That’s the big lesson from the Bihar story
Given how the chief ministers of both Bihar and Uttar Pradesh have been promising to support a coalition that grants them ‘special category’ status, FE did a little exercise to see just how important central transfers are. Not all transfers are outright grants, but we wanted to see the impact. Obviously the impact of central transfers—which includethe states’ share of central taxes—on poorer states like Bihar and Uttar Pradesh was going to be more than that for richer states like Gujarat and Maharashtra since, the way the transfer system is designed, the poorer states get more funds. While the Raghuram Rajan panel wants to raise this amount even more, this is the general philosophy behind India’s central transfers. Bihar, to cite one example, gets 8.8% of all the money that flows to the states while its share in the country’s GDP is only 2.8% and its share in population is 8.6%. Maharashtra accounts for 13.9% of GDP and 9.3% of population but gets just 6.2% of all central transfers.
The results of the exercise, a simple one comparing the increase in each year’s GDP with the amount of central transfers in that year, are astounding. For poorer states like Bihar, the increased central transfers were almost identical to the hike in GDP. For richer states like Tamil Nadu, central transfers were typically just a fourth or a fifth of the increase in GDP. What this means is that while chief minister Nitish Kumar has done a great job in building Bihar’s roads, the infrastructure deficit is so high, it will take years for industry to respond by setting up shop in the state—if there is no power and there are no roads, why will any industry come to the state? In which case, states like Bihar and Uttar Pradesh need to come up with interim strategies, perhaps based on improvement in agriculture. In the case of Bihar, its abundance of water makes it ideal for growing paddy and sugarcane—easy licensing norms for sugar mills, for instance, could help Bihar regain its earlier status of one of India’s largest sugar-producing states. Instead of just doling out cash, if the centre was to give per hectare subsidies and the state to match this with reforms to free up agriculture markets, the solution will be a win-win one.