February 18, 2017

India dropped 3.6 points in the Heritage Foundation’s 2017 Index of Economic Freedom, and dropped from #128 to #143 in the world ranking.

This is an archived blog post from The Acorn on Medium.

In 2014 and 2015 indices, India’s score improved by around half-a-point, but its world ranking still dropped to 120. In the 2016 index, both the score and the rank fell and India ended up at #128 with 54.6 points. The message is clear: despite being one of the fastest growing economies, India remains mostly unfree.

The economic freedom index is a useful reminder of how much of the reform agenda remains on the to-do list. A closer look shows that government spending and labour regulations worsened over the past year, subtracting from India’s score. Together they negated small improvements in a number of other areas, like property rights, government integrity, business freedom, tax burden, trade and investment freedom. [Update: Amitabh Dubey points out that the plunge in the ranking is due to a change in methodology this year. That doesn’t change the overall analysis, because India would still be steadfastly in the mostly unfree category.]

To improve our score — improving world ranking is incidental — we need to dismantle the Delhi Straitjacket that constrains economic life. To arrest the downward slide, it’s necessary to make government spending more efficient and begin to tackle labour reforms.

What needs to be done is well-known. For instance, Jagdish Bhagwati & Arvind Panagariya have outlined the reform agenda comprehensively in India’s Tryst with Destiny, their most recent book. Many of us have been shouting ourselves hoarse, crying We need Reforms 2.0!” for years.

Why should we care about this economic freedom and this index if the economy is growing rapidly, some might ask. Well, economic freedom is both the engine of growth as well as the distribution system. Freeing the labour market, for instance, allows millions of people to secure formal employment, with benefits like insurance coverage, provident funds and suchlike. It allows hundreds of thousands of entrepreneurs to breathe more freely and focus on growing their businesses instead of taking care’ of government officials.

(There is empirical evidence that shows that countries with greater economic freedom have lower corruption. Here’s why that might be happening.)

The ideologically different paths of promoting inclusion, reducing inequality and unleashing growth converge on the issue of economic freedom.

Just like it has set itself on improving India’s ranking in the World Bank’s Doing Business Index, the Modi government should commit itself to improvements in the Index of Economic Freedom. Indeed, if economic freedom improves, India will automatically do better in doing business.

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