Political freedom is a great thing, but as all the FDI flowing into China made clear decades ago, what matters for the economy is really economic freedom. That includes not just the usual ease-of-doing-business rules, but also how much government constrains businesses—a high fiscal deficit, for instance, means the government is making money costlier for industry; a high PSU share in industry suggests policies will be biased against private firms. Over the years, since the country rankings hid the attributes of individual states, separate rankings for the states were also calculated. The Economic Freedom Rankings for the States of India, 2012, published by Friedrich Naumann Stifting fur die Freiheit, the Cato Institute and the Academic Foundation, New Delhi, provides evidence of this correlation: states that are economically more free (Gujarat, Tamil Nadu and Madhya Pradesh) perform significantly better in terms of higher per capita growth, lower unemployment levels, better sanitation and, notably, in their ability to attract investment, than states placed lower (West Bengal, Jharkhand and Bihar). Even in terms of state GDP, the correlation is positive. In the case of Madhya Pradesh, which rose from sixth in 2009 to third in 2011, GDP growth averaged 6% per year in 2004-09, but accelerated to 9% per year in 2009-11.
Punjab gets special mention in the report as, having been among the toppers in the past, it has fallen precipitously now—from sixth position in 2005 to twelfth in 2011. As Swaminathan Aiyar, one of the authors of the report (along with Bibek Debroy and Laveesh Bhandari) says, “A major weakness has been a high fiscal deficit ... budgeted at 3.4% of GDP for 2011-12. The high fiscal deficit arises mainly out of huge unwarranted subsidies, the chief culprit being free power to farmers.” According to the report, “Perverse incentives and money laundering have driven land prices so high as to inhibit industrial investment.” Policies need to be formulated to rectify this post haste since this is taking away from the positives the state has to offer—its shift to the PPP model has enabled increased investment in power, roads, education and health, and the World Bank ranks Ludhiana the best city in India to do business in. A related statistic, though not in this publication, is that states with higher growth are the ones where governments are being elected back to power. Put that way, it’s a wonder that more state governments aren’t