Sunday, July 26, 2015

Centrally Planned Inequality

THE spectrum of regional inequalities in India is a very wide one. Punjab and Bihar with per capita incomes of Rs 25,048 and Rs 5,466 respectively represent the two ends of the wide spectrum. Though this might even have been the case historically, a cursory study of state GDP’s in the decades after independence reveals that the width of the spectrum has only widened. In 1965, Punjab’s per capita income was Rs 562, 1.7 times that of Bihar’s Rs 332. In 2001, Punjab’s per capita income grew 45 times over to Rs 25,048 and is now almost five times that of Bihar. In contrast, Bihar’s per capita grew by just 16 times to Rs 5,466. During the same period the national per capita grew from Rs 490 to Rs 16,707 or by 34 times. Quite clearly Bihar has been growing at a much slower pace than the rest of the country. It would seem that rather than ensuring greater equality, five decades of central planning has actually resulted in greater inequality between the states in particular and regions in general. Compounding this extremely unhappy situation is the fact that the intra-state inequality too is much greater in Bihar than in Punjab. The Gini coefficient for Punjab is 0.29 while that of Bihar is 0.318.1 The Gini coefficient, a measure of the inequality of income distribution, fixes inequality on a scale of zero to one. Thus in a society where everyone receives the same income the Gini will be 0.0, while if one person were to get everything, the Gini would be 1.0. In other words, the higher the Gini, the greater the inequality. The movement of the Gini tells us about the kind of society a country has. In Cuba the Gini moved down from 0.55 in 1953 to 0.22 in 1986, while in the USA it rose from 0.35 in the 1970s to 0.40 now. Most European countries get Gini’s around 0.30 while most African countries have Gini’s in excess of 0.45. So we should not be surprised that Bihar’s Gini is so much worse than Punjab’s. Sustained high economic growth leads to greater equalization, and economic growth, in India at least, is a direct outcome of public investment. That Punjab grew faster than Bihar because of higher public investment can be easily discerned by analyzing the size of the five year plans. In the first plan the outlay for Punjab was Rs 124 crore entailing a per capita expenditure of Rs 136.26, whereas it was Rs 104.4 crore and Rs 26.98 respectively for Bihar. The 10th plan envisaged an outlay of Rs 18657 crore for the now much truncated Punjab with a per capita expenditure of Rs 7684.1, whereas the comparable figure for a truncated Bihar was Rs 21000 crore, translating into Rs 2536.23 per capita. Higher public investment in a state also has other long-term effects. For instance higher investment resulting in greater tax collections gives rise to an ever-increasing entitlement to central funds. In this manner the original injustice leads to perennial flow of ‘entitled’ funds. Since its inception in March 1950, the main thrust of the Planning Commission has been to ‘formulate a plan for the most effective and balanced utilization of the country’s resources; and to define the stages, on a determination of priorities, in which the plan should be carried out and propose the allocation of resources for the due completion of each stage.’2 From the beginning India’s economy has been vigorously planned and continues to be so even after the so-called liberalization in 1992. The growth in the size of every plan is indicative of their pivotal role in shaping the economic destiny of India. The first five year plan (1951-56) had an outlay of Rs 1,960 crore while the GNP in 1951 was Rs 9,506 crore. The 10th five year plan (2002-07) in contrast has grown to Rs 15,92,300 crore while the GNP in 2002 was Rs 22,30,372 crore. Thus while GNP has grown 235 times over, plan outlays have grown more than 835 times. During the same period, per capita income has risen from Rs 275 in 1951 to Rs 16, 707 in 2002, or by about 61 times. One very obvious inference is that the state has been the main engine of economic growth in India and the Planning Commission, as it sets priorities and apportions resources, is the driver of this engine. It is undeniable that there has been growth and Indian society has undergone a substantial transformation in the past five decades. A good part of the credit for this must accrue to the Planning Commission that so minutely plotted the path of growth and change. Having said that, it also follows that what happened as a result of the skewed priorities of the plans must also be ascribed to it. Though the achievement of a greater equity between people and regions in India was not explicitly stated in the