Special Status Of Bihar Must Have For Development
Post on 10,December 2012   7:00 AM
By - Mr. S.N Singh
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The direction of discourse is changing in Bihar public investment has reached at highest level in Bihar in the recent years, the big ticket private investment is still elusive. This probably indicated that the land locked states like Bihar suffer from more disadvantages.

In the current scenario of ‘market-centric’ development strategy, the possibility of private investment in Bihar is limited due to the absence of tax incentives, which are offered by states which are awarded the Special Status Category by the Union Government. 

A Special Category State also gets preferential treatment in federal assistance and tax breaks. There were only three such states in 1969, when the Gadgil formula for sharing central plan assistance among the states was formulated. 

Presently, there are eleven Special Category States in the country of which seven are located in north-east, while four others are Sikkim, Uttarakhand, Jammu and Kashmir and Himachal Pradesh. They are given a higher share of the union government’s resource allocation.


The granting of Special Category States status is based on two sets of indicators. The first set, as per the Ministry of Commerce and Industries, identifies four parameters —  

(a) Geographical Isolation

(b) Inaccessible Terrain 

(c) Poor Resource Base and Remoteness to Larger market and 

(d) Poor Infrastructure. 

The second set, according to the Planning Commission, includes the following indicators : 

(a) Hilly and Difficult terrain 

(b) Low Population Density 

(c) Strategic location along the borders with neighboring countries 

(d) Economic and Infrastructural Backwardness and 

(e) Non-viable nature of state finance.  

On all these criteria, Bihar deserves to be granted the Special Category status for the states, except the second criterion of Planning Commission, viz, low population density.  

One thing should be kept in the mind that Bihar subsidized the entire post-independence industrialization of the country, by allowing its mineral resources to be taken outside through the ‘freight-equalization’ policy.

It not only retarded industrialization within the state, but also subsidized the transportation of minerals to other states. 

According the estimate, Bihar was subjected to a loss of Rs. 1, 12,812 crore through ‘freight-equalization’ of only steel prior to its bifurcation. No steps have been taken to calculate the total loss that Bihar had to suffer on account of freight equalization for coal and cement. 

Bihar was in the better condition at pre independence period, because there was no 'freight-equalization'.

Tata House travelled to the state and decided to invest in Bihar because of its natural advantage in the availability of natural resources particularly iron ore and coal. However, that process got reversed after independence.

It was observed that focus in Indian politics shifted from East to West and South India by 1920’s. Thereafter, Bombay and Southern group of industrialists became strong entities in the power structure of the Congress Party. They also donated nearly Rs. 200 crore to the coffer of Congress Party.

The freight-equalization was the most profitable dividend given by the Congress Party to the industrial conglomerates in South and Western India for a donation of only Rs. 200 crore.       

The scripting of the freight-equalization was done by T.T. Krishnamachari, an industrialist-turned-politician from Tamil Nadu, the then Madras state. T.T. Krishnamachari, during 1952 to 1965, served the country twice as a Central Minister. Krishnamachari was initially the Minister for Commerce and Industry and, after serving in the Steel Ministry and the Ministry of Economic and Defence Cooperation, he finally became the Finance Minister of the country in 1964. He introduced the freight- equalization Policy to ensure availability of iron ore, coal and cement at same price throughout the country, neutralizing the natural advantage of mineral rich states like Bihar.

The above policy led to continuous deprivation of the eastern states like Bihar, West Bengal and Orissa. On the other hand, the southern and the western states flourished since the crucial industrial inputs were made available there itself at a heavily subsidised prices. 


Late Sachin Chowdhury, founder Editor of Economic and Political Weekly (EPW), made several trips to Calcutta from Bombay to impress upon Dr. Bidhan Chandra Roy, the then Chief Minister of West Bengal, to protest against the policy of freight-equalization. Unfortunately, Dr. Roy remained unmoved. From this account, it is obvious that it is the Congress Party which destroyed the possibilities of industrialization in Bihar.

Besides freight equalisation policy, the central government has also been discriminating against Bihar through many other ways. Bihar always received the lowest per capita plan and non-plan grants. When Montek Singh Ahluwalia, the Deputy Chairman, Planning Commission, visited Bihar a few years back, the central government gave a bonanza of Rs. 8,000 crore to Bundelkhand region of Uttar Pradesh. But ironically, even the genuine expenditure of Bihar incurred around that time on flood and drought, one of its great disasters, was not reimbursed by the centre. 

In the Common Minimum Programme of UPA (I), Bihar was promised a package, which was altogether ignored in six subsequent union budgets, including one in UPA (II). 

In the central budget of 2010-11, several states were given substantial state-specific assistance, but Bihar was neglected.

The Special Category States gets excise duty concessions, incentivizing industry to relocate/locate manufacturing units within their territory. Apart from this, 30 percent of the central government's gross budgetary support for plan expenditure also goes to Special Category States as per policy guidelines. 

In the case of Special Category States, 90 percent of plan assistance is given as grants, and only 10 percent counted into the loan account of state. 

The 12th Finance Commission had recommended that the Union government should give only grants, and leave it to the states to raise loans as they want from market. 

Since then, the ‘90 percent grants and 10 percent loans’ policy for Special Category States is restricted to Centrally Sponsored Programs and external aid. For general category states, external aid is passed on in the exact proportion of loan and grants in which it is received at the Centre; however, in the case of Centrally Sponsored Program, only 70 percent of the central funding is given as grant.

According to the 13th Finance Commission Report, Special Category States will be given additional resource support through 

(a) Higher maintenance expenditure on Irrigation / Roads and Bridges

(b) Higher central funding (90 percent) as grants to State Disaster Relief Fund (SDRF)

(c) Non-Plan Revenue Deficit Grant to make up for the assessed deficits

(d) Higher incentive for Grid Connected Renewable Energy

These need-based transfers are as much relevant for Bihar as for the Special Category States.

Thus, with its current financial ability (including devolutions and transfers from centre) and extant policy bias, Bihar will continue to experience increasing development slump, unless special assistance is given to the state by the centre.

Even doubling of the current levels of devolutions and transfers would not be enough to enhance its development prospects of Bihar. To bring it at par with the levels of development achieved in other states, Bihar would need special policy incentives which would rope in private investments to the state. 

This calls for grant of nothing less than the special category status to Bihar. Because it needed manufacturing growth which will be only reality when they will incentivized by the policy because at current juncture it won’t be competitive as some states provide great benefit to the industry under the carpet of special status.


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