The Cato Institute and Indicus Analytics have released the Economic Freedom of the States of India 2011 report along with the support of Friedrich Naumann Foundation. The rankings are based on the latest comprehensive and objective data available (2009), and is modeled on the Fraser Institute’s world rankings. We find that Tamil Nadu is economically the most free state in India, with Gujarat a close second. Andhra Pradesh (AP), at third rank, is also the fastest improver. Swaminathan Aiyar has a chapter explaining the rise of Andhra Pradesh which nicely supplements the great work done by Bibek Debroy and Laveesh Bhandari in the rest of the report. More importantly, and some would say predictably, we find a positive correlation between economic freedom and economic growth.

This report also shows us the importance of decentralization. If states must compete on efficiency to get more businesses and skilled labour, they are more likely to enact reforms than the central government. The mildest competition may push one further than the strongest of convictions – especially in a democracy like ours. Indeed, free states healthily competing against each other to improve their governance and business environment are the laboratories of democracy. Although one must add the caveat here that part of the rise of AP’s ranking was that it was better able to exploit central funds and hence reduce the size of its state government relative to the economy, which was one-third of the ranking value. Of course, better accessing central funds is not a strategy to be recommended across all states because any top-down fund is by definition fungible.

Please go through the report and comment on your state! Let us start a fruitful discussion on bottoms-up state-led reforms.