Constitution, the very notions of a socialistic society and democracy implies a determined thrust towards just that. Unfortunately, from all available data, it is obvious that this did not happen. In fact the divisions between regions and people only deepened, a fact detailed in many studies. So why did this not become a political issue? Is it that our leaders do not care? Or that they do not know? Or is it that the people in general do not care? Whatever be the reasons, we have over time come to accept certain stereotypes, such as the relative prosperity of the Punjab is due to the hard-working and innovative peasant, while the poverty of Bihar is due to the deep divisions in its society, corruption and lawlessness. Like most generalizations these too are seriously flawed. Clearly Punjab prospered as India made huge investments in the state. These investments were often at the cost of other regions. Take the year 1955. In this year the total national outlay for irrigation was Rs 29,106.30 lakh. Of this Punjab got Rs 10,952.10 lakh or 37.62%. In contrast Bihar got only Rs 1,323.30 lakh, which is only 4.54% of the irrigation outlay. The Bhakra Nangal dam, one of Jawaharlal Nehru’s grandest temples of modern India, planned at an outlay of Rs 7,750 lakh, alone irrigates 14.41 lakh hectares. Even after excluding this from Punjab’s irrigation plan, we see that its outlay is almost 2.5 times that of Bihar. Punjab has 50.36 lakh ha. of land and of this 42.88 lakh ha. is arable. Of this arable land 89.72% or 38.47 lakh ha. is irrigated. Looking at it in another way, 76.38% of all land in Punjab is irrigated, much of it owing to the munificence of the Government of India. In contrast only 40.86% or 71 lakh ha of Bihar’s total area of 173.80 lakh ha is under cultivation. Of this cultivated area only 36.42 lakh ha or 51.30% is irrigated. Thus Bihar which is almost 3.5 times larger than Punjab has less irrigated land than Punjab. Even after accommodating for the difference in terrains in both states, the sheer difference in the quantum and percentage of irrigated acreage, the direct result of public spending on irrigation in Punjab, is telling. It is not without some irony that having benefited at the cost of other states, Punjab today denies any water to the neighbouring states. As argued earlier, Punjab got much more than Bihar in each of the five year plans. There is no need to stress that the bulk of plan funds are provided by the Government of India. This is well known. But what goes unnoticed are other less obvious benefits. For instance, almost 50% of the foodgrains procurement by the FCI is from Punjab, which means about half the food subsidy of Rs 25,160 crore too flows into the hands of Punjab’s farmers. Likewise, since Punjab consumes 8.01% of the total fertilizers, it also benefited by Rs 1,060.85 crore on this account alone. Since subsidies only escalate, it is likely that in the years to come Punjab will get even more of them. But what is more lucrative and perhaps the most unfair of the benefits that Punjab garners for itself at the cost of others is in cornering over a third of all positions in the Indian armed forces. Detailed statistics are not easily available, and military officials are understandably cagey about revealing details of a state-wise breakdown of military recruitment. The argument that some sub-nationalities are martial races and make better soldiers than others has been more than amply proven to be false by the battlefield showings of the other regiments of the Indian Army. Besides, it must also not be forgotten that the East India Company subjugated the entire Punjab with troops mostly drawn from present day UP and Bihar, who in turn were subjugated by troops drawn from southern India. The skew towards recruitment from Punjab is best illustrated by the fact that the Indian Army derives two infantry regiments – the Sikh and Punjab – with about 40 battalions from the Punjab. In contrast the Indian Army has one Bihar Regiment with about 20 battalions. The skew does not end here. The Sikh and Punjab regiments consist mostly of troops recruited from the plains and foothills of Punjab, while the Bihar regiment draws its soldiers from Bihar, Jharkhand, eastern UP and abutting areas of MP and Chhattisgarh. Most of the non-infantry units also heavily draw recruits from Punjab. The Armoured Corps, for instance, is said to be almost 50% from Punjab. An important point for us to consider is that the wage bill of India’s armed forces, 1.18 million strong at last count, in 2000-2001 was Rs 44,233.67 crore and Punjab got at least Rs 14,745 crore of it.3 There are currently 18,01,145 ex-servicemen in India. In addition we have 3,72,179 widows