Bihar is catching up fast

Written by Swaminathan S Anklesaria Aiyar | Updated: Mar 19 2014, 08:46am hrs
Bihar has long been Indias poorest, most backward state, riddled with misgovernance, caste wars, gangsterism, Maoism and hopelessness. There was an old joke that when British India was being partitioned in 1947, Indian PM Nehru told his Pakistani counterpart that he could have the disputed state of Kashmir provided he took Bihar and UP too. These two states, with a combined population today of over 300 million, were seen as a terrible drag on the rest of India, having some of the lowest growth rates and social indicators among Indian states.

Yet Bihar has undergone a veritable revolution since a new dynamic chief minister, Nitish Kumar, came to power in 2005 (and was re-elected in 2010 with a landslide majority). If we look at data available from 2006-07 to 2011-12, Bihar averaged GDP growth rate of a whopping 10.87%. This was the highest among major states, and well above the national average of 8.29%. Bihar has started pulling up the rest of India. This merits international attention because Bihar has a population of 100 million, more than that of all except a handful of countries. Unlike some other developmental successes, Bihars is not a boutique success: it is success on a grand scale. However, despite this sharp improvement, consumption (measured by per capita monthly rural spending) remains close to the lowest among all states.

Fast growth has driven down the headcount poverty ratio in Bihar, which used to be Indias poorest state. The ratio was as high as 56% in 2004-05 (a drought year), and has crashed to just 33.74% in 2011-12. This is a dramatic decline. So, although its consumption levels remain among the lowest, Bihar has ceased to be Indias poorest statefive other states now have a higher poverty headcount ratio (although three of these are tiny mini-states and so not strictly comparable). The all-India poverty ratio declined sharply in the same period from 37% to 22%, but this decline was not as fast as in Bihar. The all-India performance as well as Bihars performance showed that, contrary to much leftist theorising, faster growth is indeed a major force in reducing poverty.

Many of the states social indicators have improved dramatically too. This helps falsify the supposed trade-off between growth and equity. The plain fact is that growth is vital for improving not only incomes but government revenues required for providing public goods (essential infrastructure and social services). Of course, fast growth also requires good governance, to ensure that the new revenues are utilised well. In 2001-11, Bihars literacy rate improved 16.8 percentage points and female literacy by a whopping 20%. The state historically had a very high infant mortality rate, but in 2011, Bihars caught up with the national average at 44 infant deaths per thousand births. Polio, a scourge of the ages, was finally eradicated in Bihar and UP in 2011 (it had been eradicated in other states earlier).

Bihar continues to have the least family planning and hence the highest population growth rate (2.1% per year) among major states. But with labour scarcity growing and wages rising fast in India, what used to be condemned as a population explosion is now being hailed as a demographic dividend. Low wages and fast population growth, which historically kept Bihar poor, now promise to give the state a competitive edge and drive fast growth for decades to come.

In the bad old days of Bihar, many of these theories could be used to explain the states dismal performance. But its new dynamism after 2005 was based on two main pillarsa crackdown on gangsters and massive road building. One consequence was that the total number of registered vehicles in the state quadrupled from just 80,000 in 2005-06 to 3,19,000 by 2009-10. The taming of crime hugely improved the investment climate, and fast road-building (plus Indias broader telecom revolution) provided economic opportunities in villages that earlier had no infrastructure and hence no opportunities. However, just these two factors, public safety plus roads, would not have produced double-digit GDP growth in Bihar without all-India reforms since 1991 that helped accelerate growth. The more advanced coastal states were the first to take advantage of new opportunities created by economic liberalisation, but in the last decade, the backward BIMAROU states (Bihar, MP, Rajasthan, Odisha and UP) have began to do the same. Bihar is the best example among BIMAROU states, thanks in no small measure to the dynamism and the improvement in economic freedom Nitish Kumar has brought in as CM from 2005 onwards.

In the year 2000, Jharkhand was carved out of the original Bihar state. Jharkhand was a thinly-populated, highly-forested tribal belt. In India, tribal areas are often viewed as backward. Yet the partition gave Jharkhand almost all the coal and minerals of the original state, and four major industrial cities and steel mills at Jamshedpur, Ranchi, Bokaro and Sindri. Bihar was left with an overwhelmingly agrarian area, which had a very high population density and tiny land holdings. However, Jharkhand was left with major disadvantages too. It was predominantly a tribal area with dense forest and limited infrastructure, and this offsets to some extent the advantages of mineral deposits and a few industrial cities. But this cannot explain why Jharkhand has even lower per capita expenditure and a higher poverty headcount ratio than Bihar. A significant reason for this is massive misgovernance in Jharkhand, and the lack of a dynamic leader like Nitish Kumar. This is reflected in a decline in economic freedom scores in Jharkhand, in contrast to a substantial increase in freedom scores in Bihar.

After partition, Bihars share of industry in net state domestic product crashed from 22.5% to a calamitously low 4.6%, while that of Jharkhand went up to 37%. The royalties and tax base from minerals and the big industrial cities all went to Jharkhand, leaving Bihar in desperate fiscal straits. Besides, almost all of the original composite states coal and power stations went to Jharkhand. Bihar has by far the lowest per capita consumption of power (122 kWh) among Indian states, less than one-tenth that of Gujarat, Chhattisgarh or Himachal Pradesh, one reason for its tiny industrial base. New power plants are finally coming up in the state, and hopefully will help correct the current lopsided pattern of development. Be that as it may, Bihar has been an eye-opener in demonstrating how even lopsided development can achieve huge increases in GDP and reductions in poverty in a poor, backward state without electricity.

Annual Economic Freedom of the States of India (EFSI) reports have long shown a link between economic freedom and fast GDP growth. But Bihar may in some respects look an outlier. Its economic freedom scores continue to be the lowest among states, yet it has been a growth champion. One explanation is that while Bihars scores remain dismal, they nevertheless show an improvement of almost a quarter since 2005, much faster than the national average. Second, when the state shrinks to the point where it cannot provide physical security or basic infrastructure, it means anarchy and gangster rule. To the extent that gangsters are linked with a corrupt political class, what earlier looked small government in spending terms was actually a huge political footprint that undercuts the rule of law. In such circumstances, the restoration of safety and basic infrastructure produced spectacular growth, even though other indicators of economic freedom did not show dramatic change. A third explanation is that the state enjoyed a huge increase in transfers from the central government in the last decade, thanks in part to the revenue bonanza New Delhi reaped from fast growth catalysed by economic liberalisation.

Extracted from the Economic Freedom of the States of India (EFSI), 2013, report