Bihar chief minister Nitish Kumarís insistence on linking his post-election support to a party that promises Bihar Ďspecial categoryí status is not without reason, the stateís increase in annual GDP is almost entirely driven by what happens to central transfers in the year. In FY13, central transfers ó both tax transfers as well as plan funding ó were R50,750 crore and the stateís 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 Biharís 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. ďIndustry 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.Ē
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. Manufacturingís 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 Ďspecial categoryí 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