Bihar chief minister Nitish Kumar is a valuable potential ally in the next elections, so it is natural for the government to try and find ways to woo him. So, apart from a R1,000 crore grant for all backward states in the budget and a matching amount for Naxal-affected districts, the Cabinet even cleared a R12,000 crore grant for the state from the Backward Region Grant Fund (BRGF) over the next five years. If that isn’t enough, the government has now set up a six-member expert committee under chief economic advisor Raghuram Rajan to finalise a new set of criterion for defining backwardness of states for granting of special category status.
Apart from political opportunism, there are several problems with what the Rajan panel has been tasked with. For one, if Bihar gets included as a special category state, all other states in this category will get less funds unless the size of the pie given to special category states is increased. If that happens, there will be a clamour from more states to be included and non-special states will feel aggrieved. There is also the issue of how there is little to suggest backwardness or poverty is not used as a criterion even today. Finance Commission allocations that account for over half of all central transfers explicitly take backwardness into account. A fourth of the weight is accounted for by population, a tenth for the area of the state and 47.5% for what is called “fiscal capacity distance”—so states with a low capacity to tax get benefited. Bihar scores heavily on all these counts, which is why it got 8.8% of all central transfers in FY13—that is higher than its 6.8% share in India’s population and many times more than the state’s 2.6% share in the country’s GDP or its 2.4% share in the taxes that states across the country raise on their own.
Even if you get past all this, the question is whether increased central funds will help Bihar grow on a sustained basis—in any particular year, increased investment will obviously mean higher growth, but is this sustainable? Bihar’s higher GDP growth in the years Nitish Kumar has been the chief minister has really come from construction—of roads, for instance, from central funds. While this has resulted in the share of construction in state GDP rising from 6.7% in FY05 to 13.5% in FY12, the share of industry has fallen to a mere 4.9% in FY12. For sustainable development, attracting industry is what the state needs to work on. Increased central subsidies on agriculture, similarly, can help given the state’s relative abundance of water—this will also help develop agriculture-related industries in the state. In the rush to seek votes, however, politicians in neither Bihar nor at the Centre are likely to worry about such inconvenient facts.