As per the latest report titled “Economic Freedom of the States of India 2011”, Gujarat has emerged as one of the two foremost states to have registered a sharp improvement in the economic freedom index.
Gujarat rank 2 economic freedom of the states of india 2011
Gujarat Rank 2 - Economic Freedom of the States of India 2011As per the latest report titled “Economic Freedom of the States of India 2011”, Gujarat hasemerged as one of the two foremost states to have registered a sharp improvement in theeconomic freedom index. This report is the latest in a series of annual surveys on theeconomic freedom of Indian states, started in 2004, and is derived from the Fraser Institute’sEconomic Freedom of the World report, with adjustments for data relevant to sub-nationalentities. The authors include distinguished economists and senior scholars from India,namely, Bibek Debroy, Laveesh Bhandari and Swaminathan S. Anklesaria Aiyar.The Economic Freedom Index shows the direct correlation between economic freedom andthe well-being of citizens. As per the report, the states in India which are economically morefree are also doing better in terms of a higher per capita growth for its citizens,unemployment levels are lower in these states, sanitary conditions are better and the statesalso attract more investments. Gujarat has emerged 2nd in the overall ranking, just behindTamil Nadu, improving its rank from 5th to 2nd as compared with the 2005 rankings. Theonly other state to have shown improvement in its economic freedom score is AndhraPradesh, while other states have got lower scores as compares to 2005 (even though theirranking might have improved).The below table shows the top 10 states as per the economic freedom ranking: Vibrant Gujarat Summit 20131
The Economic Freedom of the states is determined using various socio-economic andregulatory aspect based indicators, which are broadly divided into three heads, namely:Size of the governmentUnder this indicator, the variables included are: • The inverse of government revenue expenditure as a ratio of gross state domestic product (GSDP); • The inverse of administrative GSDP to total GSDP; • The inverse of government employment to total organised employment; • The inverse of state taxes on income as a ratio of GSDP; • The inverse of state taxes on property and capital transactions as a ratio of GSDP; • The inverse of taxes on commodities and services as a ratio of GSDP; and • The inverse of the stamp duty rate.As per the report, the fundamental premise in including each of the above variables is thatthe lower the government’s importance and intervention, the better it is from the point ofview of economic freedom for the state and its citizens. Higher revenue expenditure by thegovernment is indicative of a large size of the government, and a rising share of governmentrevenue spending in GSDP is an indicator of lower economic freedom. Therefore, inverse ofthis ratio has been considered. Vibrant Gujarat Summit 20132
Legal structure & security of property rights • The variables included under this category are: • The variables included under this category are: • The inverse of vacant posts in the judiciary to the total number of sanctioned judicial posts; • The inverse of total number of cases under economic offences to the total number of cases; • The percentage of cases where investigations were completed by the police; • The percentage of cases where trials were completed by the courts; and • The inverse of violent crimes as a ratio of total crimes.In including each of these variables, the fundamental premise used by the authors is thatensuring law and order and justice and protecting property is a core governance area.Regulation of labour and businessThe sub-indicators considered under the business and labour regulation category are asfollows: • The average wage of unskilled workers as a ratio of the minimum notified agricultural wages; • The inverse of man-days lost in strikes and lock-outs as a ratio of the total number of industrial workers; • The inverse of the minimum licence fee for traders; • The implementation rate of Industrial Entrepreneurs’ Memorandum (IEM); • The inverse of power shortage as a percentage of total demand; and • The inverse of cases pending investigation from the earlier year on cases registered under prevention of corruption and related acts as a ratio of the total number of cases registered under such acts.In this category, the inclusion of variables primarily reflects state intervention in labourmarkets and bureaucratic and procedural costs, including those on physical infrastructurelike power. Vibrant Gujarat Summit 20133
The Index of Economic Freedom is calculated for each of these categories, and thenaggregated. As per the methodology mentioned in the report, all the variables arenormalised, to enable comparison between states that vary enormously in size (area andpopulation). For each of these three heads, the variables are then aggregated using principalcomponents analysis (PCA). That is, for each head, one obtains a score and a rank for eachstate. The scores drive the ranks and the scores permit a state’s performance to be trackedover time. The report also mentions that while the categories have been included in theindex on the lines of the Economic Freedom of the World reports, the variables from theEconomic Freedom of the World could not be replicated at the sub-national level in India. Soproxies were taken wherever possible that are more meaningful at the state level.Gujarat has been among the most rapidly growing states of India and has also attractedlarge investments. Moreover it has had major successes in agriculture, social welfareprogrammes, and water resource management. All of this is being achieved without aninordinate increase in the size of the government. Gujarat has, therefore, markedlyimproved its ranking in the indicator of “Size of Government – Expenditure, Taxes andEnterprises”, from 2nd in 2005 to 1st rank in 2009, as per the 2011 report. The other statesthat follow suit under this category are Jharkhand and Haryana. While Jharkhand has seensome large units in the mining and basic manufacturing industries, Haryana has attractedsignificant investments in the services sector, primarily due to its proximity to Delhi.Gujarat has shown a huge improvement in its score on the second indicator namely, “Legalstructure and Security of Property Rights”, which measures the efficiency of the governmentin protecting human life and property. The value of property recovered out of propertystolen, cases under economic offences, vacant posts in the judiciary, and share of violentcrimes all contribute to its improved position at number five. It also supports thesustainability of high economic growth that Gujarat is experiencing.In the third indicator of “Business and Labour regulation”, Gujarat has improved further onits score and retained its first position. The overall ratings are a simple equal weightedaverage of the three ratings and the top three states are Tamil Nadu, Gujarat and AndhraPradesh. In terms of Industrial Entrepreneurs Memorandum (IEM) realizations, Gujarat hasthe highest value of IEMs realized for the year 2010 with projects worth Rs. 4,565 crore (USD931.63 million) under realization phase.An interesting observation here is that the change in the economic freedom index scores forGujarat from 2005 to 2009 is around 0.11 (absolute) which is a 23.91% increase. As against Vibrant Gujarat Summit 20134
this, the annual percentage growth of the state GSDP from 2004-05 to 2008-09 at constantprices (1999-2000), is close to 11.8%. This clearly shows a direct correlation between thestate GSDP growth and the improvement in the economic freedom index. As rightly pointedout in the report, the states with better economic freedom scores reflect a better economicgrowth, the above analysis fully confirms with the findings.Source: Economic Freedom of the States of India, 2011 by Bibek Debroy, Laveesh Bhandariand Swaminathan Aiyar Vibrant Gujarat Summit 20135