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Home >Opinion >Bihar and the politics of special packages for states

After a long wait, Bihar has finally got a special package from the Union government. Announced by Prime Minister Narendra Modi at a gathering in Ara, the 1.25 trillion package has the potential to create much needed infrastructure in the state. Bihar, due to decades of neglect and mal-governance, has spent hardly any money on building and maintaining roads, bridges and much else.

What has been given to Bihar is a carefully packaged set of measures—some that were announced earlier in the budget as general spending and some that are new. Of the 1.25 trillion, the lion’s share— 54,713 crore—will be used for building national highways. If one adds the 13,820 crore allocated under the Pradhan Mantri Gram Sadak Yojana (a component of the rural development part of the package), the total amount for road connectivity in the state comes to 68,533 crore—more than half of the package. Classically, this has been the favoured pattern of spending under National Democratic Alliance (NDA) governments. It is, any day, better than ditch-digging and filling variety of spending that is wrongly called asset-building.

It is noteworthy that all the spending is tied to end-projects and does not leave any discretionary spending in the hands of the state government. State governments in the Hindi heartland can be trusted to spend money on consumption that can boost their electoral fortunes and not invest in the long-term prospects of their provinces. Whatever the reasons may be—political or clarity in understanding what the state needs—that pitfall has been avoided.

Beyond the specifics of the package—which, as noted, are laudable—the principle of conceding special packages is dangerous.

A cursory look at the expenditure patterns of all states—without exception—shows most of their tax revenue is barely sufficient to meet committed spending. Salaries, pensions and interest payments exhaust this revenue in most cases. There is no money left for contingent needs and certainly none for investment in infrastructure and other assets. These needs are met largely by borrowing money, something that adds to the committed expenditure outflows. It is a vicious circle that states are not interested in getting out of. This generates the demand for special packages—supposedly one–shot measures aimed at boosting investment.

The danger is that there are no rational economic criteria to decide which states should be given such a package. One can craft any argument—backwardness (Bihar), hardship (hill states), special circumstances (Punjab), battling insurgency)—to make these demands appear sound. They rarely are and violate a basic principle of governance: governments are sovereign in their domain and should be responsible for what they do. They cannot—in fact, should not be allowed—to cite special circumstances to extract money from the Union government. This money, ultimately, favours one set of taxpayers over others and one region over another.

There is another danger. The Union government is not a saintly organization. It is subject to the same incentives as any other government. The announcement of the package for Bihar—in the middle of electioneering for the state assembly—is blatantly political. This is the second time in recent memory when a major financial or administrative step has been taken for political gain. The conceding of a separate state of Telangana less than a year before the 2014 general election was one example; the package for Bihar takes this process one step further.

The right fora for states to demand resources are the National Development Council and the Finance Commission. But building a convincing case at those platforms requires hard work, and strong arguments such as mistakes of previous governments cut no ice. Ultimately, prosperity in states requires careful calibration of spending between consumption and investment. Indian states are yet to learn that.

Should the central government have conceded a special package to Bihar? Tell us at views@livemint.com

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