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BPSC Mains GS-2 Masterclass · Indian & Bihar Economy

Regional Development & ImbalancesWhy Some Regions Race Ahead

There is no uniform economic development over space in any country. Coastal and urban states have flourished while land-locked Bihar has hardly seen the fruits of development. This page explains regional development, how geography and policy shape it, and why regional planning has fallen short in Bihar.

Backwardness13Aspirational districts

in the TAD list are from Bihar.

Cities11.3%Urbanisation

Bihar in 2011, against 31.2% for all-India.

AllocationRs 16.9First Plan outlay

per capita for Bihar vs Rs 25.6 for all States.

Policy1952–93Freight equalisation

the policy that destroyed Bihar's industrial ambitions.

Location24%Modern industries

of India's are in the Maharashtra–Gujarat region.

Gap1/3rdPer capita income

Bihar's share of the national average today.

Part 1 · Definitions

Regional Development and Regional Planning

Two ideas to begin with: what regional development means, and what planning for regions involves.

A split landscape of India: a busy coastal port city on one side and quiet flooded farmland on the other

Regional development

Regional development is about equal development of regions and remove the development disparity in among different areas.

It's a broad term which aims at bring positive changes in the levels of the living of the people, and general condition of a region.

Regional planning

Regional planning is policies for regional development and preparation of development plans for regions with special problem and promises, i.e. backward regions, metropolitan regions, river valley and other resource development regions.

There is no uniform economic development over space in any country. Some areas are more developed and some lag behind. This uneven pattern of development over space necessitates that the planners have a spatial perspective and draw the plans to reduce regional imbalance in development. This type of planning is termed as regional planning.

Physical diversity

India is a land of diversity. Physical diversity is one among various diversities which influences the extent of development of various regions in India. The physical diversity presents different kinds of climatic conditions for the inhabitants.

India has high mountains, and deserts, plateaus, fertile plains, rivers, valleys and vast sea coasts.

Example: Think of a class where some students sit near the board and others at the very back. Regional planning is the teacher deliberately spending extra time on the back benches so that the whole class moves forward together.

Part 2 · What regional development involves

The Process of Regional Development, and an Uneven Result

Regional development follows a cycle from identifying regions to analysing impact. Yet across India the gap between regions has widened.

Regional development involves

Identification of region: e.g. Hilly areas, Coastal areas, Social backward areas, Flood prone region, Earthquake region, Landslide region etc.
Mapping and listing of resources available in the region:
- Land resources, Fertility check, Topography, Water resources, location, Forest, Minerals, Energy sources, Capital and Demographic dividend.
Mapping and listing the problems existing in the region:
- Resources scarcity, Locational disadvantage, Inaccessibility of port etc, Lacking basic infrastructure, Environmental problems, Population density, Unemployability, Religious intolerance, Social instabilities, Low capital formation.
Policy and Regional planning for the even development of different regions. It should involve participation of people of that region.
- Short term planning such as: five years plan, 3 years plan, one year plan.
- Long term planning: 15 years plan, 20 years plan, 50 years plan.
Evaluating the environment, social and political effects of planning.
Budget provision for the envisaged programs like for setting up industries, higher investment in infrastructure and social services etc in the peripheral areas.
Implementation of the programs; Mid time review; Policy and implementation changes based on the mid-time review.
Improving Governance and institutional capabilities to remove the obstacles.
Feedbacks from Public, NGO, experts etc.; Impacts Analysis.
Example: For a flood-prone district like Darbhanga: identify it as a flood region, map its rivers and fertile land, list its problems (floods, no industry, migration), plan embankments and agro-units, fund them, review midway, and correct course.

Inter-state and intra-state gaps

In India, it is largely accepted view that the development has not led to even development of different regions. Data suggests that the gap between developed and backward region has only widened after independence.
Example: e.g. Coastal states and states with large urban areas has continued to flourish, while land-locked states like Bihar which had faced long period of de-industrialisation during British rule has hardly seen the fruits of development post-independence.
Further, intra-regional development within state has also not been realised. Within all the states, there are enclaves of highly urbanised and industrialised areas, but some areas remains backward, e.g. Vidarbha region in Maharashtra, Eastern Uttar Pradesh.

