Manohar Seetharam & Prashant Perumal
Economic Freedom And India’s Free Fall
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Economic freedom as a value and a principle finds very little resonance with the Indian public and intelligentsia. Unfortunately the Indian constitution too doesn’t satisfactorily enshrine and uphold the ideal of economic freedom. It fails to firmly establish this ideal either as a part of the fundamental rights or as a part of directive principles of state policy. Even the politically popular slogans of social justice do not identify economic freedom as a part of social justice.

The Supreme Court in it’s recent judgment on the issue of Right To Education (RTE) by placing socio-economic rights of individuals above Art 19(1)(g) [1] further weakened the already shaky constitutional foundations of economic freedom in India. The Congress led United Progressive Alliance (UPA) ruling in Delhi has recently undertaken a series of measures via executive decisions – allowing 51% Foreign Direct Investment (FDI) in multi-brand retail, Aviation, hiking of fuel prices and legislative proposals to increased the cap on FDI in Insurance and Pensions. These measures, though desirable, have been pushed through with very little political clarity by the ruling coalition. These ad-hoc executive decisions have been labelled as reforms solely with the motive to score a PR point with very little political commitment to the principles of what a political party imagines as reforms. It is with this background that we examine the Economic Freedom Of The World : 2012 Annual Report [2] brought out by the CATO institute and specifically focus on the free fall in the levels of economic freedom in India since 2005.

The importance of economic freedom from the point of view of its importance to the sustenance of basic political rights [3] was argued by none other than free-market economist Milton Friedman. However, it must be admitted that the biggest reason for a vast majority of the sympathizers of the market economy coming from the general public, the academic world or the political world to support economic freedom (a feature shared to different degrees by the various mixed economies in the world today) has been the superior ability of Capitalism as an economic system to produce wealth compared to its alternatives. In fact, Milton Friedman himself won most followers to the system of Capitalism by preaching all through his career the superior ability of the system to produce wealth and improve the living standard of the vast majority of the masses.

Recently, there have been attempts by various pro-market organizations in the west to gauge the relationship between economic freedom and quality of life. As it is shown here [4], countries with better economic freedom also perform better than others on a huge number of social prosperity indicators. The ‘Economic Freedom Of The World -Annual Reports’ is an initiative by the CATO Institute in this direction to quantitatively enumerate and establish the advantages of economic freedom. Some of the major underpinnings of economic freedom are – personal choice, voluntary exchanges facilitated by markets, freedom to enter and compete in a market and the protection of persons and their property. The latest CATO report on Economic Freedom in the World considers the following five to be the major contributors to economic freedom:

1. Size of Government
2. Legal System and Property Rights
3. Sound Money
4. Freedom to Trade Internationally
5. Regulation

The very first chapter [5] of the report deals with the framework and the methodology used. Interested readers can read it for a more thorough understanding.

The following extract from the report presents a good snapshot of the global trend in economic freedom.

Economic freedom from around the world: In the chain-linked index, average economic freedom rose from 5.30 (out of 10) in 1980 to 6.88 in 2007. It then fell for two consecutive years, resulting in a score of 6.79 in 2009 but has risen slightly to 6.83 in 2010, the most recent year available. It appears that responses to the economic crisis have reduced economic freedom in the short term and perhaps prosperity over the long term, but the upward movement this year is encouraging.

In this year’s index, Hong Kong retains the highest rating for economic freedom, 8.90 out of 10. The other top 10 nations are: Singapore, 8.69; New Zealand, 8.36; Switzerland, 8.24; Australia, 7.97; Canada, 7.97; Bahrain, 7.94; Mauritius, 7.90; Finland, 7.88; and Chile, 7.84.

The scores of the bottom ten nations in this year’s index are: Venezuela, 4.07; Myanmar, 4.29; Zimbabwe, 4.35; Republic of the Congo, 4.86; Angola, 5.12; Democratic Republic of the Congo, 5.18; Guinea-Bissau, 5.23; Algeria, 5.34; Chad, 5.41; and, tied for 10th worst, Mozambique and Burundi, 5.45.

Another important fact to note in the report is the performance of the United States which has seen a steady drop in its economic freedom ranking in the last decade:

The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain-linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).

