2009 Index of Economic Freedom

Quick Facts

Population:

• 1.1 billion

GDP (PPP):

• $2.7 trillion
• 9.7% growth
• 7.6% 5-year compound annual growth
• $2469 per capita

Unemployment:

• 7.2%

Inflation (CPI):

• 6.4%

FDI Inflow:

• $16.9 billion

India’s economic freedom score is 54.4, making its economy the 123rd freest in the 2009 Index. Its score is only 0.3 point higher than last year because improvements in financial freedom, government size, and business freedom were offset by significant decreases in investment freedom and labor freedom. India is ranked 25th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.

Renouncing its previous insistence on central planning, India continues to move forward slowly with market-oriented economic reforms. Achieving average growth of about 8 percent over the past five years, the economy has emerged as a leader in information technology and other business process sectors. However, progress in strengthening institutional capacity and enhancing overall economic freedom and prosperity has been rather slow and marginal. India has no notably strong economic institutions, and the few areas that score better than the world average are government size, labor freedom, and property rights.

India could improve in business freedom, trade freedom, financial freedom, investment freedom, and freedom from corruption. The average tariff rate is high, and non-tariff barriers further impede trade. Foreign investment is overly regulated, and the judicial system remains clogged by a large case backlog. Public debt is high, and the general government fiscal deficit continues to grow.

Background Back to the top

India is the world’s most populous democracy and one of Asia’s fastest-growing economies. Its 1991 “big bang” liberalization shed decades of cumbersome regulations and trade protectionism. Since then, the economy has grown rapidly, first in services and recently in manufacturing. On a national level, the ruling Congress Party–led coalition has not accomplished much in the way of economic liberalization, restrained by its dependence on leftist parties. State-led economic reform has been far more successful. India still suffers from weak property rights and widespread corruption.

Business Freedom 54.4 Back to the top

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 38 days. Obtaining a business license requires about the world average of 18 procedures and 225 days. Bankruptcy is difficult.

Trade Freedom 51.0 Back to the top

India's weighted average tariff rate was 14.5 percent in 2005. 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 licensing, domestic bias in government procurement, problematic enforcement of intellectual property rights, export subsidies, inadequate infrastructure, counter-trade policies, 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 73.8 Back to the top

India's tax rates are high. The top income and corporate tax rates are 33.99 percent (30 percent plus a 10 percent surcharge and a 3 percent education tax on that total). Other taxes include a value-added tax (VAT), a dividend tax, and a tax on insurance contracts. In the most recent year, overall tax revenue as a percentage of GDP was 17.7 percent.

Government Size 77.8 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.2 percent of GDP. The state still plays a major role in over 200 public-sector enterprises.

Monetary Freedom69.3 Back to the top

Inflation is moderately high, averaging 6.1 percent between 2005 and 2007. The government subsidizes 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 percent 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 Freedom30.0 Back to the top

Foreign direct investment is limited by law. Foreign investment is prohibited in most real estate, retailing, legal services, agriculture, security services, and railways. Procedures do not discriminate against foreign companies in sectors where licensing is required, but certain industries are subject to export obligations and local content requirements. Bureaucracy is non-transparent, potentially corrupt, and burdensome. 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 Freedom40.0 Back to the top

India's financial sector includes 28 state-owned banks (which control about 71 percent of commercial banking), 29 private banks, and 31 foreign banks. Access to financial services varies sharply around the country. High credit costs and scarce access to financing still impede development of the private sector. Foreign banks account for about 8 percent of total commercial bank assets. Along with other restrictions, foreign banks operating in India may not directly or indirectly retain more than a 5 percent equity stake in a domestic private bank. The insurance sector is partially liberalized. Capital markets are relatively well developed, and the stock market is one of Asia's largest, but foreign participation remains limited.

Property Rights50.0 Back to the top

Because of large backlogs, courts take years 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 Corruption35.0 Back to the top

Corruption is perceived as significant. India ranks 72nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption continues to be a major concern, especially in government procurement of telecommunications, power, and defense contracts.

Labor Freedom62.3 Back to the top

India's informal economy remains a large, important source of employment. 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 disincentive for job creation.