A rich club and a poor club

Since last three decades, India has developed fast economically. However, this economic development is uneven. Regional growth performance is characterised by a high-income club and a low-income club.
The rich club constitutes states such as Gujarat, Maharashtra, Punjab, Haryana, Tamil Nadu and Karnataka etc. The low-income club includes Orissa, Bihar, Rajasthan, Madhya Pradesh and Uttar Pradesh, amongst others.
Often the physical diversities are associated with the uneven economic growth. The differences in characteristics generally affect the location factors of industries, agricultural development.

Part 3 · How geography shapes development

Physical Diversity and the Location of Industry

Raw materials, power, transport, markets, water, site and climate decide where industry and farming flourish.

The location of industrial enterprises is sometimes determined simply by location of the raw materials. Modern industry is so complex that a wide range of raw materials is necessary for its growth.
It is true in the case of raw materials which lose weight in the process of manufacture or which cannot bear high transport cost or cannot be transported over long distances because of their perishable nature. e.g. Steel Industries are generally located near coal and Iron producing regions.
Similarly, the jute mills in West Bengal, sugar mills in Uttar Pradesh, cotton textile mills in Maharashtra and Gujarat are concentrated close to the sources of raw materials for this very reason.
Example: Sugarcane starts losing sugar within a day of cutting, so sugar mills must sit in the middle of the cane fields.

But geography is not the only reason

However, the physical diversities are not the only reasons behind the uneven economic development in India. There are multiple factors associated with this phenomenon:

Location of Industries are also influenced by:
- the availability of Capital (capitals are available in big cities like Mumbai, Delhi, Chennai etc),
- Government Policies (Freight equalisation policy after independence adversely impacted the Industrialisation of Bihar),
- Industrial Inertia (Industries tend to develop at the place of their original establishment),
- situation of Law and order (insurgencies in North-Eastern India and naxalism in eastern India) etc.
The agricultural development is also associated with the modernisation of Agricultural process, Government policies etc. e.g. Green revolution benefited the north-western part of India more than any other regions.

Conclusion on physical diversity

Thus, the uneven economic development has diverse reasons behind it. This multi-dimensional problem required holistic solution.

Currently, central government is trying to bridge the regional imbalances through some measures like Aspirational Districts' Programme, special category status to mountainous states, more grant-in aid to financially poor states and incentivising the industry set up in backward regions etc.

Part 5 · Has regional planning succeeded in Bihar?

Why Regional Planning Fell Short in Bihar

However, these endeavours can't be said to be successful. The perception is that regional imbalances have actually got accentuated.

Planners' priorities and an urban-led growth

The regional development considerations was not the most important factor for the planners after independence. The planners had visualised that the handicaps of backward areas would be removed through expansion of social services and infrastructure facilities and development of agriculture.
- The Central Plans have traditionally focused on setting only national targets.
- Although the growth of the economy as a whole has accelerated, the growth rates of different states have varied and has even decelerated in some of the poorest states.
A widespread perception all over the country is that disparities among States, and regions within States, between urban and rural areas have been steadily increasing and that the gains of the rapid growth witnessed in this period have not reached all parts of the country.
Studies have shown that India's growth has been urban-led, favouring those states where urbanisation is already high, perhaps due to coastal access (Maharashtra, Gujarat, Tamil Nadu) or where there is relatively high productivity of agriculture (e.g. Punjab, Haryana).
The scope for action for reducing regional disparities is limited because of limited resources.

