The Hindu Business Line : India still shackled, says report

People today speak of a sea-change in the Indian economic environment since the early 1990s. But the Economic Freedom Index tells us that, not only is India placed way down at the 121st position among 161 countries, there has been just an 11 per cent improvement from conditions obtaining in 1995 when the first index was drawn up.

IN NOVEMBER last year, the Union Finance Minister said in Kolkata that he was confident of the national economy attaining a seven per cent growth rate in 2005-2006 and that the outlook for the economy was "brightest compared to all the emerging economies". Simply put, what this means is that the economy is doing better than most other economies, a view which should make Indians happy, specially in view of the fact that, for decades, the country has been a plodding laggard in the international growth stakes.

There is in fact some cause for relief and optimism because it does appear that the country has, finally, been able to extricate itself from the "Hindu rate of growth" syndrome, and is now firmly hitched on to the 6.5-7.5 per cent growth bandwagon. There is also little doubt that one of the principal reasons for this shift has been the policy of economic liberalisation first introduced by none other than Dr Manmohan Singh himself in 1991, when he was Finance Minister in the Narasimha Rao Government.

There are no two points of view on this aspect of India's recent economic performance. Also, there is general agreement that the reforms have been mainly characterised by freeing internal decision-making and, of course, opening up the national economy to external investment flows. Some amount of liberalisation has no doubt taken place, resulting in a recession of Government interference in the workings of the economy. This, however, is the `inside' view of national economic development during the past 15 years. The question is: Does the outside world look on these developments in the same way, and, if it does, how does it rate the freeing of the economy from the shackles of official interference?

It is a matter of some concern that, in the eyes of the Heritage Foundation/Wall Street Journal "Index of Economic Freedom 2006", the Indian economy is way down the ladder in the matter of freeing itself from Government interference, being placed in 121st among the 166 countries studied. Admittedly, there is no compulsion to take the findings as Gospel truth, not to speak of the fact that — against the backdrop of the strong degree of Government control over the economy in the 1960s, 1970s and 1980s — the relative progress made today in reducing such control has been phenomenal, to say the least. Even so, the fact remains that the Economic Freedom Index has given low marks to Indian liberalisation, something that cannot be brushed aside peremptorily, particularly because the report has been published for the past 12 years and has been taken seriously by the international investing community, among others. But, first, what does the Economic Freedom Index report purport to do? What is its objective? As the report itself says, the objective is to produce " a user-friendly `index of economic freedom' as a tool for policymakers and investors". What is this "economic freedom" that the report talks about? It is defined as "the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive". In short, economic freedom makes life more liveable for individual, ordinary people.

This being the target, how did the authors of the report go about their business? They had to develop "a systematic, empirical measurement of economic freedom in countries throughout the world" for which "a set of objective economic criteria" had to be selected. For this purpose, 50 independent variables were chosen grouped into 10 categories, namely, trade policy, fiscal burden, government intervention, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity. Without going into the weight variations, if any, among the different factors, an index was constructed on this foundation, a total of 161 countries being put under the scanner.

In the words of the report, the index is a "careful theoretical analysis of the factors that most influence the institutional setting of economic growth". And what is the most important inference from the exercise?

To quote the report once again: "It has been found that the countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than are those with less economic freedom". Further, the report also says that countries with the highest levels of economic freedoms have the highest living standards.

It is in this setting that the view expressed by the Union Finance Minister (referred to earlier) should be seen, specially the point that the economic prospects of the country are the "brightest compared to all the emerging economies".

If the Minister is right and the 2006 Economic Freedom Index realistic, the latter should place India rather high up in the list of countries examined by it. But that, surprisingly, has not been the case. People today speak of a sea-change in the Indian economic environment since the early 1990s. But the Economic Freedom Index tells us that, not only is India placed way down at the 121st position among 161 countries, there has been just an 11 per cent improvement from conditions obtaining in 1995 when the first index was drawn up.

A scrutiny of the data relating to the 10 broad categories (listed above) spread over seven reports beginning from the 2000 one suggests that Indian policy has been rather stable regarding eight heads (trade, monetary policy, capital flows and foreign investment, banking, wages and prices, property rights, regulation and informal market activity) with improvements being registered in monetary policy, capital flows and foreign investment, wages and prices, and informal market activity.

Unstable performance has marked two sectors, namely, fiscal burden and Government intervention, the former being rather erratic, seesawing between the 2003 and 2006 reports but ending with an improved score of 3.9 on a reducing scale of five against 4.3 in 2003.

The scores for Government intervention showed a worsening position for the reports from 2001 till 2004, ending at 3.0 for 2006 (the same level as in 2000).

Clearly, going by the Economic Freedom Index, there is vast scope for improvement in a number of broad sectors, the third chapter of the report titled "Grassroots Capitalism Thrives in India" suggesting very generally where the main potential for improvement lies. Among other things, informal sector activity has been singled out as a promising area where, if the Government decides to provide incentives and reduce crippling regulations, the potential for development is virtually limitless.

To quote the report: "If these grassroots capitalist entrepreneurs were freed from the shackles of bureaucratic economic regulations, they could well take India to the top of the development ladder.

"It would not be too farfetched to suggest that there is hardly any country in the world today where informal-sector economic activity is as diverse and as widespread as it is in India. This activity is an unrealised potential just waiting to be harnessed".