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India
India’s
economic freedom score is 53.8, making its economy the 124th freest in the
2010 Index. Its score is 0.6 point lower than last year as a result of
declines in freedom from corruption, business freedom, and monetary
freedom. India is ranked 24th out of 41 countries in the Asia–Pacific
region, and its overall score is below the world average.
India continues to move
forward with market-oriented economic reforms and has achieved average
growth of about 9 per cent over the past five years. The economy has been
driven by information technology and other business process sectors.
Despite sluggish progress in reducing onerous non-tariff barriers, the
trade regime has gradually become more open, with its average tariff rate
decreasing.
The state still plays a
major role in over 200 public-sector enterprises. Public debt is 80 per
cent of GDP, leaving little fiscal room to react to the global downturn.
India’s overly restrictive regulatory environment does not facilitate
entrepreneurship or realisation of the economy’s full potential.
Corruption is pervasive, and the judicial system remains inefficient and
clogged by a large backlog of cases.
Labour freedom is
especially weak, with rigid regulations a costly impediment to further
economic growth and job creation.
Background
India is the world’s
most populous democracy and one of Asia’s fastest-growing economies. Its
1991 “big bang” liberalisation ended decades of cumbersome regulations
and protectionism, and the economy has since grown rapidly, first in
services and more recently in manufacturing. The Congress Party government
was re-elected to another five-year term in May 2009 on a populist
platform that included a social welfare scheme that guarantees employment
for rural households. Though over 80 per cent of the population is Hindu,
the country has one of the world’s largest Muslim populations. Conflict
with Pakistan over Kashmir, which has simmered since independence and
twice boiled over into war, continues unresolved.
Business freedom 36.3%
The overall freedom to
start, operate, and close a business remains restricted by India’s
regulatory environment. Starting a business takes an average of 30 days,
compared to the world average of 35 days. Obtaining a business license
requires more than the world average of 18 procedures and 218 days.
Trade freedom 67.9%
India’s weighted
average tariff rate was 6 per cent in 2008. Large differences between
bound and applied tariff rates, import and export restrictions, services
market access restrictions, import taxes and fees, complex and
non-transparent regulation, onerous standards and certifications,
discriminatory sanitary and phytosanitary measures, restrictive import
licensing, domestic bias in government procurement, problematic
enforcement of intellectual property rights, export subsidies, inadequate
infrastructure, and complex and non-transparent customs add to the cost of
trade. Twenty points were deducted from India’s trade freedom score to
account for non-tariff barriers.
Fiscal freedom 73.4%
India’s tax rates are
relatively high. The top income and corporate tax rates are 33.99 per cent
(30 per cent plus a 10 per cent surcharge and a 3 per cent education tax
on that total). Other taxes include a dividend distribution tax, a tax on
interest, and a value-added tax (VAT). In the most recent year, overall
tax revenue as a percentage of GDP was 18.8 per cent.
Government spending
76.1%
Total government
expenditures, including consumption and transfer payments, are relatively
low. In the most recent year, government spending equaled 28.2 per cent of
GDP.
Monetary freedom 67.5%
Inflation has been
relatively high, averaging 7.7 per cent between 2006 and 2008. The
government subsidises agricultural, gas, and kerosene production; applies
factory, wholesale, and retail 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. Another 354 drugs are to be
brought under controls by a new pharmaceutical policy. Domestic price and
marketing arrangements apply to commodities like sugar and certain
cereals. Fifteen points were deducted from India’s monetary freedom
score to account for policies that distort domestic prices.
Investment freedom 35.0%
Foreign investors
generally receive national treatment. If licensing is required, procedures
do not discriminate against foreign companies; however, in certain
consumer-goods industries, export obligations and local content
requirements are imposed. Foreign investment is prohibited in multi-brand
retailing, legal services, security services, nuclear energy, and
railways. Foreign investment in real estate is limited to company property
used to do business and the development of some types of new commercial
and residential properties. Bureaucracy is non-transparent and burdensome,
and contract enforcement can be difficult. Foreign exchange, capital
transactions, and some credit operations are subject to approvals,
restrictions, and additional requirements.
Financial freedom 40.0%
Liberalisation and
modernisation have allowed more private banks to compete, but state-owned
institutions continue to dominate the banking sector and capital markets.
Currently, 28 state-owned banks control about 70 per cent of commercial
banking assets. Access to financial services varies sharply around the
country. High credit costs and scarce access to financing still impede
private-sector development. Foreign banks account for less than 10 per
cent of total assets. Foreign banks operating in India may not directly or
indirectly retain more than a 5 per cent equity stake in a domestic
private bank. Insurance is partially liberalised. Capital markets have
been developing but remain illiquid, with foreign participation limited.
Property rights 50.0%
The legal system imposes
a number of restrictions on the transfer of land, and titling problems can
make buying and selling difficult. There is no reliable system for
recording secured interests in property. Because of large backlogs, courts
take years to reach decisions, and foreign corporations often resort to
international arbitration. 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
34.0%
Corruption is perceived
as significant. India ranks 85th out of 179 countries in Transparency
International’s Corruption Perceptions Index for 2008. Corruption
remains a major concern, especially in government procurement of
telecommunications, power, and defense contracts.
Labour freedom 57.7%
India’s informal
economy remains an important source of employment. The non-salary cost of
employing a worker is moderate, but dismissing an employee is costly.
— Courtesy: The
Heritage Foundation
Quick Facts - (2010)
Population
1.1 billion
GDP (PPP)
$3.4 trillion
7.1% growth
8.9% 5-year compound
annual growth
$2,972 per capita
Unemployment
6.8%
Inflation (CPI)
8.3%
FDI Inflow
$41.6 billion
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