The change in methodology caused India to fall in the 2020 Index of Economic Freedom

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Earlier this month, the Fraser Institute of Canada published The World Economic Freedom Index 2020, where India’s rank dropped significantly. According to the index, India dropped 26 places to reach the 105th position in the ranking, which was 79th in the index the previous year. The city-states of Hong Kong and Singapore ranked first and second in the index, while China ranked 124 and Pakistan ranked 129, both lower than India.

As might be expected, India’s drop in rankings gave opponents of the Modi government ammunition to target the government. After the report was released, the Congress party tweeted on 11e September, claiming that India is only progressing downward under the BJP government.

Ranking measures economic freedom, or the ability of individuals to make their own economic decisions in a country, by analyzing the policies and institutions of those countries. While a 26-spot drop in the Index of Economic Freedom in a single year is worrying, this is not the report’s correct analysis. This is because a major reason for the changes in the ranking of countries this year is due to several changes made to the methodology adopted in the report. Therefore, this year’s rankings are not comparable to previous years, as the calculation methods have changed significantly.

The Economic Freedom Index 2020 report was prepared using data from 2018. The degree of economic freedom is measured in five broad areas, namely size of government, legal system and property rights, sound currency, freedom to trade internationally and regulation. India’s ranking declined in all five areas, contributing to the overall decline. The 5 domains have several components and subcomponents in each of them, and several changes have been made to the measures of these.

India’s ranking in 2019 and 2020 in five different fields included in the Global Index of Economic Freedom

Within the size of the government area, the “government investment” component experienced the largest decline, by 43 points. However, the previous year included a different component “Public enterprises and investments” which is replaced this year by the component “Public investments”. The scoring formula is also different and is now based on a standard maximum and minimum formula instead of the categorical scoring method used previously.

In the ‘Regulation’ area, there is a drop of 14 places. The maximum decline in rank is in the “Business regulation” component. Here, too, the ‘extra payments / bribes / favoritism’ based on the Global Competitiveness Report were replaced with V-Dem data on ‘a rigorous and impartial public administration’, which resulted in a lower score. of -0.33.

In the area ‘Freedom to trade internationally’ there are 4 components. The maximum decline is in the “Controls of movement of capital and people” component. However, this is due to a change of a sub-component in this component. The previous index in 2017 had ‘foreign ownership / investment restrictions’, where India had a rating of 5.84, while in the current index, ‘financial openness’ where the India has a rating of 1.66.

Therefore, it can be seen that there have been significant changes in the calculations of the 2020 ranking based on the 2018 data, which resulted in changes in the Index of Economic Freedom. In fact, the report itself states that it cannot be compared to the 2019 report due to the changes. He says, “In this year’s report, we made key and significant changes to nine items. This means that making comparisons for these variables (and for the associated domain and summary notes) between the 2019 report and this 2020 report will be extremely difficult. “

The report adds that “You can’t make so many changes without impacting the ratings and rankings of countries in the EFW Index. While most countries’ ratings and rankings change only slightly, there are a few that are affected to a fairly significant degree. “

As India has improved other global economic rankings, such as the World Bank’s Ease of Doing Business ranking, the fall in the Economic Freedom Index is largely attributed to changes in methodology to arrive at the index. . And therefore the Narendra Modi government is not responsible for the same as the Congress party claims.


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