India’s Economic Freedom: Marginal Improvement

Earlier this month, Canada-based Fraser Institute published its annual Economic Freedom of the World Report. Based on 2011 data, India was ranked at 111 amongst a total of 152 countries ranked.

Between 2012 and 2013, India appears to have improved its score on four out of the five indicators–legal system and property rights, sound money, freedom to trade internationally and regulation. It should come as no surprise that the only indicator where India has performed worse than last year is ‘size of government’, the component of government consumption in particular. This component measures general government consumption spending as a percentage of total consumption–thus suggesting that the government consumption expenditure as a proportion of total expenditure increased between 2010 and 2011.

The figure below provides a summary of India’s ranking on the index from 1970 to 2011. After peaking in 2005, the score had consistently been dropping until last year. This year, the trend appears to have reversed.

(Source: Economic Freedom of the World Report, 2013)

India’s score has improved over the last year, however, India’s rating has remained constant.

While India’s performance this year on the Economic Freedom Index may qualify as marginal improvement over last year, in terms of ratings, India (111) continues to lag behind its emerging market peers such as Philippines (56), Indonesia (80), South Africa (88), Sri Lanka (92), Mexico (94), Russia (101) and Brazil (102). Instead we are in the company of economies like Pakistan (111) and Bangladesh (114). The bottom-line is that India continues to be categorised among economically “least free” economies.

Centre for Civil Society’s recent monograph, “Why is India Poor?” attempts to identify reasons for India’s poverty. A careful analysis leads us to the conclusion that at the root of what we commonly consider to be the cause of India’s poverty is the lack of economic freedom. The evidence clearly suggests that higher economic freedom leads to prosperity, as shown in the figure below.

(Source: Economic Freedom of the World Report, 2013)

We hope that the trend reversal as seen in the figure above picks up pace and is never reversed again.