Good Thinking, Bihar!

Bihar is known to have achieved high SDP (state domestic product)-growth in the past decade; this improvement has been attributed to the tenure of its chief minister, Nitish Kumar, for lack of better evidence. But now, evidence has become available, thanks to the Bihar government, which has published what is perhaps the most comprehensive and systematic economic survey of any state. There are many stories to be drawn from it; one of the most striking is what the government has done to its own budget.

In the 1990s, the finance minister of West Bengal invented a new economic theory: that the distinction between revenue and capital, between taxing people and borrowing, was obsolete, and that a state could spend money without caring how it got hold of it. Finance ministers of other states loved this theory, for it meant that they could spend without thinking of tomorrow. Finally, their borrowings from banks became so huge that the Reserve Bank took fright and stopped their overdrafts. The central government stepped in in the mid-2000s and baled out the state governments. It took most of their debt on its own books on a promise that they would reform their ways. Reform in this case implied restraint in borrowing.

But Bihar went further. Its debt in 2005-06 was 52 per cent of its SDP. By 2010-11, it brought it down to 28 per cent. It did not have to stop borrowing to do that; it just exercised restraint in expenditure. As a result, the revenue account carried a surplus, which was used to bring down debt in the first three years. That brought down interest payments from 4.5 per cent of SDP in 2005-06 to 2.2 per cent in 2010-11, and created room to increase capital outlay from 2.6 to 5.2 per cent. It also enabled the government to avoid going cap in hand to the central government and asking for loans as is the habit of many states.

Bihar tripled development expenditure and quintupled plan expenditure over the five years. Being a poor state, it got most of the money from central grants and transfers. But it greatly raised its revenue from entertainment tax, as Biharis flocked to the cinemas. They drank a lot more liquor and paid excise. They built thousands of houses and paid excise on cement; when they moved into the houses, they paid registration charges. More important, the government made sure of collecting the taxes.

Besides what it did on the revenue side of the budget, the Bihar government restructured its expenditure. In 2005-06, development and non-development expenditure were roughly equal; five years later, development expenditure was twice as high as non-development expenditure. Salaries and pensions were  almost a half of revenue expenditure in 2005-06; five years later, they were down to about a third. The share of education went up, and within it, the share of secondary education. In many parts of India, primary education is available to almost all children, though often substandard, but the incentive to take advantage of it is weakened by lack of secondary education. The Bihar government seems to have noted this and tried to ensure the continuity of education beyond primary school.

The central government spends considerable sums in Bihar as elsewhere on its own schemes; the Bihar government is critical of it. It cannot monitor the outcomes; and the central government is fond of devising numerous schemes with extremely narrow objectives, which are often irrelevant to the local situation. For example, there are at least nine variants of house-building schemes named after Indira Gandhi. It may be that the Congress government is better at multiplying  brands of social services than at delivering them.

The Bihar government has attempted a rough assessment of its success at serving the state. According to its calculation, it spends a half of its resources on its own consumption, 17 per cent on capital investment, and 28 per cent on transfers to its people. It also gives some figures about its enterprises: of its 63 companies, 40 were closed; together they made losses every year. Fifteen of them are under liquidation, and five have never prepared any accounts in their entire lives. That does not sound very flattering, but at least we have the facts for Bihar, unlike other states. They are facts collected and published by the government of Bihar, and it uses them to assess its own performance and to set its goals. Instead of producing propaganda, it has surveyed facts and learnt from them. It has set a model for the rest of India; it is there for other states to follow.

(This story was published in Businessworld Issue Dated 09-05-2011)