Talking back to the Centre
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As regional parties demand radical changes for greater fiscal decentralisation
Nitish Kumar, Bihar's chief minister, is much sought after. And he knows it. In a giant rally in New Delhi, held recently, Kumar made it clear that his party would side with whichever political combination supported the granting of "special status" to Bihar. Not so long ago, the West Bengal chief minister had also asked for a special package for her state. But her demand received short shrift, possibly because she has proved to be an unreliable political ally. In view of the Congress's recent overtures to Kumar, political expediency may well ensure that Kumar's demand is satisfied. Now Orissa's chief minister, Naveen Patnaik, has pressed the Centre again for special status for his state.
But what light can economic principles shed on this issue? The special status category has typically been granted to those states that are geographically handicapped — the hill states of Uttarakhand, Himachal Pradesh as well as states in the Northeast. These states have a substantial part of their development plans funded by the Central government. Although Bihar is among the poorest states in India, it cannot claim that its misfortunes are due to any locational disadvantage. While Kumar himself has been instrumental in turning around the fortunes of the state, his predecessors have been guilty of gross misgovernance. This has been the principal reason for Bihar's backwardness.
Of course, this does not tell the full story. Bihar can, with some justification, claim that Central government policies have not treated the state fairly. First, the earlier, much misguided freight equalisation policy discriminated against the mineral-rich eastern region by subsidising the cost of transporting minerals to western India. So entrepreneurs found it profitable to set up factories in regions that were closer to ports or had better infrastructure, instead of locating their plants closer to the source of raw materials. Second, and perhaps more seriously, Bihar continues to receive less than the national average Central assistance on a per capita basis. This is despite the fact that Centre-state transfers are supposed to be biased in favour of the poorer states.