final approval.
Though there are no concrete figures, government is party to at least 50 per cent of the court cases ranging from service matters to indirect taxes.
While the Centre has so far failed to finalise the litigation policy, several states have gone ahead with their respective policies based on the 2010 draft of the Law Ministry.
"The easy approach, 'Let the court decide', must be eschewed and condemned," says the draft.