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INDIA
India's economy
is 54.2 per cent free, according to our 2008 assessment, which makes it
the world's 115th freest economy. Its overall score is 0.1 percentage
point higher than last year, partly reflecting improved labor freedom.
India is ranked 21st out of 30 countries in the Asia–Pacific region, and
its overall score is lower than the regional average.
India has no notably
strong economic institutions, and the few areas that score better than the
world average are limited government size, labor freedom, and property
rights. Government expenditure is relatively low.
India could improve in
several areas, including business freedom, trade freedom, financial
freedom, investment freedom, and freedom from corruption.
The average tariff rate
is high, and the government imposes severe non-tariff barriers. Foreign
investment is overly regulated, and the judicial system is erratic and
clogged by a significant backlog of cases. Though the country has a large
financial sector, the government interferes extensively with foreign
capital.
Background
India is the world's
most populous democracy and one of Asia's fastest-growing economies. The
current Congress Party coalition government is politically dependent on
left-leaning parties, crippling its ability to enact desperately needed
economic reforms—and leaving state governments to push forward
liberalisation. Nevertheless, the economy continues to grow strongly on
the back of a vibrant services sector and an expanding manufacturing
sector. India's economic challenges include heavy regulatory burdens, high
trade barriers, and an outdated and heavily protected agricultural sector,
which employs the majority of the country's workers.
Business freedom - 50
per cent
The overall freedom to
start, operate, and close a business is considerably restricted by India's
regulatory environment. Starting a business takes an average of 33 days,
compared to the world average of 43 days. Obtaining a business license
requires 20 procedures and 224 days. Bankruptcy proceedings are onerous
and lengthy.
Trade freedom - 51 per
cent
India's weighted average
tariff rate was 14.5 per cent in 2005. Export restrictions, a negative
import list, service market access restrictions, high tariffs, import
taxes and fees, a complex and non-transparent trade regime, onerous
standards and certifications, discriminatory sanitary and phytosanitary
measures, problematic enforcement of intellectual property rights,
restrictive licensing, domestic bias in government procurement, export
subsidies, inadequate infrastructure, counter-trade policies, and complex
and non-transparent customs add to the cost of trade. An additional 20
percentage points is deducted from India's trade freedom score to account
for non-tariff barriers.
Fiscal freedom - 75.7
per cent
India's tax rates are
moderate. Both the top income tax rate and the top corporate tax rate are
33 per cent (30 per cent plus a 10 per cent surcharge). Other taxes
include a dividend tax, a property tax, and a tax on insurance contracts.
In the most recent year, overall tax revenue as a percentage of GDP was
15.8 per cent.
Freedom from Government
- 73.5
Total government
expenditures, including consumption and transfer payments, are low. In the
most recent year, government spending equaled 29.7 per cent of GDP. The
state still plays a major role in over 200 public-sector enterprises.
Monetary freedom - 70.3
per cent
Inflation is moderate,
averaging 5.4 per cent between 2004 and 2006. Relatively unstable prices
explain most of the monetary freedom score. The government subsidises
agricultural, gas, and kerosene production; applies factory, wholesale,
and retail-level price controls on "essential" commodities, 25
crops, services, electricity, water, some petroleum products, and certain
types of coal; and controls the prices of 74 bulk drugs that cover 40 per
cent of the market, with another 354 to be brought under controls by a new
pharmaceutical policy. Domestic price and marketing arrangements apply to
commodities like sugar and certain cereals. An additional 15 percentage
points is deducted from India's monetary freedom score to account for
policies that distort domestic prices.
Investment freedom - 40
per cent
Highly complex rules and
laws limit foreign direct investment. Rules established in 2005 maintain
restrictions on most existing joint ventures but allow some new
negotiations. Foreign investment is prohibited in most real estate,
retailing, legal services, agriculture, security services, and railways.
Foreign investors may bid for privatisation contracts, but privatisation
has stalled. Residents need central bank approval to open foreign currency
accounts domestically or abroad. Non-residents may hold conditional
foreign exchange and domestic currency accounts. Capital transactions and
some credit operations are subject to restrictions and requirements.
Financial freedom - 30
per cent
India's 28 state-owned
banks control about 75 per cent of loans and deposits, and 29 private
banks and 31 foreign banks make up the rest. The government owns nearly
all of the approximately 600 rural and cooperative banks and most other
financial institutions. Banks must lend to "priority" borrowers.
Foreign ownership of banks and insurance companies is restricted. The
insurance sector is partially liberalised, but five state-owned insurers
dominate the growing market. Capital markets are widespread, and the stock
market is one of Asia's largest, but foreign participation is restricted.
Property rights ñ 50
per cent
Because of large
backlogs, it takes several years for the courts to reach decisions, and
foreign corporations often resort to international arbitration. Protection
of property for local investors is weak, and protection of intellectual
property rights is problematic. Proprietary test results and other data
about patented products submitted to the government by foreign
pharmaceutical companies have been used by domestic companies without any
legal penalties.
Freedom from corruption
- 33 per cent
Corruption is perceived
as significant. India ranks 70th out of 163 countries in Transparency
International's Corruption Perceptions Index for 2006. Corruption
continues to be a major concern, especially in government procurement of
telecommunications, power, and defense contracts.
Labour freedom - 68.6
per cent
Relatively flexible
employment regulations could be improved to enhance employment
opportunities and productivity growth. The informal economy employs about
90 per cent of workers. The non-salary cost of employing a worker is
moderate, but dismissing a redundant employee is costly. The difficulty of
laying off a worker creates a risk aversion for companies that would
otherwise hire more people and grow.
— Courtesy: The
Heritage Foundation
Quick Facts
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Population: 1.1
billion
*
GDP (PPP): $3.8 trillion
9.2% growth in 2005
7.1% 5-yr. comp. ann. growth
$3,452 per capita
*
Unemployment:
8.9%
*
Inflation (CPI):
4.2%
$5.2 billion
*
Off. Dev. Assis.:
$1.8 billion
(9.0% from the U.S.)
*
External Debt:
$123.1 billion
*
Exports:
$112.0 billion
Primarily textile goods, gems
and jewelry, engineering goods, chemicals, leather manufactures
*
Imports
$187.9 billion
Primarily crude oil,
machinery, gems,
fertilizer, chemicals
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