Does Bihar require special status

Written by Soumya Kanti Ghosh | Updated: Mar 27 2013, 08:34am hrs
Economic indicators may justify the demand for special assistance but inclusion in a special category status might not help the state financially.

Bihar has been in news for a while now. In fact, no one can deny that the average annual GSDP growth for Bihar for the five-year period ended FY10 was 10.9% against an average annual growth of 6% for the five-year period ended FY05a dramatic progress by any count.

So much so that the recent turnaround image of Bihar has even caught the attention of international media. However, the more recent news is the demand made by Bihar for being included in the special category of states. The figures, however, make us believe otherwise.

A key element of Indias federal structure is the institutionalisation of the Finance Commission (there have been 13 in all so far) to support the cause of regional inclusion and equity. Accordingly, the primary criteria of income devolution recommended by the commission is that states with a lower per capita income get a higher share in taxes and grants from the Centre.

So, how does Bihar fare in terms of such criteria

Bihar collects 2.4% of the taxes all states collect but it gets 10.9% of the taxes distributed by the Centre to all states. On a cumulative basis, accumulated over 12 Finance Commissions, Bihar stood second (after Uttar Pradesh) in terms of state-wise share in central taxes and grants, and was ranked significantly lower in terms of per capital income.

In FY13, for every rupee of tax collected by Bihar, twice the amount was transferred by the Centre to Bihar as part of its share in central tax revenues.

As per the Reserve Bank of India data in FY13 (budgetary estimates), 11 special category states got around 18.5% of all central transfers including taxes, whereas Bihar got 8.8%. It is, therefore, not clear how Bihar will benefit from being clubbed with them considering it alone gets 8.8% of all central transfers (equivalent to nearly 50% of consolidated transfers to the special category states).

Interestingly, at present, Assam gets the maximum transfer amongst special category states5% of the total transfer. Thus, Bihar is much well-off under the current dispensation.

At 8.8%, this transfer is higher than the states 6.8% share in the countrys population and nearly three and a half times more than Bihars 2.6% share in Indias GDP.

Bihars share of central transfers according to the 13th Finance Commissionthe average central devolution to the state is likely to rise from 13.6% of its GSDP in the 12th Finance Commission period (2005-10) to 19.4% in the 13th Finance Commission period (2010-15).

It is, therefore, clear that Bihar has indeed got a large chunk of central transfers. So, its not immediately certain how Bihar will get more funds under a new backwardness criterion, if any. The larger picture is that Bihar has done remarkably well in the second half of the first decade of the 21th century. In fact, the growth rate of Bihar was the highest in terms of compounded annual growth rate and even higher than the states of Maharashtra, Gujarat and Tamil Nadu.

Along with this growth, there have been other positives also, like a jump in share of secondary sector, driven by a boom in construction activities (for example, huge public investments in the roads sector). It clearly proves that Bihar may no more be a laggard and a backward state in terms of growth.

The author is a senior fellow at ICRIER. Views are personal