Budget 2015 & faltering economy

India ranks poor in 2015 index for Economic Freedom

With the promise of minimum government and maximum governance, Narendra Modi and BJP got a massive mandate last year. When Modi took charge of the office in May 2014, what he got as the legacy was a country ailing from heavy corruption and faltering economy.

The faltering economy was a consequence of decade-long policy paralysis under UPA’s rule. To which, State’s extensive presence in the economy and wasteful subsidy programs contributed the most. PM Modi promised economic reforms. However, in a country where the absence of a well-functioning legal & regulatory framework, a weak rule of law aggravated by corruption in many areas of economic activity undermined the emergence of a more vibrant private sector, ensuring Economic Freedom among all was a tough task.

Economic freedom index is a ranking of countries or states based on the number and intensity of government regulations on wealth-creating activity. Metrics that an economic freedom index evaluates include international trade restrictions, government spending relative to GDP, occupational licensing requirements, private property rights, minimum wage laws and other government-controlled factors that affect people's ability to earn a living and keep what they earn. Such indexes are usually produced by economic think tanks.

One such index is produced by the U.S.-based Heritage Foundation in conjunction with the Wall Street Journal. Its 2011 index ranked Hong Kong, Singapore, Australia, New Zealand and Switzerland as the most economically free, in that order. The United States ranked ninth. The index both compares countries to each other and compares overall levels of economic freedom across time.

When we talk about Economic Freedom, India’s score is less than the world average, regional average (Asia-Pacific region) and much below the average of free economies. In the 2015 index for Economic Freedom prepared by the Heritage Foundation in partnership with the Wall Street Journal, India has slipped to 128th rank from 120th last year.

While with the advent of Modi regime, his promises of big ticket reforms and a few undertaken initiatives to reform the inefficient government sector, the business freedom has increased a little and corruption has gone down a bit, major factors like labour freedom and trade freedom have only worsened. The think tank organisation Niti Aayog which replaced the Planning Commission has made the much-needed labour reforms its priority. One of the BJP-ruled States Rajasthan recently initiated the unprecedented labour reforms.

While the measures taken towards the deregulation of diesel subsidies, raising the FDI cap from 26 per cent to 49 per cent in the insurance sector and a step towards unified goods and services tax (GST) inspire optimism, there is a lot that needs to be done on the front of limited Government, regulatory efficiency and open market. Let’s take a look at how the 2015 index for economic freedom rates India on different parameters:

Rule of Law
Corruption has declined but still has a negative effect on government efficiency and economic performance. The judiciary is independent, but Indian courts are understaffed and lack the technology necessary to clear an enormous backlog.

Limited government
Government expenditures amount to 26.9 per cent of the domestic economy. Public debt equals approximately 67 per cent of GDP. The fiscal deficit has declined but remains above 4 per cent of GDP.

Regulatory Efficiency
Business registration fees have been considerably reduced, but completing licensing requirements remains time-consuming. The labour market remains plagued by low labour productivity. The government had announced its intention to cut badly targeted fuel subsidies but has yet to set out a clear plan.

Open markets
India’s average tariff rate at 7.7 per cent and other non-tariff barriers interfere with the flow of goods and services. The government retains considerable ownership in the banking sector, and the level of nonperforming loans is relatively high. While the government is inviting foreign investment, its policies in their present form can favour domestic firms.

As many feel that the first budget presented in July 2014 was short on detail about plans to reignite economic growth, all eyes are on this year’s budget with expectations of much awaited and promised bold reforms towards achieving economic freedom.