Spotlight On Bihar: Understanding India’s Poorest State With Economist Prachi Mishra
Bihar’s economy stands at a crossroads, grappling with stark disparities and untapped potential
In this episode, journalist Puja Mehra is joined by economist Prachi Mishra to uncover the factors behind Bihar’s economic challenges. From historical policies like the Freight Equalisation Scheme to the migration patterns driven by low wages, Prachi explains the root causes of Bihar’s struggles and its divergence from other Indian states. They also discuss the aspirations of Bihar’s youth, the state’s limited industrial growth, and the role of education in shaping its future.
ABOUT PRACHI MISHRA
Prachi Mishra is currently Professor of Economics, Director and Head of the Isaac Center for Public Policy, Ashoka University. Prior to joining Ashoka, Prachi was Chief of the Systemic Issues Division and Advisor in the Research Department at the International Monetary Fund. Previously, Prachi worked in several IMF departments in Washington, including the office of the First Deputy Managing Director. Between 2018 and 2020, she worked at Goldman Sachs as Managing Director, Global Macro Research, and India Chief Economist. During 2014-17, she served as Specialist Adviser and Head of the Strategic Research Unit at the Reserve Bank of India. During 2012-13, she was Senior Economist in the Office of Chief Economic Advisor in India’s Ministry of Finance, and at the Prime Minister’s Economic Advisory Council. She also served as a member on the Board of CAFRAL (Center for Advanced Financial Research and Learning, owned and promoted by the RBI), on the External Advisory Council of the Fifteenth Finance Commission of India, and on the Fiscal Responsibility and Budget Management Review Committee. She has a PhD in Economics from Columbia University and a Masters from the Delhi School of Economics. Her research interests are in the areas of international economics, macroeconomics, and the Indian economy and financial markets.
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INTERVIEW TRANSCRIPT
Puja Mehra: Hi Prachi, thank you for coming to the show.
Prachi Mishra: My pleasure Pooja, thank you so much for inviting me.
Puja Mehra: Prachi, we always read you and all my conversations with you is always about the macroeconomy but today I've invited you to speak on a subject which I think at some point on the other everybody who is interested in the economy has thought about and that is the economy of Bihar and I'm asking you about this because you wrote an excellent piece on the economy of Bihar.
So, to start with, will you help us understand, you know, what is the economy of Bihar like, how it has been, how has it been changing over time and they're all interested, all Indians I think are interested in the economy of Bihar because wherever we go we see people of Bihar taking up low-wage jobs, we hear a lot about people of Bihar in conversations about the economy because there's such stark disparities of incomes etc. between Bihar and the other states, there's just so much curiosity we all have, so much we want to understand, we may have a lot of misunderstandings, so just take us through all of this.
Prachi Mishra: So, look Pooja, I think when India gained independence that time an explicit objective of the government was to have a more egalitarian society and what do we mean by egalitarian society is that, you know, you basically have balanced development across different regions, that's why active state intervention was envisaged, you reduced, you know, some of the pre-existing disparities at that point. However, you know, despite 15 finance commissions and the former planning commission, divergence across states has in fact increased quite a lot and my guess is that, you know, and what my research suggests is that this may have assumed extreme proportions and none of this, you know, exemplifies this other than the case of Bihar. This is what motivated the article which you read and the title of the article which is, you know, sub-Saharan that is associated with chronic underdevelopment.
Bihar actually fits in with, you know, perfect typology of a low-income sub-Saharan state in terms of its economic indicators and standard of living. You asked an important question, you know, why do people migrate? You know, this huge literature on migration, international, sub-national and it's well established that migration is determined by both push as well as pull factors.
So, push factors, you know, what is pushing people out of Bihar could include low earnings in the home state or country, the pull factors includes, you know, relatively higher earnings and importantly network effects which help fructify the intention to migrate. So, relatively higher earnings in the destination. So, like if I'm a migrant, I would evaluate, you know, whether the earnings differential is enough to cover the migration costs and importantly to also send remittances back.
So, basically, all these factors, you know, operate in the case of Bihar. So, if you take the case of a driver, right, a lot of, you know, as you mentioned, you know, we see people from Bihar all over India working for low wages. So, if you take a driver, even in the capital city of Patna would be earning about 11 to 13,000 per month.
