We all know what political freedom is: the right to vote and choose a government that the majority of us prefer. Many of us know what social freedom is: the right to be treated equally regardless of caste, race or gender.

But how many of us know about economic freedom? Yet, without economic freedom, political and social freedom are at best inadequate and at worst a farce. What good is political freedom if the rich can buy votes and the government? What meaning does social freedom hold when people are tempted to change religion for money, or marry their girl child off to the highest bidder? India is a country with a high level of political freedom and a low level of economic freedom.

INFOGRAPHIC

CLICK HERE TO VIEW THE GRAPHIC

What really is economic freedom? In the simplest terms, higher prosperity means higher economic freedom. So policies that promote prosperity are the policies that foster economic freedom. Some 200 years ago, Scottish philosopher and father of modern economics Adam Smith had said: "Nations will experience opulence and peace once they create the institutions that encourage entrepreneurship and savings." Clearly, economic freedom is about the kind of policies (e.g. tax, expenditure and savings) and the type of institutions (e.g. police, judiciary and banking) that a country evolves to help its people become-and remain-prosperous.

Over the past decade several institutions around the world have ranked countries on economic freedom. On every such ranking, India's place is closer to the bottom than to the top. Hong Kong, Taiwan, Malaysia and Singapore are among the most economically free countries in the world-way ahead of India. None of these countries offer the level of political freedom that Indians enjoy. But that doesn't mean countries with a high level of political freedom can't have high economic freedom. The US, UK, Germany, France and Australia are ranked much higher than India on economic freedom and people in these countries are as politically free as Indians are. India needs to increase its level of economic freedom, while preserving its already high political freedom. That is because political freedom can be enjoyed most only when combined with economic freedom.

PICTURE SPEAK

AGGRESSIVE DISINVESTMENT in state-owned companies and a smaller proportion of government employees push Chhattisgarh's score as freedom facilitator.

To be fair, the Central government has done quite a bit since 1991-both on the policy and on institutional fronts-to enhance India's economic freedom. But economic freedom is as much a consequence of the policies of the Central government as it is a result of the acts of state governments. In a pioneering study, Bibek Debroy and Laveesh Bhandari-the duo behind India Today's annual ranking of states-have developed an index of economic freedom for Indian states.

Being the first effort of its kind, the index faced some limitations. Not all factors that reflect economic freedom were available in India. Data on many factors were not available for all states (see box: Measuring Economic Freedom). Yet measuring the level of economic freedom in Indian states was worth an attempt. The results are instructive and validate the hypothesis that higher economic freedom results in higher prosperity. The five most economically free states in India generate about 40 per cent of India's GDP. The income of people living in these five states, barring Chhattisgarh, is higher than the Indian average (see table: Freedom = Prosperity). So economic freedom pays and pays very well.

Of course, within this broader conclusion there are exceptions. For instance, Chhattisgarh, the fourth most economically free state in India, has income levels much lower than the national average and its contribution to the country's GDP is abysmal. On the other hand, Punjab, which is one of the richest states of India, ranks very low on the economic freedom index. One way to interpret the apparent contradiction is as a performance-potential gap. Chhattisgarh's high level of economic freedom points to the immense potential the state has for economic growth and it is up to the state Government to realise that potential (through better policies and institutions). The high level of prosperity in Punjab indicates that the state has scope to increase the degree of economic freedom for its people (again by improving policies and institutions).

INFOGRAPHIC

CLICK HERE TO VIEW THE GRAPHIC

A caveat is in order. Most of the data used in the study are up to the year 2001. State governments that came to power after that year can't be credited-or discredited-for their high or low ranks. Gujarat should particularly take note of this since the state Government claims the high rank on economic freedom as its achievement.

What are these policies and institutions that can help states increase freedom and prosperity? The study identifies three categories of factors: facilitation, protection and regulation. Facilitation is about the size and type of government in a state. Tax rates and expenditure levels give an idea of the government's size and intervention in the economy. Generally, low tax means higher freedom. Chhattisgarh has one of the lowest taxes on commodities and services. Stamp duty is low in Andhra Pradesh, Madhya Pradesh and Punjab. Disinvestment in state-owned companies also enhances economic freedom. Andhra Pradesh, Chhattisgarh, Uttar Pradesh and Uttaranchal outperform other states on this parameter. Economically freer states also spend the least on subsidies. Power subsidy to domestic users is among the lowest in Gujarat, Jharkhand, Bihar and West Bengal.

