India’s rankings in the Economic Freedom Index took a freefall from 123 last year to a dismal 143 this year.
Economic Freedom Index is a ranking system by The Heritage Foundation that scores and ranks countries on how easy it is to invest in that country, based on 12 different factors.
India’s score dropped by 3.6 points to 52.6, behind countries like Pakistan (52.8, ranked 141), Bangladesh (55.0, ranked 128), Nepal (55.1, ranked 125), Nigeria (57.1, ranked 115), SriLanka (57.4, ranked 112) and China (57.4, ranked 111). China has notched up a gain of 5.4 points in its Economic Freedom score from last year.
India has been placed in the category of ‘mostly free’, similar to its neighbouring countries.
The Heritage Foundation, which accords these rankings, in its description for India stated that despite maintaining a growth rate of almost 7% over the last 5 years, issues like corruption, poor management of public finance and underdeveloped infrastructure continues to undermine India’s overall development.
The Foundation pointed out that market-oriented reforms have been uneven. Government presence via public-sector enterprises is extensive. The regulatory environment is restrictive and discourages entrepreneurship and limits private-sector growth.
Of the 12 factors used to rate countries, India showed negative growth in ‘Government Spending’ falling from 78.1% to 77.4%, and Labour Freedom decreased from 47.8% to 41.6%. This decrease is even more pronounced if you consider the fact that only in 2014, India scored 74% in Labour Freedom.
The top 5 countries in the Economic Freedom Index are Hong Kong, Singapore, New Zealand, Switzerland and Australia in that order. Canada ranked 7th, the United Kingdom ranked 12th and the United States 17th in terms of economic freedom.
The reason for this downgrade can be traced to the introduction of the categories ‘Judicial Effectiveness’ and ‘Fiscal Health’ this year in which India scored very low. In fact, in ‘Fiscal Health’, India managed a paltry score of 11.0% compared to the world average of 68.9%.
The news has come as a surprise for many, especially after the host of economic reforms that were implemented by the Modi government. However, it remains to be seen whether major steps like demonetization has affected the score, since demonetization was introduced only towards the end of last year.
Although demonetization was introduced as a measure to curb corruption, it also led to greater state intervention in private sector activities.
Given these challenges, India will likely to continue to rank low in the Economic Freedom Index for at least several months more.