After the FY14 Budget allocated R1,000 crore more for all backward states by way of the Backward Region Grant Fund (BRGF) and another R1,000 crore for Naxal-affected districts, Bihar chief minister Nitish Kumar has reason to feel pleased with the Union Cabinet clearing a proposal to give the state another R12,000 crore over the next 5 years from the BRGF. Though there is no real evidence of the Centre discriminating against Bihar, Nitish Kumar has successfully built up a case for a more favoured treatment. RBI data shows Bihar gets 10.9% of all taxes distributed by the Centre to the states—in FY13, Bihar’s own taxes were R15,700 crore versus R33,130 crore of central tax transfers. And if you take into account all other transfers, Bihar gets 8.8% of all money flows from the Centre to the states. Juxtapose this with Bihar’s 2.8% share in India’s GDP or its 8.6% share in the population and there’s little evidence of a bias against the state. Maharashtra, by contrast, accounts for 13.9% of India’s GDP—and 9.3% of the population—but gets just 6.2% of all central transfers including the tax ones.
Will R12,000 crore over 5 years help keep up Bihar’s current growth rate of 10% per annum over the last 7 years? Much of the state’s growth in recent years has come from construction, most likely the result of the state making better utilisation of central assistance. From 6.7% of GDP in FY05, construction’s share rose to 13.5% in FY12. Manufacturing’s share of GDP, in contrast, has fallen from a low 6.5% in FY94 to 4.9% in FY12. While most laud the state’s progress in terms of increasing school enrolment, improvement in law and order and in basic infrastructure, Bihar’s growth isn’t sustainable without increased industrial investment. Indeed, given the relative water scarcity in states like Punjab and Maharashtra, Bihar’s best bet right now would be to get the Centre to give it the necessary support to make its agriculture grow. Punjab’s paddy farmers get annual subsidies of as much as R12,000 per hectare—this encourages them to grow paddy which is rapidly depleting its water table. If such subsidies are made available to Bihar—and there are government schemes for this—agriculture can rapidly become a growth magnet. Combined with easy licensing policies for mills, for instance, Bihar could quickly regain its status of being one of India’s largest sugar producing states. Higher agricultural growth—over the last 7 years, Bihar’s agricultural growth has been half that of Gujarat—is also what will help lower Bihar’s poverty levels. Despite its high growth, Bihar’s poverty reduction has been abysmal. This is what Nitish Kumar needs to fix, and getting more BRGF funds isn’t going to help.