Global Competitiveness - Developments in India

According to the March 1, 2005, BNA Daily Tax Report, India’s finance minister has proposed corporate income tax rate cuts from 35% to 30%. The top personal tax rate remains at 30%, though middle-income taxpayers (earning from $3436 to $5727) would benefit from a cut to 20%. At the same time, however, it is broadening the scope of taxes imposed on some types of services, including services to clean office buildings.

India has captured the media spotlight recently in stories about the migration of service industry jobs from the United States to India. (A friend recently commented that his credit card company had moved customer services to India – a move made evident by the accent of the call center staff.) This corporate tax cut may well improve India’s competitive position. However, income taxes aren’t the only force that affects business. A broad range of service taxes may offset income tax benefits. Moreover, government bureaucracy can also make an environment unpleasant.

Apparently, India still has a ways to go on both counts. The Heritage Foundation compiles an annual list entitled the Index of Economic Freedom. That list can be found here: http://www.heritage.org/research/features/index/. India stands at a rank of 118, and it is doubtful these small changes would cause a significant move in the index. Those worried about more job flows to India should thus take a deep breath.

However, as pointed out in a previous post, small changes can lead to significant competitive improvements. Moreover, those with the biggest mess can make the greatest improvements – while those at the top can only go one direction. A sobering thought in this area: this year is the first in the history of the Index of Economic Freedom in which the United States falls outside the top ten.

Edward A. Morse
Professor of Law
Creighton University