Given that investors want more freedom to trade, more open markets for credit and labour, and a sound legal system in which to operate, it is not surprising that states which offer all three—these are the essential components of the Economic Freedom Index—are the ones that grow fast. Indeed, it is heartening that while India has slipped in the Economic Freedom of the World Index, from 76th in 2005 to 111th in 2013, various states within India have managed to increase their freedom score. While Gujarat moving to the top of the league—from being 5th in 2005—is not really surprising, what comes as a real surprise is the performance of states like Chhattisgarh and Bihar—the former has seen a 33% jump in its freedom score between 2005 and 2013, and the latter a 24% jump. Not surprisingly, the two have been amongst the highest-growth states in the country over the past 6 years. So while Gujarat grew at an average of 10.13%, Bihar grew at 9.34% and Chhattisgarh, despite the Maoist problem, grew at 8.59%—slightly higher than the all-India average of 8.46%. Jharkhand, despite all its mineral wealth, found its freedom score fall from 0.4 to 0.33—its rank fell from 8th to 18th—so it is not surprising to find it grew at well below the all-India average.
Important, in this context, is to see what the states did to improve their scores. In Bihar, the hiring of para-teachers dramatically raised literacy levels and mass jailing of gangsters improved safety levels significantly while using government funding well improved basic infrastructure.
But, and this is where Bihar’s high growth story comes under threat, while its economic freedom score has improved, the state remains at the bottom of the heap, the result of other states improving faster. Also, the state seems to have derived the maximum mileage it could from the better use of government funds; it now needs a big dose of private investment. Improving its economic freedom score will help, but the state needs a strategy. Since it is abundant in water, focussing on agro-industry seems the most logical way to go, more so since the state fares very well on the agriculture freedom index constructed by the Commission for Agriculture Costs and Prices. Once private investment picks up in this sector, the state can, over a period of time, look at attracting investment in other areas as well.