receiving pensions. The total pension bill of the armed forces was Rs 11,000 crore (est.) in 2003. In the past six years alone this amount has grown from Rs 4,947.42 crore to Rs 11,000 crore. This means in the past seven years at least Rs 22,000 crore of the Rs 65,000 crore paid by way of pensions has flowed into Punjab on this account. In contrast Bihar gets a negligible amount in terms of both wages and pensions. It is Kerala which is often described as a money order economy. But facts seem to suggest that it is Punjab that better fits this description. With such subsidies and fund flows, both deserved and undeserved, it is little wonder that Punjab is doing better than others and much better than Bihar. In recent years there has emerged a new trend of ranking states ostensibly on the basis of performance by magazines and other publications. Since they command considerable resources and are politically influential, such awards are public occasions with constitutional functionaries like the President of India lending a stamp of official confirmation of authenticity to the awards. Punjab does well in getting these awards. Two years ago the best administered state award given annually by the widely circulated India Today newsmagazine was presented to Punjab’s former chief minister, incidentally just a year before the people of Punjab ignominiously turned him out of power. It only proves that you can’t fool all the people all the time. As we have seen in the case of Punjab and Bihar, unequal public spending has created an unequal economic situation. But this does not automatically establish that Punjab is better administered, as these publications would like us to believe. Punjab’s financial position is not much better than that of Bihar. Probably the best measure of how well a state is being administered is to look at its debt service ratio. Punjab is no better than Bihar in this regard. Clearly both states are living beyond their means, but Bihar is doing better on this account with much smaller revenue expenditure to revenue gap. In 2002-03 this gap for Bihar was Rs 1,517 crore, whereas it was Rs 3,018 crore for Punjab. Both states have almost the same revenue levels. Bihar has a superior record than Punjab when it comes to the proportion of disbursements out of capital budgets. If one has to go by the charges made by the present chief minister of Punjab against his immediate predecessor, and what the previous chief minister said about the present incumbent, corruption in Punjab is a much more serious problem. The sums involved at the top leadership level are quite astounding. There is no evidence to suggest that the incidence of subordinate corruption is lower in Punjab than Bihar. Clearly being better off does not make a state better run, especially when doing better just means getting more from the Government of India than size, needs and merit warrant. The relationship between human development rankings and per capita income is an obvious one. Thus, generally speaking, the higher the per capita income, the higher is the human development ranking. While these rankings have not changed in any substantial way since 1981, the big change was in Tamil Nadu, which leapt from seventh place in the HDR to third place between 1981 and 1991. It stayed that way till 2001. Tamil Nadu also had the best economic growth during this period. In the decade 1991-2001, Tamil Nadu’s per capita income grew by 378% while that of Punjab grew by 306%. TABLE I How much more did Punjab get and how much less did Bihar get? I II I II Five year plan Actual plan allocation to Punjab Projected plan allocation on basis of national average Gap between I and II Actual plan allocation to Bihar Projected plan allocation on basis of national average Gap between I and II First FYP 1951-56 Punjab: Actual plan allocation to Punjab: 124.00 Projected plan allocation on basis of national average: 52.71 Diff: 71.29 Bihar: Actual plan allocation: 104.00 Projected plan allocation on basis of national average: 423.22 (-)318.82 Second FYP 1956-61 PUNJAB Actual plan allocation:1263.00 Projected plan allocation on basis of national average:110.37 Diff: +1152.63 BIHAR Actual plan allocation: 194.20 projected:465.40 (-)271.2 Third FYP 1961-66 PUNJAB Actual plan allocation 231.40 Projected: 189.53 Diff: +41.86 Bihar APA: 337.04 Projected: 793.08 (-)456.04 Fourth FYP 1969-74 PUNJAB Actual:293.60 Projected:371.60 (-)78.04 Bihar Actual:531.28 Projected:1703.61 (-)1172.33 Fifth FYP 1974-79 PUNJAB: Actual:220.80 Projected:655.84 (-)434.97 BIHAR Actual:368.67 Projected:2732.92 (-)2364.25 Sixth FYP 1980-85 PUNJAB: 1957.00 2492.91 (-)535.91 BIHAR 3225.00 10374.40 (-)7149.40 Seventh FYP 1985-90 