The rankings and the analysis are based on the data obtained till the year 2010. The India specific findings of the survey shouldn’t come as a surprise to anyone who takes even a basic interest in the nation’s politics and economics; but the broad trend of the numbers from the year 2000 to 2010 can help us understand and reflect upon how the priorities set by the national political leadership have impacted the trajectory of Indian economy. The index rating and the ranks of the nations are available for the years 2000,2005,2009 and 2010, the following table presents the score on a scale of 0-10 and the ranking (within brackets) of India on the chosen parameters at various points in time

Parameter 2000 2005 2009 2010
Summary Rating(Rank) 6.32 (75) 6.89 (64) 6.47 (82) 6.42 (90)
Size of Government 6.83 (41) 7.42 (38) 6.33 (63) 6.37 (63)
Legal System and Property Rights 5.99 (59) 7.29 (32) 6.48 (50) 6.22 (53)
Sound Money 6.88 (86) 6.84 (91) 6.55 (108) 6.42 (111)
Freedom To Trade Internationally 5.51 (99) 6.35 (84) 6.48 (83) 6.57 (87)
Regulation 6.40 (56) 6.65 (72) 6.59 (76) 6.60 (81)

( Source : ‘The Economic Freedom Of The World – 2012 Annual Report’ Chapter 2, pg no 88 )

Does it really surprise anyone that the size of the government has gone up since 2005 ? On the whole the trend seems to quiet clear and categoric. Between the years 2000 and 2005 all indices of economic freedom improved significantly, as a result the overall rating of India improved from 6.32 to 6.89 and India’s ranking improved by 11 positions. However, it has been downhill since then with the 2010 numbers being as worse as the 2000 numbers. India has fallen to it’s lowest ever rank on the index of economic freedom since the year 1980 (earliest year for which India specific data is available) in the year 2010.

With the benefit of hindsight we all know that the Indian economy fared much worse since 2010, hence there is little hope of these numbers having improved since 2010. The decline in scores in the 2005-10 time-frame has been the sharpest on the parameter of ‘size of the government’. MNREGA and other entitlement programs are indeed the flagship ideas of the UPA and not withstanding a major financial meltdown it is highly unlikely Sonia Gandhi would even think about reversing these schemes. But for the marginal improvement on the ‘freedom to trade internationally’ index, ratings of all other indices too have nosedived since 2005.

While on the surface Indian media has recently bombarded our newsprint and television screens with ‘reforms’ there exists no foundational understanding of this term. The impetus for these ‘reforms’ haven’t come from any principled political commitment and have very little to do with any economic thought that firmly believes in their version of ‘reforms’ as an end in itself. Only weeks after the Prime Minister lectured the nation on how money doesn’t grow on trees [6] his own government went on to give 2 Lakh crore worth of hand-out [7] to various other State Electricity Boards (SEBs). The BJP led NDA regime did indeed deliver a robust performance on the issue of economic freedom; but is the BJP of today willing to take credit for that ? Writing in the Economic Times on the issue of reforms, politics and FDI, Shri Yashwant Sinha wrote [8]

Our own impressive record of economic reforms between 1998- 2004 did not help us electorally and we lost all the Lok Sabha seats in Delhi and in other Metros.

Does this mean that the party of reforms and the very individuals who played key roles in formulating those policies are having a re-think on reforms ? Trying to be a poor copy of your opposition is a bad idea even in politics. With the record still firmly on their side it is for the BJP to pro-actively formulate and set the reform agenda for the nation.

Political disarray on economic issues and the status quo perpetuated by the left-liberals feed off each other and are unfortunately in a state of stable equilibrium. While we are reminded by commentators in their columns, editors in their editorials and anchors in the “debates” on how malnutrition in India is worse than Sub-Saharan Afrca; no one ever mentions the fact that Sub-Saharan African nations like Zambia, Uganda, Botswana, Ghana, Kenya, Malawi, Namibia etc rank much above India [9] in terms of economic freedom. Again completely in-line with the expectations, even on the ease of doing business rankings India is ranked at 132nd position, where again many Sub-Saharan African nations and nations ruled by monarchs fare significantly better than India.

Unless the idea of economic freedom arrives on the Indian political scene we might have to go through many more decades where India will take one step forward and two steps backward. It is indeed a long term project. We need a constitutional amendment which would add the following to the list of directive principles of state policy –

State shall work towards enhancing and protecting the economic freedom of it’s citizens.

However, the danger of the Indian Supreme Court placing the directive principle referring to economic inequalities above this ambitious constitutional amendment would still remain.