Gujarat is top State in economic freedom

The Economic Freedom of the States of India 2012 report, released by the Center for Global Liberty and Prosperity, Cato Institute, in collaboration with Friedrich-Naumann Stiftung, in Hong Kong on Wednesday, says Gujarat is the top State in economic freedom.

The report, prepared by Bibek Debroy, Centre for Policy Research, Laveesh Bhandari, Indicus Analytics, Swaminathan S Anklesaria Aiyar, The Cato Institute, and Ashok Gulati,

Commission for Agricultural Costs and Prices, Government of India, estimates “economic freedom in the 20 biggest Indian States, based on data for 2011, using a methodology adapted from the Fraser Institute’s Economic Freedom of the World annual reports”.

Analysing ‘Size of Government’ of the 20 States, Bibek Debroy and Laveesh Bhandari write: “Gujarat’s is a well-known success story through much of the 2000s.  Moreover it has had major successes in agriculture, social welfare programmes, water resource management.  All of this is being achieved without an inordinate increase in the size of the government.”

A comparative study of ‘Legal Structures and Security’ of the 20 States shows that “as Gujarat leaves behind its sordid past of communal violence and destruction, other States are unable to improve security of life and property in the manner required.  This puts a serious question mark on the sustainability of high economic growth in such States.”

On ‘Regulation of Labour and Business’, Gujarat has seen “significant improvement in its index values and retains its pre-eminent position”.

Equal weighted average ratings based on these three parameters have been used for determining the overall rating of the States. Debroy and Bhandari conclude: The top three States are Gujarat, Tamil Nadu and Madhya Pradesh. These are followed by Haryana and Himachal Pradesh.

According to the report, “Gujarat has significantly improved in its rating from 0.47 in 2005 to 0.64 in 2011, mainly driven by better legal and regulatory performance.”

The report also shows as many as “eight States have seen a fall in their economic freedom rankings since 2005”.

The “worst performers in 2011 are Jharkhand, West Bengal and Maharashtra. Jharkhand is one State that has performed poorly, its rating has fallen by 0.09 since 2005”. The other States with declining index values since 2005 are Odisha, Maharashtra and Punjab.

Surprisingly, despite all the media-driven hype and hoopla over Bihar, the State continues to languish. “Bihar has not been able to break out of the bottom position it has held for so many years, despite an improvement in its ratings.”  But there is hope yet for Bihar. As the report says, “If the same improvement momentum continues it is expected to finally break out of its laggard position the time the next ratings are conducted.”

Here are the main features, excerpted from the report:

• The top State in India in economic freedom in 2011 was Gujarat.  It displaced Tamil Nadu, which had been the top state in 2009.
• Gujarat’s freedom index score has been rising fast, and at 0.64 it is now far ahead of second-placed Tamil Nadu (0.56).
• Madhya Pradesh (0.56) is close behind in third position, Haryana (0.55) retains fourth position, and Himachal Pradesh (0.53) retains fifth position.
• The bottom three States in 2011 were, in reverse order, Bihar, Jharkhand and West Bengal.
• In 2009 the reverse order was Bihar, Uttarakhand and Assam.
• Uttarakhand has moved up sharply from 19th to 14th position, and this improved freedom is reflected in its average GDP growth rate of 12.82 per cent in 2004-11, the fastest among all States. This is an impressive achievement for a once-backward State.
• Earlier the median score for economic freedom for all States had declined from 0.38 in 2005 to 0.36 in 2009. But it has now improved substantially to 0.41 in 2011. This is good news.
• Still the median score lags way behind Gujarat’s 0.64, so other States have a long way to go.
• The biggest improvement has been registered by Madhya Pradesh. Its freedom index score rose from 0.42 in 2009 to 0.56 in 2011, enabling it to move up from 6th to 3rd position. This improved economic freedom was associated with acceleration in its GDP growth which averaged 6 per cent per year from 2004-09, but then accelerated to 9 per cent per year in 2009-11.

Economic Freedom of Indian States: Index scores and ranking, 2009 and 2011

	2011 rank	2009 rank	2011 score	2009 score
Gujarat	1	2	0.64	0.57
Tamil Nadu	2	1	0.57	0.59
Madhya Pradesh	3	6	00.56	0.42
Haryana	4	4	0.55	0.47
Himachal Pradesh	5	5	0.52	0.43
Andhra Pradesh	6	3	0.51	0.51
Jammu and Kashmir	7	8	0.46	0.38
Rajasthan	8	7	0.43	0.40
Karnataka	9	13	0.42	0.34
Kerala	10	10	0.42	0.36
Chhattisgarh	11	15	0.41	0.33
Punjab	12	12	0.39	0.36
Maharashtra	13	10	0.39	0.36
Uttarakhand	14	19	0.38	0.26
Assam	15	18	0.36	0.29
Uttar Pradesh	16	13	0.35	0.34
Orissa	17	17	0.34	0.31
West Bengal	18	15	0.32	0.33
Jharkhand	19	8	0.31	0.38
Bihar	20	20	0.29	0.23

The biggest decline in economic freedom has been recorded by Jharkhand, which slumped from 8th to 19th position. Its score declined from 0.38 to 0.31. Unsurprisingly, its GDP growth has averaged only 4.6 per cent in 2004-11, one of the lowest among all States

Jharkhand has unique problems as a heavily forested State suffering from Maoist insurrection. But such problems also afflict its southern neighbour, Chhattisgarh, which has jumped up from 15th to 11th position in economic freedom. The State has been rewarded with rapid GDP growth averaging 10 per cent per year in 2004-11.

As many as eight States have registered a decline in rank. These include some of the most industrialised states, such as Tamil Nadu, Maharashtra and Andhra Pradesh. However, the situation is better than it sounds. Some of these States have improved their freedom scores (Maharashtra, Rajasthan), but nevertheless fallen in rankings, because other States have improved their scores even faster.

Seen over a longer time horizon, Punjab has fallen in economic freedom rankings from 6th position in 2005 to 12th position in 2011. Once among the most prosperous and fast-growing States, it has suffered relative decline. Punjab’s travails arise mainly from high fiscal deficits and public debt, both arising substantially from the curse of free rural electricity given to woo farmers’ votes. Perverse incentives and money laundering have driven land prices so high as to inhibit industrial investment.

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