Less money for Bihar

Bihar has been receiving less per capita allocation from the centre for development expenditure than any other of the states. Right from the beginning of planned development, it has received less than half the all-India average.
- Since resource allocation partly depends on resource utilization capacity, Bihar received relatively low per capita allocations.
- e.g. The first FYP gave to Bihar only a total outlay Rs. 16.9 per capita as against an average of Rs. 25.6 per capita for all States taken together.
Bihar has the lowest resource utilization rate in India. The unused funds in Bihar are transferred to more efficient states.
Because Bihar has relatively undeveloped industry and services sectors, the fiscal resource base of both states is relatively small. Moreover, their low administrative capacity has weakened the ability of both states to collect revenue.
Bihar was not even able to manage the matching funds required for centrally sponsored development programmes. So, it received progressively less over various Plans than the national average.
Example: If a central scheme pays 60% only when the state puts in 40%, a state that cannot find its 40% loses the central 60% too.
Analysis of State plan expenditures doesn't show higher expenditures in the backward states. The trend indicate significantly lower outlays in the poorer or backward states (the same First Plan example: Rs. 16.9 per capita for Bihar against Rs. 25.6 for all States).
Bihar had the worst record for getting benefits from the Center. Even though the central help to Bihar exceeded that offered to many other states, it was now not enough to close the gap because Bihar's own tax base was very low.

Three channels of transfers

Essentially three distinct channels of transfers existed in India: the Finance Commission, the Planning Commission directly gives funds to support developmental plans and different Ministries with the central government devolve funds to their state counterparts to support centrally sponsored schemes as well as central projects.

Both the Finance Commission and the Planning Commission transfers are formula based and allow for little discretion, while the Ministry specific transfers tend to be determined within the Ministry and thus, more discretionary.
While transfers have been increasing overtime, there has been a decline over time in the fraction of transfers through formula based channels such as the Finance Commission and the Planning Commission and an increase in the discretionary transfers. The discretionary funding allows for the possibility of large disparities in interstate transfers across states.

Freight equalisation

While Colonial India's permanent settlement policy took away Bihar's agricultural productivity, independent India's freight equalization policy destroyed Bihar's industrial ambitions.

The policy was introduced in 1952, and remained in force until 1993.
This policy was adopted by the Government of India to ensure that essential commodities were available at the same price across the country regardless of transportation (freight) costs.
The goal was to allow all states irrespective of access to natural resources, an equal chance to industrialize. Obviously this meant that manufacturers setup industries in coastal states with ports to be able to ship their final produce easily.
Being near the minerals of Bihar was no longer necessary as there was no cost advantage in being close to the raw materials. The freight equalization took care of it.
Ex-President Pranab Mukherjee, had admitted that the Union Government's freight equalization policy caused backwardness of Bihar: "So, despite having mineral resources and fertile land, Bihar, and now Jharkhand, too, could not make the desired progress."

What the Bihar record shows

Even though, the Gangetic plains of Bihar has among most fertile land in the world, there were very few steps taken to modernise the agriculture. Green revolution was focused on the north-western part of India, where farmers had the capital to invest in new technologies and there were no issue of land fragmentation.
Bihar, which had achieved an average annual rate of growth of 18% in industrial employment during 1951-61, slid down to 0.7% during 1961-81.
- Further, there has been absolute decline in the employment in the secondary sector post 1981. Primary sector has absorbed this displacement of workers from secondary sector.
Between 1947 and 1980s Bihar continued to be behind most Indian states. Since the 1960s, the rate of growth of the Bihar economy on both the agriculture and the industrial front has been dismal.
- In 1960-61, Bihar's per capita income was 2/3rd of India's average per capita income; it declined to less than half towards late 1980s and currently it is around 1/3rd of the national average.
- Thus, the regional disparity has only accentuated.
The absence of a strong non-agricultural sector, despite a large population, the urbanization rate in Bihar is just 11.3 % as of 2011, vis-a-vis 31.2% for all-India.
According to 2011 census, 33.7% of Bihar population is below the poverty line while poverty ratio at all India level is 21.9%.
- Between 1957-58 to 1973-74 the percentage of rural population below the poverty line in India declined from 53.4 to 46%, but in Bihar the decline was almost negligible from 59.7 to 58.4.
- In 1977-84, while the rural population in poverty decreased by 10.8% points in India, the corresponding decrease was only 6.4% points in Bihar.
1950s was a small difference in literacy rates between Bihar and India — widened 4x over the next 5 decades.
Even within state, the industrialisation was lopsided. While the undivided State of Bihar heavily invested in the Southern portions of the state and industrialised it, the creation of Jharkhand in November 2000 to separate out the tribal areas of South Bihar took away much of the minerals base of the state and left it empty handed.
- The most of industries were set up in the southern part of state while economy of northern half of state remained agricultural.
- After division most of industrial towns like Ranchi, Dhanbad, Bokaro, Jamshedpur was separated from Bihar.
- It is one of the major causes behind lack of industrialisation in current day Bihar.

