Photo: Bloomberg
Photo: Bloomberg

Patna and policy

How the now-defunct Freight Equalization Policy of 1948 continues to blight Bihar

There is really nothing that quite matches the delicious tension we all were going through in these few days between exit polls tallies and the election results in Bihar. The tension was doubly delicious given that the exit polls, barring one, had not been particularly conclusive.

Also, everyone I speak to reckons that the outcome in Bihar will have repercussions that extend far, far beyond the borders of the state.

Regardless of such broader impacts, one hopes the results are good for the people of Bihar. Bihar has a reputation for being one of India’s more problematic states. And a good government in Bihar can only mean good things for the rest of India. So... all the best, old chaps.

Having said that, this week I have been wondering: Why are things in Bihar, a state rich with natural resources, so troubled? Why so many references to “jungle raj" when the topic of the Bihar government comes up? Where did it all go wrong? Especially given the state’s rich history and huge contributions to nation-founding?

In all my reading, one particular piece of policy kept popping up again and again. And that brings me to the topic of this essay.

What do you think was, or is, the single most damaging piece of legislation or policy in the history of independent India?

Now, many of you will immediately point to the restrictions on free speech brought about by the first amendment to the Constitution in July 1951. Rajeev Mantri wrote eloquently in Mint: “If a citizen’s fundamental right to freedom of expression is subject to the whims of mobs, then the citizen doesn’t have that fundamental right. Moreover, those who are offended by some form of speech are incentivised to take to violence under the reasonable restrictions regime. They know that by indulging in violence and creating threats to public order, they can have their way."

Others will point to the Tenth Schedule to the Constitution, or the anti-defection law. This prevents any member of a state or central legislature from voting on an issue in contravention of the party whip.

Congress party spokesperson Manish Tewari himself explained the problems arising out of this law in a December 2009 piece for the Observer Research Foundation. He said, “The net result is that a member invariably ends up voting for a bill if you are on the treasury benches and against a bill if you are in the opposition because positions are taken not on the merits of the provisions but the larger political reality both inside and outside Parliament. It has the effect of completely de-incentivising lawmakers from undertaking any serious research, lateral thinking or the search for best practices for incorporation in legislation."

These are all, on the face of it, pretty damaging pieces of legislation.

To this list, I would like to add a third piece of policy that is of great relevance to the state of Bihar, pun intended. And that is the Freight Equalization Policy (FEP) of 1948. (There is some conflict among various sources about when the policy really kicked in. But in any case, the policy was in effect no later than 1956.)

With the government looking to boost industrialization, the FEP was seen as a policy to encourage new factories all over India. The policy was simple enough: industries could purchase key raw materials—coal, steel, iron—at similar prices all over India. Any costs involved in transportation would be partly or wholly subsidized by the government. The idea was to create a level playing field. It ended up doing anything but that.

What happened next is described in Reshaping Economic Geography, a 2009 World Bank report. “Lost in the process was the location-based advantages of resource-rich areas. The affected areas included southern Bihar, eastern Madhya Pradesh and western Orissa, each among the poorest, least developed parts of the country. The policy weakened the incentives for private capital to locate production in lagging areas."

In other words, now that the government was paying for transporting minerals, industrialists saw no reason to invest close to the mines in and around Bihar. Instead, they clustered their investments around ports and established industrial zones, while the government spent public funds to actually deepen the gulf between states such as Bihar and others such as Maharashtra, Gujarat and Tamil Nadu, which profited from the FEP.

Some 40 years later, after liberalization, the FEP and other policies like it were quickly rejected. But by then it was perhaps too late. Bihar’s economy was crippled so badly that between 1991 and 1998, it received just 0.1% of all foreign direct investment that began to flow into India. FEP, in a sense, continues to repel capital.

What if the freight equalization policy had never been suggested? Asking such counterfactuals can be dangerous. But surely, Bihar would have benefited from investment, jobs and a better industrial environment. Could it have mitigated Naxalism? Dampened caste politics?

It was, in hindsight, a pretty damaging piece of policymaking.

What are some other examples of bad policy? Which ones, in your opinion, are the worst? Leave comments below.

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