Economic Freedom for States of India 2007

This is the third year that the authors, Bibek Debroy and Laveesh Bhandari, have undertaken an economic freedom rating for Indian States.

This third version of the study has been done for the International Management Institute (IMI).

The two earlier versions of the study generated controversy, understandably, because sub-regional ratings are rare and also more difficult on account of data problems.

However, controversy often results from an imperfect understanding of what an economic freedom rating does.

First, this is a rating of economic freedom, not of social or political freedom.

Second, economic freedom is based on a premise that reduced government intervention is better.In other words, the role of the government should be limited to protecting property and ensuring enforcement of contracts and speedy dispute resolution.

This government intervention is captured under three heads: size of government; legal structure and security of property rights; and regulation of credit, labour and business.

Since the intention is to capture inter-state differences, the choice of variables is determined by what is constitutionally under the jurisdiction of the States, not the Centre. Third, all data are objective, obtained from government sources.

No subjective responses to questionnaires are involved.

Hence, if a variable has not been included, the answer usually lies in the non-availability of comparable data across States.This also explains, "Why only 20 States could be ranked".

Fourth, there is a process of aggregation and choice of weights in obtaining the index values for each State under each of these three heads and also in obtaining the composite index.

However, index values (though, not ranks) are robust to different methods of aggregation.

Fifth, index values are better to track a State's performance than ranks.

Sixth, there is no link between economic freedom rating and an incumbent State government.