Bihar has come of age. The direction of discourse is changing in the state. On November 4 of this month, there was a rally in Patna, the size of which was one of the largest in the post independence period. Ironically, the rally was not on some emotive issues; in contrast, it was on an esoteric issue of economic agenda, viz., granting of ‘Special Category Status’ to Bihar. While public investment has reached a very high level in Bihar in the recent past, the big ticket private investment is elusive. This probably indicated that the land locked states like Bihar suffer from more disadvantages.
In the present scenario of ‘market-centric’ development strategy, the possibility of private sector investment in the state is very limited without tax incentives, which are generally allowed only to those states which are accorded the Special Category Status. A Special Category State also gets 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 the states was devised. Presently, there are eleven Special Category States of which seven are located in north-east, while four others are Sikkim, Uttarakhand, Jammu and Kashmir and Himachal Pradesh. They are given a higher share of the central government’s resource allocation.
The granting of Special Category States status is based on two sets of indicators. The first set, as per the Ministry of Commerce and Industries, identifies four parameters — (a) Geographical Isolation (b) Inaccessible Terrain (c) Poor Resource Base and Remoteness to Larger market and (d) Poor Infrastructure. The second set, according to the Planning Commission, includes the following indicators : (a) Hilly and Difficult terrain (b) Low Population Density (c) Strategic location along the borders with neighboring countries (d) Economic and Infrastructural Backwardness and (e) Non-viable nature of state finance. On all these criteria, Bihar deserves to be granted the Special Category States status, except the second criterion of Planning Commission, viz, low population density.
One thing should be borne in mind that Bihar subsidized the entire post-independence industrialization of the country, by allowing its mineral resources to be taken outside through the ‘freight-equalization’ policy. It not only retarded industrialization within the state, but also subsidized the transportation of minerals to other states. According to one estimate, Bihar was subjected to a loss of Rs. 1,12,812 crore through ‘freight-equalization’ of only steel. No attempt has been made to calculate the total loss that Bihar had to suffer on account of freight equalization for coal and cement. One should also note that Bihar was in a better condition before independence, because there was no 'freight-equalization'. Tata House travelled to the state and decided to invest in Bihar because of its natural advantage in the realm of minerals. However, that process got reversed after independence.
It is said that the centre of gravity of Indian politics shifted from East to West and South India by 1920’s. Thereafter, Bombay and Southern group of industrialists became strong entities in the power structure of the Congress Party. They also donated nearly Rs. 200 crore to the coffer of Congress Party. The freight-equalization was the most substantive gift from the Congress Party to the industrial conglomerates in South and Western India for a donation of only Rs. 200 crore.
The scripting of the freight-equalization was done by T.T. Krishnamachari, an industrialist-turned-politician from Tamil Nadu, the then Madras state. T.T. Krishnamachari, during 1952 to 1965, served the country twice as a Central Minister. He was initially the Minister for Commerce and Industry and, after serving in the Steel Ministry and the Ministry of Economic and Defence Cooperation, he finally became the Finance Minister in 1964. He introduced the freight- equalization Policy to ensure availability of coal, iron and cement at same price throughout the country, neutralising the natural advantage of mineral rich states like Bihar. This led to continuous deprivation of the eastern states like Bihar, West Bengal and Orissa. On the other hand, the southern and the western states flourished since the crucial industrial inputs were made available there itself at a heavily subsidised prices.
Late Sachin Chowdhury, founder Editor of Economic and Political Weekly (EPW), made several trips to Calcutta from Bombay to impress upon Dr. Bidhan Chandra Roy, the then Chief Minister of West Bengal, to protest against the policy of freight-equalization. Unfortunately, Dr. Roy remained unmoved. From this account, it is obvious that it is the Congress Party which destroyed the possibilities of industrialization in Bihar.
Besides freight equalisation policy, the central government has also been discriminating against Bihar through many other ways. Bihar always received the lowest per capita plan and non-plan grants. When Montek Singh Ahluwalia, the Deputy Chairman, Planning Commission, visited Bihar a few years back, the central government gave a bonanza of Rs. 8,000 crore to Bundelkhand region of Uttar Pradesh. But ironically, even the genuine expenditure of Bihar incurred around that time on flood and drought, one of its great disasters, was not reimbursed by the centre. In the Common Minimum Programme of UPA(I), Bihar was promised a package, which was altogether ignored in six subsequent union budgets, including one in UPA (II). Further, 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 relocate/locate manufacturing units within their territory. Apart from this, 30 percent of the central government's gross budgetary support for plan expenditure also goes to Special Category States.
In the case of Special Category States, 90 percent of plan assistance is given as grants, and only 10 percent as loans. The 12th Finance Commission had recommended that the central government should give only grants, and leave it to the states to raise loans as they want from market. Since then, the ‘90 percent grants and 10 percent loans’ formula for Special Category States is restricted to Centrally Sponsored Schemes and external aid. For general category states, external aid is passed on in the exact mixture of loan and grants in which it is received at the Centre; however, in the case of Centrally Sponsored Schemes, only 70 percent of the central funding is given as grant.
As per 13th Finance Commission Report, Special Category States will be given additional resource support through (a) higher maintenance expenditure on Irrigation / Roads and Bridges, (b) higher central funding (90 percent) as grants to State Disaster Relief Fund (SDRF), (c) Non-Plan Revenue Deficit Grant to make up for the assessed deficits, and (d) higher incentive for Grid Connected Renewable Energy. These need-based transfers are as much relevant for Bihar as for the Special Category States.
Thus, with its current financial capacity (including devolutions and transfers from centre) and extant policy bias, Bihar would continue to experience increasing development slump, unless special assistance is given to the state by the centre. Even doubling of the current levels of devolutions and transfers would not be enough to enhance its development prospects. To bring it at par with the levels of development achieved in other states, Bihar would need special policy incentives which would rope in private investments to the state. This calls for grant of nothing less than the special category status to Bihar.
* Member-Secretary, Asian Development Research Institute (ADRI), Patna