Earlier this month, Canada’s Fraser Institute released the Global Economic Freedom Index 2020, where India’s rank dropped considerably. According to the index, India fell 26 spots to the 105th position in the ranking, which was 79th in the previous year’s index. City-states Hong Kong and Singapore occupied first and second spot in the index, while China ranked 124 and Pakistan was ranked 129, both below India.
Expectedly, the fall in India’s ranking gave the opponents of the Modi government ammunition to target the government. After the report was released, the Congress party tweeted on 11th September, saying that India is moving only downwards under BJP government.
The ranking measures the economic freedom, or the ability of individuals to make their own economic decisions in a country, by analysing policies and institutions of these countries. Although a fall of 26 spots in the Economic Freedom Index in a single year is worrisome, that is not the correct analysis of the report. Because a major reason in changes in rankings of the countries this year is due to several changes made to the methodology adopted in the report. Therefore, this year’s rankings are not comparable with previous years, as the methods to calculate that has been changed considerably.
The Economic Freedom Index 2020 report has been prepared using data from 2018. The degree of economic freedom is measured in five broad areas, which are Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation. India’s ranking decreased in all five areas, contributing to the overall decline. The 5 areas have several components and sub-components in each of them, and several changes have been in the measurements of those.
Within the Size of the Government Area, the ‘Government investment’ component saw the greatest decline, by 43 spots. However, the previous year had a different component ‘Government enterprises and investment’ which is replaced by the ‘Government investment’ component this year. The rating formula also is different, and now it is based on a standard maximum and minimum formula instead of the categorical rating method used earlier.
In the ‘Regulation’ Area there is a decline of 14 places. The maximum decline in rank is in the ‘Business regulations’ component. Here also, the “Extra Payments/Bribes/Favoritism” based on the Global Competitiveness Report has been replaced with V-Dem data on “rigorous and impartial public administration” which has resulted in a decline in rating of -0.33.
In the ‘Freedom to Trade Internationally’ area there are 4 components. Maximum decline is in the component of ‘Controls of the movement of capital and people’. However, this is due to a change of a sub-component in this component. Earlier Index in 2017 had ‘Foreign ownership / investment restrictions’, Where India had a rating of 5.84, while in the present index has ‘Financial openness’ where India has a rating of 1.66.
Therefore, it can be seen that there have been significant changes in the calculations for the 2020 ranking based on 2018 data, which have resulted in changes in the Economic Freedom Index. In fact, the report itself says that it can’t be compared with the 2019 report due to the changes. It says, “In this year’s report, we have made key and important changes to nine components. This means that making comparisons for these variables (and for the associated area and summary ratings) between the 2019 report and this 2020 report will be extraordinarily difficult.”
The report further adds, “it is impossible to make so many changes without an impact on the ratings and rankings of the countries in the EFW index. While most nations’ ratings and rankings change only modestly, there are a few that are affected to a fairly significant degree.”
As India has made improvements in other global economic rankings, like the World Bank’s Ease Of Doing Business ranking, the fall in the Economic Freedom Index is largely attributed to the changes in the methodology in arriving at the index. And therefore, the Narendra Modi government is not responsible for the same, as alleged by the Congress party.