If the driver migrates to Delhi, he would be earning twice or even thrice 25 to 30,000 plus a bonus. Take my driver, for example, his salary is directly deposited into his wife's account. So, what is interesting is that, you know, despite low standards of living in big cities like Delhi, Mumbai, etc, migrants still decide to do it because of lack of job opportunities in the backfill and the earning differential.
Puja Mehra: Why is it that Bihar's economy suffers in a way where the standards of living, job opportunity, income opportunity, there's a disparity between that vis-a-vis the rest of the economy? What are the factors that have, and I'm guessing there must be legacy issues here, that are putting Bihar at a disadvantage relative to the other states?
Prachi Mishra: Basically, Bihar accounts for 9% of India's population. For one state, accounting for 9% is big. Yet, in terms of GDP, it's less than 2%.
And its per capita income is close to 60,000 rupees. This is lowest in the country. What surprised me most when I was looking at the data, Pooja, was that, you know, it's lower than most in sub-Saharan Africa.
It's actually comparable to Liberia, which is one of the poorest countries in sub-Saharan Africa, inflicted by civil wars. And if you exclude, for example, Patna or one or two cities, I think the average income is going to be way lower. If you look at poverty statistics, the poverty head count ratio in Bihar is again the highest in India.
And it's also among the most densely populated, as well as the least urbanised. However, one interesting statistic is also that Bihar has the youngest population in the country. So close to 60% of population of Bihar is under 25.
And Bihar reports the highest fertility rate. So if you look at NFHS, the latest one, NFHS 5, the fertility rate is about 2.98, much higher than the replacement rate. Meaning that Bihar's population will continue to grow at a fast pace, compounding Bihar's challenges.
Different from the rest of the country where we are talking about, you know, we have the demographic dividend, but not for too long. If you look at what does all this mean, it's basically, if you look at PLFS, the unemployment rate in Bihar is 13%, thrice the unemployment rate in the country. And if you look at the youth, basically 15 to 29 years of age, their unemployment rate is again like over 30% and thrice the national level.
If you come to education statistics, I found the statistics even more striking. So higher education gross enrolment rate is again, you know, among the lowest in the country. If you look at learning scores, you know, for example, A.I.SHA learning scores, learning achievement scores are also among the lowest. And these statistics are particularly appalling for a state, Pooja, with a very rich history of education, as well as, you know, very strong intent and aspiration of the citizens. And you can, if you, I don't know if you've travelled through Bihar, you will see how evident are these aspirations and intent in its ever exploding institutions.
Puja Mehra: You know, Prachi, I've never been to Bihar, not even once. But you know, often sometimes I'm invited in Delhi or elsewhere, other universities to speak to students. And I've always noticed that everywhere I find students from Bihar, and they'll always come and approach me.
And mostly the conversation that they want to have is that seeing that I'm a journalist, they request me to write about how government vacancies should be filled up, because they're very keen on government jobs. Also, probably because there isn't much of a private sector opportunity in the state of Bihar. It sometimes, I don't feel so good having these conversations, because it tells me that the youngsters in Bihar are not thinking beyond, you know, the traditional government job aspiration.
Something needs to be done about that.
Prachi Mishra: In the country as a whole is considered to be very, you know, it comes with benefits, security, pensions, etc. So I think there is a countrywide effect. And Bihar, there's also a legacy effect.
Traditionally, if you look at a lot of civil servants, government servants in general, central, state level, they've always been coming from Bihar. Education is very important. So I would distinguish between private sector manufacturing and private sector services.
See, if you travel through Bihar, private sector services, health and education, you know, hospitals and educational institutions, coaching institutes are like, you know, that's what is driving the economy. So what is absent, again, you know, there is a countrywide trend, you know, about manufacturing, but I think in particular in Bihar, the lack of, you know, manufacturing is very, very, you know, it's tough. So manufacturing, private sector manufacturing opportunities are, of course, quite limited.
And let me add also, you know, when you, you know, women, for example, you know, the lowest workforce participation rates for women are, is actually in Bihar. So it's a no single, if you compare, I don't know how, you know, we can take some of those statistics with a grain of salt, you know, how they are measured, especially, you know, household work, etc. But that applies to the country as a whole.
