In search of a Pakistan policy
September 25, 2016
Across the aisle: Bad ideas will drive out the good
October 9, 2016

Across the aisle: How free is freedom in India?

Twenty-five years after the Congress government under P V Narasimha Rao ushered in “liberalisation” of the economy, India has still not come to terms with the idea of economic freedom. This is disappointing for a country that was at the forefront of the struggle for political freedom for all countries.

We understand political democracy, but we do not understand economic democracy. I confess that I was a convert to the idea of an open, liberal and competitive economy after flirting with socialism in my formative years.

Freedom is Indivisible

Political freedom and economic freedom go together. I urge you to take a look at Article 19 of the Constitution (as originally incorporated) that, along with Articles 14 and 21, constitutes the core of the fundamental rights enshrined in the Constitution that we “gave unto ourselves”. The founding fathers were wise and placed political and economic rights on a par. Freedom of speech and expression [clause (a)] was on a par with freedom to carry on a business, trade or profession [clause (g)]. Freedom to form an association [clause (c)] was on a par with freedom to hold property [clause(f)]. The founding fathers understood how one set of freedoms reinforced the other and how each set would be meaningless without the other.

A little known set of Articles of the Constitution is a group consisting of Articles 301 to 305. If it had been interpreted correctly, Article 301 would have ushered in the idea of One Nation, One Economy. The Article declared that “Trade, commerce and intercourse throughout the territory of India shall be free”. That bold idea was smothered by interpretation and scuttled in implementation. State governments and rent-seekers were happy — until they were called out in the few cases that reached the higher courts.

Governments restrict economic freedom in many ways. Once upon a time the regime was so oppressive that it gave rise to the infamous description of India’s governance model as the ‘licence-permit-quota raj’. Some restrictions are justified as legitimate requirements, such as registering a business or getting environmental clearance. They are legitimate, but the legitimacy is mostly eroded by the inordinate amount of time it takes to get that piece of paper.

How does India fare?

Every year, the World Bank publishes a study called the Ease of Doing Business report. It ranks countries on ten parameters such as Starting a Business, Getting Electricity, Registering Property, Getting Credit, Paying Taxes and Enforcing Contracts. Between 2015 and 2016, India’s rank remained the same or worsened on seven of the ten parameters. It improved only on three parameters, but even on these three counts, there is nothing to crow about. On Starting a Business, India’s rank improved from 164 to 155, on Dealing with Construction Permits from 184 to 183, and on Getting Electricity from 99 to 70. On Getting Credit the rank has worsened from 36 to 42, on Paying Taxes it is 157 and on Enforcing Contracts it is a lowly 178. Overall, India’s rank in 2016 is 130 out of 189 countries. Compared with emerging market economies, India ranks 22 out of 23 economies, with only Egypt below us.

Since the 1960s, we have approached the issue of ‘freedom vs control’ from the wrong end. We started with ‘control’ and then looked at relaxations bit by bit. The correct approach is the exact opposite. We must start with ‘freedom’ and then look at what minimum regulations will be necessary to ensure a level-playing field and compliance with the laws. The first time that I attempted the latter approach was in 1991-92 when we made a bonfire of the dreaded Red Book (that controlled exports and imports) and wrote, in plain English, a 100-page Import-Export Policy. I tried that approach again with the Direct Taxes Code: there are three versions of the Code gathering dust, but the government has declared, unfortunately, that it is not inclined to replace the 55-year old Income-tax Act.

The other way in which the State interferes with economic freedom is in the purported exercise of its power to punish wrongdoers. I think it is a waste of the State’s time, energy and resources if it goes about looking for ‘wrongs’ and ‘wrongdoers’ in every activity. When administrative or business decisions are taken, mistakes will be committed, but every mistake is not a ‘wrong’ that must be investigated and punished. In matters concerning the economy, the State must punish only egregious wrongdoing that has large externalities and baneful consequences.

We are mostly unfree

The Heritage Foundation and The Wall Street Journal publish an annual Index of Economic Freedom based on ten factors of ‘economic freedom’. India’s rank is 123 out of 178 countries, placing us in the ‘mostly unfree’ category. The World Economic Forum’s Global Competitiveness Index measures the ‘competitiveness’ of an economy, and India’s rank, released a few days ago, is 39 out of 138 economies; but on some key parameters such as health and primary education, higher education, labour market efficiency and technological readiness, India is at 81 or lower. These are wake-up calls. Lack of economic freedom, low competitiveness and obstacles to doing business hurt investment, growth, job creation, consumers and, above all, poor people and poor regions.

Despite the reforms since 1991, which is a remarkable story, the State-to-firm interface remains a problem. What need to be done and what can be done deserve a separate column and I hope to be able to write one soon.