Urbanisation rate, 2011

All-India31.2%
Bihar11.3%

First Plan outlay per capita (Rs)

All States25.6
Bihar16.9

Growth of industrial employment

1951-6118%
1961-810.7%

Fall in rural poverty, 1977–84

India10.8 pts
Bihar6.4 pts

Liberalisation and after

When liberalisation and economic reforms started in 1991, Bihar had already lagged behind and was not ready to capitalise the opportunity liberalisation brought.
- It has also been viewed that the liberalisation has further widened the regional developmental gaps. Most of the private and foreign investment took place in already developed regions. Further, as the nature of state planning changed, state led investment also declined.
- With the opening up of the economy and removal of controls, the play of market forces may tend to exacerbate disparities.
While there may remain ambiguities about whether Bihar merits support under the 'special category' status, usually reserved for hilly and difficult terrain and low levels of infrastructure, there is little doubt that Bihar has faced significant barriers to growth. What made these barriers insurmountable were the lack of support from the central government, before and after Independence.
The growth curve of SEZs indicated preference for urban agglomeration by industry, undermining the objective of promoting balanced regional development.
The previous Economic Survey of India have also pointed out that spatial income inequality in India is not only large but increasing.

Part 6 · Beyond regional planning

Other Causes, and the Way Forward

Other factors behind the lack of economic development in the state, other than the limitations in the regional planning, and what should be done next.

Other factors

No meaningful land reform was taken. Most of the economically successful States had undertaken land reforms immediately after Independence.
In the absence of a multi-caste social movement and sub-nationalism, rent-seeking was the only agenda of the traditional elite in Bihar.
Most of the development work in Bihar was engulfed in input-related corruption, implying that the expected development did not materialise at all.
- In other States also, there was corruption, but it was turnover-based, where the development work was duly completed and then the state functionaries extracted direct or indirect payments from the direct beneficiaries of the development.
Ever growing population along with low literacy, skill etc.
Political instability → Bihar had 40 change of hands in just 70 years. On average Chief Ministers of Bihar had a tenure of 1.5 years. In fact many stayed in office for just a few months.
Collapse of Bihar economy in 1990s.
Deep rooted caste system, widely prevalent patriarchy and high prevalence of child marriage etc.
Lack of industrial culture; Natural disasters like earthquake, flood, drought, heat wave etc.

Going forward

The objective of bringing about greater regional balance must be the overriding consideration for determining the use of Central funds that flow as Central assistance to State Plans.
Unlike past practice, tripartite agreements or contracts between Central, State and local governments should be entered to incentivise appropriate State level policies that will improve regional balance.
The emphasis has to be on outcomes, and necessary institutional reforms.
Co-operative and competitive federalism: States support each other and positively compete with each other to attract funds and investment, which facilitates efficiency in administration and enhances developmental activities.
Re-conceptualising the mandate of the Inter-State Council in facilitating a comprehensive partnership for collective and balanced regional growth deserves priority.
Promoting labour-intensive industries like textiles and leather.
Example: A leather-footwear cluster can employ thousands of workers with little capital per job, which suits a state with many young, low-skilled workers.
Boosting human development.
Special infrastructure programmes designed for the more backward states will have multiplier benefits.

Conclusion on regional planning

Further, the mandate and role of the Niti Aayog may also be redefined and enhanced to evolve models aimed at balanced regional development. The lack of private investment in backward states can be somewhat overcome through enhanced public outlays.

Given the constraints of fiscal space, seeking greater engagement of multilateral agencies, both traditional and non-traditional, like the World Bank, the Asian Development Bank, the New Development Bank as well as the Asian Infrastructure Investment Bank would be helpful.

“There is no uniform economic development over space in any country. Some areas are more developed and some lag behind.”

— BPSC Mains answer, 2016

Curated for BPSC, UPSC & State PCS Civil Services Aspirants | Indian & Bihar Economy Master Module

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