India is considered one of the few spots of economic glow on a global stage of gloom. Its leaders never tire of declaiming its strong growth. At this time, it would be interesting to see the nature of this growth. So what kind of economy does India have: free, unfree or repressed?
One such comparative measure is the Index of Economic Freedom (IEF), an index tracked by the Heritage Foundation, a US think tank, and The Wall Street Journal. The IEF for 2011 paints a picture of contrast between India’s strong economic performance and the relative economic unfreedom in the country. India ranks 124 among 179 nations that the 2011 IEF charts, with a score of 54.6. The world average is 59.7. The score is on a scale of zero to 100, with zero marking absolute economic repression and 100 complete freedom. It is classed in the index as a “mostly unfree” country. The IEF is a composite of 10 indicators, chief among them business freedom, trade freedom, monetary freedom and investment freedom.
It is important that some definition minefields be cleared. The IEF defines economic freedom as “the fundamental right of every human to control his or her own labour and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please… In economically free societies, governments allow labour, capital and goods to move freely…”
Seen from that perspective, it is hardly surprising that India is considered an economically unfree country. For example, IEF data shows that total government expenditure, including consumption and transfer payments, constitutes 27.2% of the country’s gross domestic product, a figure not seen in any free economy. In advanced economies, this proportion has risen steadily since 2009 due to the economic and financial crisis. This spending, however, is very different from that in India, where it is not due to any crisis. At the same time, in terms of business freedom, India has a score of 36.9, much below the world average of 64.3.
This creates an almost magical economic picture: low business freedom coupled with high government expenditure creating an economic wonder. This recipe, if it can be called that, is hardly a winning formula. While it spurs domestic consumption—an important ingredient of India’s economic success—it comes at a high cost. High inflation and a large government debt are some of its results. It requires constant tightening of interest rates by the central bank and a high level of taxation to keep things under control. Hardly a sustainable formula.
Is India a “free” economy? Tell us at firstname.lastname@example.org