Index of Economic Freedoms United States and India

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Macroeconomics

On the 2011 Index of Economic Freedoms the United States ranks 9^th and India ranks 124^th. India has a population of 1.2 billion with a GDP of $3.5 trillion and a per capita GDP of $2,941. United States has a population of 307.4 million with a GDP of $14.2 trillion and a per capita GDP of 46,381. The unemployment of India is 10.9%, while the U.S. has 9.6% of its population unemployed. In the last five years India has grown at an 8% compounded rate while the U.S. has only grown at .7%.

 Even though India ranks low it has seen improvements in four categories: Business, Fiscal, Government and Labor freedoms. India has also seen a drop in two categories: Trade and Monetary freedoms.  The United States has seen a drop in four categories: Business, Trade, Government, and Monetary freedoms. The United States has seen improvement in Fiscal and Labor freedoms.

One clear difference between the U.S. and India is in property rights, Copyrights and intellectual property rights are difficult to protect in India. Domestic companies have used patented products without legal penalties. Property rights in the U.S. are secure there is a well developed licensing system that protects patents and copyrights. Protecting property rights goes a long way in creating a strong economy, it allows people to develop new products or services and bring them to market without fear of someone stealing their property.

Business freedom in the United States even though it has declined is still much higher than India’s. In India it is still difficult to start a business regulations are burdensome with little legal framework. It takes a very long time to start a business and even longer to get permits to do anything. Although India has shown improvement in allowing more freedom in creating a business it still has a long way to go. America protects the freedom to create and run a private enterprise. New regulatory uncertainty in the U.S. has led to a small drop in business freedom. Despite that the U.S. still remains well above average in allowing business freedom to form. Creating an environment that allows people to easily start a business aids in economic expansion by making it easier for someone to put their ideas to work. Regulation hampers new business because it adds more costs to the start up costs.

In India 28 state-owned banks dominate the banking sector they control 70% of the commercial banking assets. The high cost of credit makes it difficult for private businesses to grow and develop. Foreign banks are limited to owing only 5% equity in a private Indian banks. The United States has made changes to its financial sector since the sub-prime mortgage crisis in 2008. The government has intruded on the management of financial firms many of which have been bailed out. The Sarbanes Oxley act of 2002 still raises concerns due to increased disclosure and internal control requirements that hurt smaller firms. Even with the U.S. making its changes to the financial sector it still ranks much higher than India with regards to financial freedoms. Allowing the financial markets to run independently from the government allows greater access to financial options, such as securing loans for business expansion. The changes the U.S. has implemented also show the how public opinion can encourage governments to restrict the total freedom of financial markets.

The United States has burdensome taxes, top income and corporate tax rates are 35%. There are also estate taxes and excise taxes. On the state and local levels there are additional income, sales and property taxes. Tax revenue in the most recent year was 26.9% of GDP. There is also the possibility of the top income tax bracket to rise to 39.6% and capital gains tax to change from 15% to 20%. India has high taxes a top income tax rate of 30.9 %. The top corporate tax rate is 33.99%. There are also taxes on dividend and interest as well as a new general sales tax. Tax revenue was 18.6% of GDP in the most recent year. Higher tax means less reward for an investor or entrepreneur who takes a risk in hopes of a large return. High taxes are never popular it creates a feeling of being robbed, especially if you don’t see or feel the benefits of that tax revenue. With more money going to the government it could cause people to move their money or ideas to a country with lower taxes. When money and ideas leave there are less new businesses and less innovation.