The Heritage Foundation/Wall Street Journal 2004 Index of Economic Freedom ranks India 121st of the 155 economies reviewed, behind such free market economies like Saudi Arabia, Egypt and Pakistan. While the authors do not claim that this is the best way to measure economic freedom, they do claim it works. China is conspicuous by its absence.
While I find it hard to accept how Saudi Arabia could have more economic freedom than India, I do think the it points out some key issues which India should address: reduce protectionist trade barriers, further deregulate industry, improve tax base, and strengthen the banking & finance sector. Overall India’s score has improved from 3.58 to 3.53 (inverted scale) due to a lower fiscal burden.
Why is it that the Indian press has generally ignored this study? India can pat itself on its back for being the biggest democracy, for its political freedoms, for “India Shining”, for “Mera Bharat Mahan”, but unless the government brings greater economic freedom to its citizens India’s democracy will remain incomplete. What I’m arguing is that economic freedom is an essential democratic right – something which has been denied to most Indians since gaining political freedom in 1947. The fact that Indians create more wealth per capita in Silicon Valley than in Bangalore is the ultimate outcome of this.
Nevertheless, many believe that India cannot become the regional economic powerhouse it aspires to be without a “second generation” of reforms. New Delhi has taken some positive steps by lowering agricultural subsidies, enacting new laws that make it faster and easier to convict loan defaulters, relaxing some restrictions on foreign investment, and privatizing major state-owned enterprises like its largest car manufacturer and international telephone company. Numerous structural problems, however, continue to be a drag on the economy. The government continues to restrict 700 sectors to small-scale industries, preventing larger companies from taking advantage of economies of scale. A convoluted regulatory system, including draconian laws that ensure labor market rigidity, discourages private sector investment, and an underdeveloped securities market and a public deficit that is 5.6 percent of GDP have driven up the price of capital.[The Heritage Foundation]