For Bihars GDP, look at central transfers

Written by Raj Kumar Ray | New Delhi | Updated: Oct 3 2013, 04:28am hrs
Bihar chief minister Nitish Kumars insistence on linking his post-election support to a party that promises Bihar special category status is not without reason, the states increase in annual GDP is almost entirely driven by what happens to central transfers in the year. In FY13, central transfers both tax transfers as well as plan funding were R50,750 crore and the states GDP rose R61,645 crore; in FY12, R44,870 crore was transferred while the GDP rose R42,532 crore (see graphic).

None of this is surprising at one level since, as is the case with any spending, there is an immediate boost to GDP. What is surprising is the lower level of private sector response to government spending. In the case of even Chhattisgarh, which has a state GDP size of R1.6 lakh crore as compared to Bihars R3.1 lakh crore, and is also Naxal-affected, while R14,100 crore of central transfers were made in FY13, state GDP rose R20,673 crore; in FY12, R12,740 crore of central transfers led to a R21,537 crore hike in GDP.

DK Pant, chief economist at India Ratings, however, is not surprised. Industry needs power and roads at the very minimum... What your data is showing is that things were so bad, the government is trying to fix the infrastructure deficit. Once this is fixed, industry will come... Whether that takes two years or five years is difficult to say.

Indeed, other data for Bihar corroborate this story. The share of the construction segment rose to 13.5% of GDP in FY12 from 6.7% in FY05. Manufacturings share of GDP, in contrast, has fallen from a low 6.5% in FY94 to 4.9% in FY12.

Uttar Pradesh, another state whose ruling party put a similar special category demand in return for post-poll support, has seen a similar dependence on central transfers for boosting growth. In FY13, R83,620 crore of central transfers resulted in an increase of R90,722 crore; in FY12, central transfers were R74,200 crore versus a GDP increase of R78,843 crore.

For more prosperous states, generally also with higher levels of industrialisation, this multiple is naturally very different. In the case of Tamil Nadu, central transfers are typically between a fourth and a fifth of the total hike in the state GDP each year. For Punjab, the ratio is similar; for Gujarat, the importance of central transfers is even lower. Even at an all-India level, central transfers account for around half to a third of incremental GDP each year.

Since local supply responses dont happen immediately, but over a period of several years, a good way to judge what is happening is to look at what has happened over a period of a few years. That doesnt change things too much in the case of Bihar. While R2.38 lakh crore of central funds were transferred between FY06 and FY13, GDP rose by only R2.3 lakh crore during this period.

In the case of Haryana, while central transfers totalled R39,641 crore, GDP rose by R2.55 lakh crore. At an all-India level, transfers rose R27.67 lakh crore versus

GDP growth of R64.9 lakh crore. States like Jammu & Kashmir are exceptions to this rule, and in this case, central transfers are around three times higher than the increase in GDP, suggesting a lot of the funds are leaking along the way.

While committees such as those headed by Raghuram Rajan have made out a case for higher transfers to states like Bihar, it has to be pointed out that such states are not being discriminated against right now either. In FY13, Bihars 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 Bihars 2.8% share in Indias GDP or its 8.6% share in the population and theres little evidence of a bias against the state. Maharashtra, by contrast, accounts for 13.9% of Indias GDPand 9.3% of the populationbut gets just 6.2% of all central transfers, including the tax ones.