Why Bihar is special

The state has subsidised growth for the rest of India

Bihar has come of age. On November 4, the largest rally since Independence took place in Patna on an esoteric economic issue: granting Bihar "special category status". While public investment has recently increased in the state, private investment remains elusive. This draws attention to the disadvantages that land-locked states like Bihar suffer.

The possibility of private sector investment is very limited without tax incentives, which only special category status states are allowed. These states also get preferential treatment in federal assistance and tax breaks. There were only three such states in 1969, when the Gadgil formula for sharing Central plan assistance among states was devised. Presently, there are 11, of which seven are located in the Northeast. The four others are Sikkim, Uttarakhand, Jammu and Kashmir and Himachal Pradesh. They are allocated a higher share of the Centre's resources.

The granting of special category status is based on two sets of indicators. The first, laid out by the ministry of commerce and industries, identifies four parameters: geographical isolation, inaccessible terrain, poor resource base and remoteness to larger markets, and poor infrastructure. The second, formulated by the Planning Commission, includes hilly and difficult terrain, low population density, strategic location along the borders with neighbouring countries, economic and infrastructural backwardness, and non-viable nature of state finance. Under all of these criteria, except low population density, Bihar deserves special status.

Bihar subsidised post-Independence industrialisation by allowing its mineral resources to be taken outside the state through freight-equalisation. This not only retarded its industrialisation, but also subsidised the transportation of minerals to other states. According to one estimate, Bihar lost Rs 1,12,812 crore just through the freight-equalisation of steel. Before Independence, the Tata group decided to invest in Bihar because of its natural advantage of minerals. This was reversed after Independence.

The centre of gravity of Indian politics had shifted from the east to the west and south by the 1920s. Bombay and the southern group of industrialists became strong supporters of the Congress, and donated a large sum of money to it. Freight-equalisation was the most substantive gift from the party to the industrial conglomerates in south and west India.

T.T. Krishnamachari, an industrialist-turned-politician from Tamil Nadu, introduced freight-equalisation to ensure availability of coal, iron and cement at the same price throughout the country, neutralising the natural advantage of mineral-rich states. This led to the deprivation of eastern states like Bihar, West Bengal and Orissa.

Besides the freight-equalisation policy, the Central government has discriminated against Bihar by giving it the lowest per capita plan and non-plan grants. Recently, the Central government gave Rs 8,000 crore to the Bundelkhand region of Uttar Pradesh. But it did not reimburse Bihar for the expenditures it incurred around the same time due to floods and drought. Under UPA 1's Common Minimum Programme, Bihar was promised a package that was ignored in the six subsequent union budgets. In the Central budget of 2010-11, several states were given substantial state-specific assistance, but Bihar was neglected.

The special category states get significant excise duty concessions, incentivising industry to locate manufacturing units there. About 30 per cent of the Central government's gross budgetary support for plan expenditure also goes to these states. They receive 90 per cent of plan assistance as grants, and only 10 per cent as loans. The 12th Finance Commission had recommended that the Centre give only grants, and leave it to the states to raise loans from the market. For special category states, this formula is restricted to Centrally sponsored schemes and external aid.

According to the 13th Finance Commission Report, special category states will be given additional resource support through higher maintenance expenditure on irrigation, roads and bridges, higher Central funding (90 per cent) as grants to the State Disaster Relief Fund, non-plan revenue deficit grants to make up for assessed deficits, and higher incentives for grid-connected renewable energy. These need-based transfers are as necessary for Bihar as they are for other special states.

With its current financial capacity (including transfers from the Centre) and the extant policy bias, Bihar would continue to experience a development slump. Even doubling the current transfers would not be enough to enhance its development prospects. To bring it on par with other states, Bihar would need special policy incentives to attract private investment. This calls for nothing less than special category status.

The writer is member-secretary, Asian Development Research Institute (ADRI), Patna


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