PICTURE SPEAK

HIGHER RECOVERY of stolen property, high rate of completion of trials and moderate vacancies of judicial posts make Tamil Nadu the best protector of economic freedom.

In Tamil Nadu, Orissa, Gujarat and Kerala, government services and revenue expenditure of the government constitute a smaller part of the state GDP-a positive factor for economic freedom. What is measured here is the revenue expenditure and not investment (or capital expenditure) by the government. When it comes to capital spending, higher spending may be good for freedom. Chhattisgarh is the surprise topper on the facilitation index.

Protecting freedom is as important as granting it. Protection index measures how good a state's legal system is in protecting property and other rights. In Andhra Pradesh, Rajasthan, Haryana and Jammu and Kashmir a larger share of property that gets stolen is recovered (a high percentage of stolen property is recovered). Bihar, Assam, Kerala and Maharashtra don't do well on this parameter. Safety of life is highest in Gujarat, Tamil Nadu and Andhra Pradesh. However, Jammu & Kashmir, Bihar and Uttar Pradesh don't do well on this count.

INFOGRAPHIC

CLICK HERE TO VIEW THE GRAPHIC

Economic freedom is higher if justice is served effectively and without delay. In Gujarat, Chhattisgarh, Rajasthan and Madhya Pradesh most of the cases taken up by the police are ensured complete investigation. Completion rate of trials by courts is high in Andhra Pradesh, Tamil Nadu, Karnataka and Orissa. Judicial posts are least vacant in Kerala, Karnataka, Chhattisgarh and Himachal Pradesh-which helps in speedier trials. Uttar Pradesh, Madhya Pradesh and Jharkhand do badly on this factor.

Easy and regular supply of credit (loans) and labour are critical ingredients of economic freedom. States that regulate credit and labour well have a higher level of economic freedom. Wages for workers are higher than the minimum wage rates in Andhra Pradesh, Maharashtra, Himachal Pradesh and Jammu & Kashmir. That means higher economic freedom for workers. Industrial disputes constrain business. Gujarat, Madhya Pradesh, Uttar Pradesh and Orissa report least number of days lost due to strikes and lockouts, whereas Kerala, West Bengal and Tamil Nadu show a higher level of industrial disruption. The ratio of unorganised to organised labour force is very high in Bihar, Uttar Pradesh and West Bengal and is among the lowest in Gujarat and Tamil Nadu. The presence of a large number of unorganised labour means more workers, a positive factor for businesses. Bihar, Uttar Pradesh and West Bengal are better performers.

PICTURE SPEAK

HIGHEST MINIMUM wages for unskilled workers and one of the lowest rates of industrial strikes make Maharashtra the best regulator of economic freedom.

Special economic zones (SEZs) were created to grant industries higher freedom. Gujarat, Andhra Pradesh and Maharashtra have a large number of SEZs. An indicator of economic freedom is the implementation rate of investment proposals. Rajasthan and Haryana show a very high rate of proposals translating into actual investments. Implementation rate is the slowest in Chhattisgarh and Orissa. When it comes to corruption, Gujarat, Andhra Pradesh and Maharashtra are the cleanest states while Jharkhand, Jammu & Kashmir and Bihar are among the most corrupt. Overall regulation is best in Maharashtra-the topper on the Regulation Index.

The three indices of facilitation, protection and regulation present a blueprint of sorts for states willing to enhance economic freedom. The 26 factors that the three indices cover are by no means exhaustive. But they clearly prove that a state can only be as prosperous and free as its policies and institutions allow it to be. The Economic Freedom Index also tells us why some states prosper while others don't. Ten years ago, an average person in Goa, India's richest state, earned six times more than an average Bihari. Now he earns 7.7 times more.

INFOGRAPHIC

CLICK HERE TO VIEW THE GRAPHIC

As states compete among each other for investment, their track record on economic freedom is one achievement investors can consider, especially now when states are becoming determinants of their destiny by breaking free from the controls of the Central government. The lesson for Bihar, and all other states ranked low on economic freedom, is to break the shackles imposed on the economic lives of its people. And what about the states with a high level of freedom? They must keep raising the bar of economic freedom-for themselves and for the laggards.

Index