PUNJAB 3285.00 4108.92 (-)823.92 BIHAR 5100.00 18777.12 (-)13677.10 Eighth FYP 1992-97 PUNJAB 6570.00 4373.63 2196.37 BIHAR 13000.00 18609.38 (-)5609.38 Ninth FYP 1997-02 PUNJAB 11500.00 8288.61 3211.39 BIHAR 16680.00 36850.72 (-)20170-70 Tenth FYP 2002-07 PUNJAB 18657.00 13715.51 4941.49 BIHAR 21000.00 46972.25 (-)25972.30 TOTAL PUNJAB 44101.80 34359.63 Diff: Gain of 9742.19cr more than they should have Bihar 60540.59 137702.10 Loss of (-)77161.50 than what should have been given During this entire period political power in Tamil Nadu alternated between the two Dravidian parties, each with similarly quaint notions of good governance, probity in public life, and personal ethics. The point here is that the calibre and even character quotient of political and bureaucratic leadership does not vary much from state to state, yet some do better than others. Much of this has to do with public investment. To say some of our sub-nationalities are intrinsically better than others in qualitative terms is both unscientific and intellectually offensive. To make out that some deserve more than others is just as pernicious. The accompanying table, derived from the documents of the Planning Commission, answers the question. It shows how Punjab consistently got more than the national per capita average and how Bihar progressively got less in each plan. When these amounts are totted up they are quite huge. Even without factoring the benefits due to the Bhakra Nangal project and border roads and canal networks, Punjab got Rs 9742.19 crore more, and Bihar got a huge Rs 77,161.50 crore less. Given this money it is likely that Bihar would have fared better. It will be worthwhile to recall that in 1952, Paul Henson Appleby, the well-known scholar, after a detailed study of public administration systems in the various states, concluded that Bihar had the best run government in India. We can now only speculate on the possibilities that might have been had the good government got requisite financial support. It is this Rs 77,000 crore hurdle Bihar must vault over first, if it is to catch up with the rest of India. If we factor the last fifty years and the cost of human misery inflicted as a result of this neglect, the real cost will be truly astronomical! -Mohan Gurusamy. Original article has been taken from here : Footnotes: 1. Macroscan (August 2003): ‘Per Capita Income Growth in the States of India’, 2. Business Desk (19 July 2004): What does the Planning Commission do? 3. Kendriya Sainik Board, Ministry of Defence, GOI.

Economic Strangulation of Bihar since Independence

THE ECONOMIC STRANGULATION OF BIHAR! The Prime Minister yesterday announced a Rs.50,000 crores package for Bihar. Just as he announced a Rs.100,000 crores package for J&K on July 12. The first question one must ask is why twice as much for J&K than over India's most poor and backward state? Bihar has a population of over 103 million andJ&K has a population of 12.5 million. This is not a new story. Bihar has been systematically exploited by denying it its rightful and deserved share of central funds from the First Plan. That Bihar is India's poorest and most backward state is undeniable. The facts speak for themselves. But what makes its situation truly unique is that Bihar is the only state in India where the incidence of poverty is uniformly at the highest level (46-70%) in all the sub-regions. The annual real per capita income of Bihar of Rs. 3650 is about a third of the national average of Rs.11, 625. Bihar is also the only Indian state where the majority of the population - 52.47% - is illiterate. But Bihar has its bright spots also. Its infant mortality rate is 62 per 1000, which is below the national average of 66 per 1000. But what is interesting is that it is better than not just states like UP (83) and Orissa (91), but better than even states like AP and Haryana (both 66). Even in terms of life expectancy, the average Bihari male lives a year longer (63.6 yrs.) than the average Indian male (62.4 yrs) and the state's performance in increasing life spans has been better than most during the past three years. Bihar has 7.04 mn. hectares under agriculture and its yield of 1679 kgs. per hectare, while less than the national average of 1739 kgs. per hectare is better than that of six other states, which include some big agricultural states like Karnataka and Maharashtra. Despite this, in overall socio-economic terms, Bihar is quite clearly in a terrible shape. As opposed to an All-India per capita developmental expenditure during the last three years of Rs.7935.00, Bihar's is less than half at Rs.3633.00. While development expenditure depends on a bunch of factors including a state's contribution