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August 16, 2013

The backward vision

Nitish Kumar’s vision of a backward state for Bihar will only perpetuate poverty and dependency.

The vision of current political leadership of Bihar led by Chief Minister Mr Nitish Kumar of Janata Dal (United) is to lobby the Union government to declare Bihar  a Backward State. This will qualify the state to obtain additional government grants which will predominantly be subsided directly or indirectly by citizens and taxpayers from rest of India. Currently, eleven states have been granted the Backward State status, and Bihar is not among them. But with 2014 General Election approaching, the issue has acquired partisan political dimensions.

Nalanda

From a development perspective, focusing energies on the “backward state” vision is likely to severely limit Bihar’s economic and political options, and perpetuate poverty and dependency on the Union government and on the rest of the country.

Reasoning leading to such a bleak assessment is presented below.

In 2012, Bihar accounted for 8.5 percent of India’s population but only about 3.0 percent of the GDP. Bihar is among the least urbanised states in India, with more than four-fifths of the population in non-urban areas, but the share of primary sector in GSDP (Gross State Domestic Product) is only about a quarter. This suggests urgent public policy priority in narrowing the gap between the proportion of population making a living from non-urban activities, primarily agriculture, and the share of GSDP generated by it.

According to the Planning Commission data, in 2011-12, measured in 2004-05 prices, and using the Tendulkar methodology, Bihar ranked last among the 17 states sample in per capita GSDP, and 15th in proportion of poor population. This suggests that there is a high correlation (not necessarily causation) between the level of per capita income and the poverty level.

International experience strongly suggests that public policies are more effective in reducing poverty than in reducing income and consumption inequalities, though public policies could worsen them.  According to the Planning Commission,  the poverty levels in India as a whole have declined significantly, though its extent is being debated, declining consumption expenditure inequalities in rural areas were reversed sharply in 2011-12, while in urban areas inequalities increased sharply. The Planning Commission has projected sharp decline is poverty ratio is Bihar from 54.5 percent of the population in 2004-05 to 53.5 percent in 2009-10, and to only 33.7 percent in 2011-12.

Such inconsistent projections have undermined credibility of the Planning Commission as a competent and objective institution. Better and more timely data from more independent sources than currently available are needed to analyse linkages between growth rates and their composition on the one hand and poverty and inequality trends for the country in general and for Bihar in particular for nuanced and objective analysis.

Limitations of data notwithstanding, without narrowing  of the gap between proportion of population dependent on agriculture for livelihoods and the income generated by the sector, Bihar cannot improve quality of life of its people.

Such a narrowing can only be accomplished by pursuing traditional drivers of growth, and by improving public financial management, including making public service delivery systems more effective. The relevant literature and the country experiences over a long period suggest that key drivers of growth are capital investments in infrastructure and in machinery and plant equipment; employable labor skills in an economy which generates productive livelihoods; managerial competence; and ability to apply existing knowledge improving efficiency of resource use in a context specific manner.

During the early years of the current administration when it was in alliance with the Bharatiya Janata Party (BJP), improvement in community safety, and emphasis on road and electricity connectivity did lead to better growth environment.

But the focus on the Backward State status, reiterated in the chief Minister’s Independence Day message on August 15, 2013, is likely to create perverse incentives towards highlighting the states’ backwardness, not rapidly modernising agriculture and manufacturing, and continue the lopsided dependence on the public sector  whose organisational and institutional capacities to use knowledge are weak.

The erratic behaviour of the Chief Minister Mr Kumar indicated by decision to end alliance with the BJP, and his immature reaction to the mid-day meal tragedy of July 16, 2013 in which 23 children died and more than 20 fell sick in a primary school in the Saran District, have increased risk perceptions of investing in Bihar.  Such behavior will also make it difficult to pursue Public Private Partnerships (PPP), which the state hopes to pursue for urban transport and other areas.

The Backward State vision is also unlikely to persuade aspirational class with talent to regard Bihar as a location for their economic activities. This will also hamper realisation of the benefits of the demographic advantage due to rising proportion of the working age young in the total population. Without new private sector investments, dynamism and diversification of Bihar’s economy is likely to be adversely impacted.

The ending of the alliance with the BJP has also deprived Bihar of some of its more competent Ministers. In particular the absence of Sushil Modi, former Finance Minister of Bihar, will impact on the public financial management (PFM). Key elements of PFM concern ability to raise own resources from conventional taxes, and from non-conventional sources such as state’s land, mining and other assets, ability to deliver public services effectively, and focusing on outcomes or results rather than on merely spending.

Total budgetary expenditure as percent of GSDP at around 25 percent in Bihar is well above the average; but its own-source- revenue as percent of total revenue (or current) expenditure at about a quarter is substantially lower than the average of around three-fifths for  India as a whole. It is thus already heavily dependent on the Union government and other outside sources for financing expenditure. Absence of the former Finance Minister Sushil Modi will deprive the State of a person who is well versed in the intricacies of the Goods and Services Tax (GST) to be introduced in the coming years. Mr Modi  had chaired the Empowered Committee of the state finance ministers on GST.

Higher risk perceptions of Bihar along with slower growth are also likely to increase risk-premium in re-financing of Bihar’s public debt (it was about 30 percent of GSDP in 2010-11). The state will need to continue to borrow as its Gross Fiscal Deficit (GFD) to GSDP ration has been around 2.5 percent in recent years.

The Backward State vision will make Bihar even more dependent on the outside sources reducing fiscal policy autonomy of the State, and this in turn will spill over in even more constrained policy options in social, political and other areas. It will also create perverse incentives discouraging reliance on own efforts to improve living standards. In economic reasoning this is called moral hazard.

In a column in the Indian Express, titled Modi-hit, Shekhar Gupta stated that “… Nitish is now not talking about governance or development”. Unless the current course is reversed, pessimism about the future economic and social well-being of the people of Bihar is fully warranted.

Photo: Wonderlane


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