Gujarat Is India’s Top State in Economic Freedom

The Raghuram Rajan Committee on development indicators says Gujarat’s social indicators are just middling. Looking at children of class 3–5 who can do subtraction, Gujarat has declined from 22nd among 28 states in 2006 to 23rd in 2012. However, economist Arvind Panagariya argues that Gujarat has made substantial social progress under Modi, starting from a low base.

Forget this debate. Neither growth nor social indicators are accurate measures of Modi’s main election plank — good governance. Measuring governance is difficult, and hence neglected by statisticians. Yet it’s all‐​important. One annual report has long provided indicators of governance. This is Economic Freedom of the States of India (EFSI), written by Bibek Debroy, Laveesh Bhandari and me. The 2013 EFSI report shows Gujarat has been No. 1 in economic freedom for the last three years, widening its lead over others. On a scale from 0 to 1, its overall freedom score has improved from 0.46 to 0.65. Tamil Nadu comes a distant second with 0.54. Economic freedom is not identical to good governance. But lack of economic freedom typically means poor governance — a jungle of rules and obfuscating bureaucrats that promote corruption, delay and harassment. This hits everybody from farmers and consumers to industrialists and transporters.

What exactly is economic freedom? EFSI uses a methodology adapted from Economic Freedom of the World, an annual publication of the Fraser Institute. Data for Indian states is not available on many issues. So, EFSI limits itself to 20 indicators of the size and efficiency of state governments, their legal structure and property rights, and regulation of labour and business.

Many of these indicators directly measure governance — the proportion of stolen property recovered; proportion of judicial vacancies; proportion of violent crimes; proportion of investigations completed by police and of cases completed by the courts; and the pendency rate of corruption cases. The list is by no means comprehensive, but provides strong clues.

Gujarat is the best state in pendency of corruption cases, and in the proportion of non‐​violent crime. It is close to the top in completion of police investigations. It scores poorly in judicial vacancies and recovery of stolen property.

Its quality of government spending is high: it has the lowest ratio of administrative GDP to total GDP. Spending is focused on infrastructure rather than staff. Modi’s repeated state election victories show that his approach produces high voter satisfaction. Gujarat is not a classical free‐​market state. It has large, expanding public sector companies, and substantial taxes on capital and commodities. It has many subsidies, though fewer than in other states. Still, business thrives in its business‐​friendly climate. One businessman told me that in Tamil Nadu, it took six months and several visits (and payments) to ministries for industrial approval. But in Gujarat, the ministry concerned called him the day before his appointment, asking for details of his proposal. Next day, he found the bureaucracy had in advance prepared plans of possible locations for his project, and settled the matter on the spot. This was unthinkable elsewhere, and showed both efficiency and honesty. Corruption has not disappeared in Gujarat, but is muted.

Modi’s Jyotigram scheme provides 24/7 electricity for rural households, plus reliable power at fixed times for tubewells. This explains why Gujarat has India’s fastest agricultural growth (10%/year for a decade, say economists Gulati and Shah). Indian agriculture is crippled by regulations, but Gulati shows that Gujarat has the highest agricultural freedom among states. Modi charges farmers for power, and so all his three state power companies are profitable. By contrast, power companies in other states with free rural power have accumulated losses of almost Rs 200,000 crore.

Critics accuse him of giving cheap land to favoured industrialists. But state and national governments the world over use such sops to attract industries. Unlike most politicians, Modi has clearly not enriched himself.

Good governance includes communal peace. So, the 2002 Muslim killings reflect terribly on Modi. For some, it puts him beyond the pale. But since 2002 the state has been peaceful. In 2011-12 , Gujarat had the lowest Muslim rural poverty rate among all states. Its overall poverty rate for Muslims (11.4%) was far lower than for Hindus (17.6%). This was also true of six other states, so Gujarat is not unique in this.

In sum, EFSI and other studies show that Gujarat has good governance. It has social and communal flaws. But it is India’s top state in economic and agricultural freedom. That’s not hype.