Gujarat Rank 2 - Economic Freedom of the States of India 2011
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. This report is the latest in a series of annual surveys on the economic freedom of Indian states, started in 2004, and is derived from the Fraser Institute’s Economic Freedom of the World report, with adjustments for data relevant to sub-national entities. 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 and the well-being of citizens. As per the report, the states in India which are economically more free 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 states also attract more investments. Gujarat has emerged 2nd in the overall ranking, just behind Tamil Nadu, improving its rank from 5th to 2nd as compared with the 2005 rankings. The only other state to have shown improvement in its economic freedom score is Andhra Pradesh, while other states have got lower scores as compares to 2005 (even though their ranking might have improved).
The below table shows the top 10 states as per the economic freedom ranking: Vibrant Gujarat Summit 2013 1
The Economic Freedom of the states is determined using various socio-economic and regulatory aspect based indicators, which are broadly divided into three heads, namely: Size of the government Under 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 that the lower the government’s importance and intervention, the better it is from the point of view of economic freedom for the state and its citizens. Higher revenue expenditure by the government is indicative of a large size of the government, and a rising share of government revenue spending in GSDP is an indicator of lower economic freedom. Therefore, inverse of this ratio has been considered. Vibrant Gujarat Summit 2013 2
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 that ensuring law and order and justice and protecting property is a core governance area. Regulation of labour and business The sub-indicators considered under the business and labour regulation category are as follows: • 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 labour markets and bureaucratic and procedural costs, including those on physical infrastructure like power. Vibrant Gujarat Summit 2013 3
The Index of Economic Freedom is calculated for each of these categories, and then aggregated. As per the methodology mentioned in the report, all the variables are normalised, to enable comparison between states that vary enormously in size (area and population). For each of these three heads, the variables are then aggregated using principal components analysis (PCA). That is, for each head, one obtains a score and a rank for each state. The scores drive the ranks and the scores permit a state’s performance to be tracked over time. The report also mentions that while the categories have been included in the index on the lines of the Economic Freedom of the World reports, the variables from the Economic Freedom of the World could not be replicated at the sub-national level in India. So proxies 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 attracted large investments. Moreover it has had major successes in agriculture, social welfare programmes, and water resource management. All of this is being achieved without an inordinate increase in the size of the government. Gujarat has, therefore, markedly improved its ranking in the indicator of “Size of Government – Expenditure, Taxes and Enterprises”, from 2nd in 2005 to 1st rank in 2009, as per the 2011 report. The other states that follow suit under this category are Jharkhand and Haryana. While Jharkhand has seen some large units in the mining and basic manufacturing industries, Haryana has attracted significant 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, “Legal structure and Security of Property Rights”, which measures the efficiency of the government in protecting human life and property. The value of property recovered out of property stolen, cases under economic offences, vacant posts in the judiciary, and share of violent crimes all contribute to its improved position at number five. It also supports the sustainability of high economic growth that Gujarat is experiencing. In the third indicator of “Business and Labour regulation”, Gujarat has improved further on its score and retained its first position. The overall ratings are a simple equal weighted average of the three ratings and the top three states are Tamil Nadu, Gujarat and Andhra Pradesh. In terms of Industrial Entrepreneurs Memorandum (IEM) realizations, Gujarat has the highest value of IEMs realized for the year 2010 with projects worth Rs. 4,565 crore (USD 931.63 million) under realization phase. An interesting observation here is that the change in the economic freedom index scores for Gujarat from 2005 to 2009 is around 0.11 (absolute) which is a 23.91% increase. As Vibrant Gujarat Summit 2013 4
against this, the annual percentage growth of the state GSDP from 2004-05 to 2008-09 at constant prices (1999-2000), is close to 11.8%. This clearly shows a direct correlation between the state GSDP growth and the improvement in the economic freedom index. As rightly pointed out in the report, the states with better economic freedom scores reflect a better economic growth, the above analysis fully confirms with the findings. Source: Economic Freedom of the States of India, 2011 by Bibek Debroy, Laveesh Bhandari and Swaminathan Aiyar
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