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Indian economy mostly unfree: Report

However, investors can be cautiously optimistic about India, says a report.

business Updated: Jan 05, 2006 15:20 IST

Despite 15 years of economic liberalisation, India remains economically "mostly unfree", though it has marginally improved its score on the Index of Economic Freedom, according to a report released on Wednesday.

According to the 2006 Index of Economic Freedom, published by The Wall StreetJournal and the conservative Washington think-tank Heritage Foundation, India ranks 121st among countries ranging from the "free" to the "unfree."

Hong Kong remains the freest economy.

With India registering economic growth rate of 8.6 per cent annually, the report concedes that, "despite concerns that the United Progressive Alliance might hinder economic reforms to appease its leftist partners, progress continues, albeit slowly."

"Investors can be cautiously optimistic about India," the report adds.

While tax rates are still too high, some are being reduced. The ruling Congress is committed to selective privatisation and recent discussions with Wal-Mart and other global chains indicate that India might soon relax its ban on foreign investment in the retail sector, according to the report.

It criticised the country's labour laws, which require companies employing more than 100 people to seek government permission to fire anybody.

These "remain an obstacle to exploiting India's full economic potential in both the manufacturing and service sectors", says the report.

"Nevertheless, the continued commitment to economic reforms displayed by Indian leaders of all stripes indicates that there are grounds for cautious optimism about long-term prospects for successful economic reform," according to the report.

India's trade tariff rate has risen since 2001, from 21 per cent to 28 per cent and non-tariff barriers remain extensive, "including a confusing bureaucracy, onerous standards and certifications on many goods, discriminatory sanitary and phytosanitary measures," the report states.

"There is also a negative import list that bans or restricts imports," the report concludes, adding that India's trade policy score is unchanged.

But on net, India's fiscal burden of government score is 0.4 point better this year, the report calculates.

Despite delegations of Indian business and government officials trekking to the United States to assure foreign investors, investment is deterred by the amount of government control that sets limits on equity and voting rights, mandatory approvals and capital controls, presenting a "difficult market", the report emphasises.

"However, India is taking gradual steps to attract more foreign investment, and foreign ownership is permitted in most sectors," the report concedes.

Restrictions have been relaxed on foreign direct investment in India and this includes scrapping of the hated Press Note 18, which required a release by the Indian partner and GOI approval for any new investment, a provision often subject to abuse, the report notes.

India fares a little better in the banking and finance sectors where the government has adopted a more tolerant policy toward foreign banks in recent years, the report says.

However, the government continues to dominate the banking sector, accounting for more than 70 per cent of deposits and loans, whereas foreign banks handle 13 per cent of the market in metropolitan areas.

Businesses must contend with extensive federal and state regulation, the report contends.

The report seems to ignore the rising dissatisfaction among developing countries about protectionist measures used by industrialised countries especially in the agricultural sector when it concludes that, "economic freedom made impressive gains throughout North America and Europe," and these regions lead in the ranking of economic freedom.

The US rejoined the world's 10 freest economies, it concludes. Germany joined the ranks of "free" economies for the first time. Romania improved more than any other country worldwide, except Pakistan.

The Index ratings reflect an analysis of 50 different economic variables, grouped into 10 categories: banking and finance, capital flows and foreign investment, monetary policy, fiscal burden of government, trade policy, wages and prices, government intervention in the economy, property rights, regulation, and informal (or black) market activity.

Worldwide, the scores of 99 countries improved, 51 declined and the scores of five, including Greece, are unchanged from last year's Index.

India improved its ranking by 0.04 per cent overall to score 3.49. Countries are rated one to five in each category, one being the best and five the worst. These ratings are then averaged to produce the overall index score.

This is the 12th consecutive year the Heritage Foundation and The Wall Street Journal have published the Index.

First Published: Jan 05, 2006 10:23 IST