to the national exchequer, no logic can explain away the per capita Tenth Plan size, which at Rs. 2533.80 is less than a third of that of states like Gujarat (Rs.9289.10), Karnataka (Rs.8260.00) and Punjab (Rs.7681.20). Simple but sound economic logic tells us that when a region is falling behind, not just behind but well behind, it calls for a greater degree of investment in its progress and development. It is analogous to giving a weak or sick child in the family better nutrition and greater attention. Only in the animal kingdom do we see survival of the fittest with the weak and infirm neglected, deprived and even killed. But instead of this we see that Bihar is being systematically denied, let alone the additional assistance its economic and social condition deserves, but also what is its rightful due. From the pitiful per capita investment in Bihar, it is obvious that the Central Government has been systematically starving Bihar out of funds. Quite obviously Bihar has also paid the price for being politically out of sync with the central government for long periods. The last one was for a dozen years from 1992 to 2004. For the last one year Bihar had a government in New Delhi that was supposed to be favorably disposed to the regime in Patna. Now it is out of sync again. Quite clearly states that are in political sync do much better in terms of central assistance. Lets take a look at how Andhra Pradesh, a state that has stayed largely in political sync with New Delhi, has fared in the past few years. In terms of grants from the Central Government (2000 to 2005), Bihar fared poorly receiving only Rs. 10833.00 crores while AP got Rs. 15542.00 crores. Bihar has also been neglected as far as net loans from the center are concerned. It received just Rs.2849.60 as against Rs.6902.20 received by AP from 2000-02. It's only in terms of per capita share of central taxes do we see Bihar getting its due. This gross neglect by the central government is reflected in the low per capita central assistance (additional assistance, grants and net loans from the center) received by Bihar in 2001. While AP received Rs.625.60 per capita, Bihar got a paltry Rs.276.70. The results of the economic strangulation of Bihar can be seen in the abysmally low investments possible in the state government's four major development thrusts. Bihar's per capita spending on Roads is Rs.44.60, which is just 38% of the national average, which is Rs.117.80. Similarly for Irrigation and Flood Control Bihar spends just Rs.104.40 on a per capita basis as opposed to the national average of Rs.199.20. Now the question of how much did Bihar "forego"? If Bihar got just the All-India per capita average, it would have got Rs. 48,216.66 crores for the 10th Five Year Plan instead of the Rs.21,000.00 crores it has been allocated. This trend was established in the very first five-year plan and the cumulative shortfall now would be in excess of Rs. 80,000.00 crores. That’s a huge handicap now to surmount. Then it would have got Rs. 44,830 crores as credit from banks instead of the Rs. 5635.76 crores it actually got, if it were to get the benefit of the prevalent national credit/deposit ratio. Similarly Bihar received a pittance from the financial institutions, a mere Rs.551.60 per capita, as opposed to the national average of Rs.4828.80 per capita. This could presumably be explained away by the fact that Bihar now witnesses hardly any industrial activity. But no excuses can be made for the low investment by NABARD. On a cumulative per capita basis (2000 to 2002) Bihar received just Rs.119.00 from NABARD as against Rs.164.80 by AP and Rs.306.30 by Punjab. It can be nobody's argument that there is no farming in Bihar. If the financial institutions were to invest in Bihar at the national per capita average, the state would have got Rs.40, 020.51 crores as investment instead of just Rs.4571.59 crores that it actually received. Quite clearly Bihar is not only being denied its due share, but there is a flight of capital from Bihar, India's poorest and most backward state. This is a cruel paradox indeed. The cycle then becomes vicious. This capital finances economic activity in other regions, leading to a higher cycle of taxation and consequent injection of greater central government assistance there. If one used harsher language one can even say that Bihar is being systematically exploited, and destroyed by denying it its rightful share of central funds. To even make a dent on the abysmal state that Bihar is now in, Bihar will need at least twice what it gets from the Centre, as of yesterday. -Mohan Guruswamy, renowned scholar, financial expert
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