Gujarat tops economic freedom sweepstakes

Courtesy its industrial progress and the small size of its government in comparison to its gross domestic produce, Gujarat is the country’s most economically free state.

While Chhattisgarh scores higher than Gujarat when it comes to the relative size of the government and the legal structure, it fares poorly in terms of the curbs put on business.

Despite this, the fledgling state ranks fourth in the overall Composite Economic Freedom Index prepared for the Friedrich-Naumann-Stiftung Foundation by Bibek Debroy of the Rajiv Gandhi Institute for Contemporary Studies and Laveesh Bhandari of research firm Indicus Analytics.

Andhra Pradesh is ranked second on the index, and Kerala third. Assam is the worst of the 20 states for which the study has been done and Bihar just a tad ahead. The surprising bit is that Punjab is third from the bottom.

A total of 26 variables were chosen for the study, including measures like government expenditure as a proportion of GDP, per capita power subsidy, state taxes as a share of GDP and the stamp duty rate.

These were clubbed into the sub-index called ‘size of government’. ‘Legal structure and security of property rights’ comprised indices like the shares of violent crimes and economic crimes in the total crimes committed, vacant posts in the judiciary to the total sanctioned, the ratio of property recovered to the stolen property and so on.

The sub-index ‘regulation of credit, labour and business’ includes the ratio of average wages of unskilled workers to minimum wages, number of special economic zones, market fees charged by government and the implementation rate of industrial entrepreneurs memorandum and so on. For instance, the lower the fees for obtaining a licence from the government, the higher the level of economic freedom.

Several parameters of economic freedom, ironically, appear counter-intuitive. While fiscally well-run states tend to have high tax-to-GDP ratios, the report takes the classical view that high taxes are a constraint on economic freedom since they rob individuals some of the choices on what to do with their money.

So, while Gujarat’s ranking gets lowered because of its high tax-to-GDP ratio, the state makes up by the low share of government services in its GDP and the lowest lower power subsidies. All said, Gujarat is ranked second in the ‘size of government’ sub-index and has a score of 0.46.

A lower wage level, similarly, is seen as a sign of lower economic freedom since, if there is perfect mobility of labour, workers will migrate to higher-paying jobs.

Logically, however, higher wages (and so higher economic freedom) should make it relatively unattractive for industry. Not really, says Debroy, because the higher productivity makes up for higher wage levels.

Not surprisingly, states that have a high index of economic freedom have a higher per capita income. It is also found that states that have a poor level of economic freedom tend to have a low level of migration. The level of migration rises along with the freedom level, though after a while, it tends to slow down again.

Whether greater economic freedom leads to higher GDP, however, is something the authors don’t hazard a guess about. In general, states with higher economic freedom tend to have lower inflation rates and states that have repealed the land ceiling laws tend to be among the top 10 economically free states. No co-relation is found between the Right to Information Act and Economic Freedom.