But I think it's the statistics suggest that it's in, you know, lower single digits, workforce participation rate for Bihar.
Puja Mehra: Let's say that, you know, at the time of independence, did all states start at the same point? And then, you know, that these disparities have come about? Or Bihar and the other states, there was disparities to begin with, which have become probably more acute?
How is it being?
Prachi Mishra: I don't have data going back to 1940s, etc. But what I can tell you is, there is definitely a legacy. And you know, the origins of these unbalanced development is, you know, rooted deep in history.
How did Bihar get here, even despite some of these objectives of balanced development since independence, is what we can look at. So I think two main policies here, you know, one was, and these policies may have been well-beaming, but I think it exacerbated some of the pre-existing inequalities. So one is India's freight equalisation scheme.
So this was introduced post-independence 1952. So what it did was, it's, you know, it aimed to promote even industrial development by subsidising long distance transport of key inputs, such as iron and steel, which actually contributed to divergence. If you think about it, you know, undivided Bihar, very rich in resources.
So existing research suggests that, you know, over the long run, this freight equalisation policy contributed to the decline of industry in eastern India, and especially pushing iron and steel using industries towards more prosperous states. Because, you know, changing locations of the processing of some of these basic iron and steel materials, the resource-rich states suffered under this freight equalisation policies and never recovered.
Puja Mehra: Why was it more profitable for companies that depend on these resources to locate their manufacturing facilities and industries away from the sources of these materials?
Prachi Mishra: Because basically, what it did was subsidised long distance transport of key inputs, such as iron and steel. So if you are in a state, which is, you know, which is a western state or southern state, you could, you know, in a very subsidised way, you could transport these essential resources. So if this subsidy had not been there, companies would have to locate, you know, relocate to, you know, closer to eastern regions.
So that is the, and you know, there's existing research which suggests that, you know, this could have contributed, you know, exacerbating some of the divergence. And typically, you know, pushing iron and steel using industries towards already more prosperous states. The second is the green revolution again.
So green revolution also, the benefits of green revolution bypass some of the eastern states because, you know, it was basically states which were already heavily invested in agriculture infrastructure, like Punjab, Haryana, you know, and also some of the input subsidies and output price support and procurement policies aided, you know, these already agriculturally advanced states to boost agriculture production.
So this completely bypassed eastern India where Bihar is. So I think these are the two key policies I can think of which perhaps, you know, exacerbated some of the pre-existing inequalities and the pre-existing divergence which existed, you know, at the time of independence. And the goal of our forefathers was finance commissions with planning commissions to neutralise some of these pre-existing inequalities.
Puja Mehra: Is there anything that the state of Bihar can do? I mean, what I'm trying to say is, if you were to advise the finance minister of Bihar, what is the policy agenda they could follow to correct some of these biases that have been introduced by national level policies, so that some of these economic disparities that we are talking about can be addressed?
Prachi Mishra: I think before going to, you know, what can they do, and it really, you know, this is something I'm thinking through, you know, what, these are not easy questions. But one thing that strikes me even more is that, you know, Bihar continues to lag, significantly lag other states. And it's, in fact, its divergence with other states has increased over time.
So this has struck me even more. That is, you know, if you do simple calculations, even to catch up to Orissa, Bihar would need 17 years. You know, if we want Bihar to catch up to all India average and Gujarat, forget about it.
I think we need really, you know, doubling, tripling of growth rates in nominal GDP per capita to have double digit years of catch up, all India average and also with faster growing states. Because, you know, the other states also, if you're going to catch up in convergence, the other states are also growing. So, you know, that makes the catch up even harder.
I think the latter seems to be very, very, you know, far-fetched in Bihar, if you look at the statistics now. So, you know, we talk about the country, but I think, you know, states with the youngest population, with very high fertility rate, we really need a strategy of, you know, how to seize the demographic dividend, how to, you know, spur economic growth and development in a comparatively short period of time. So again, you know, human capital, I think, and perhaps, you know, large-scale trading.
Internationally, we know that if countries have grown for a sustained period of time, I think trade has really been important. So, I think the same thing applies for states as well. So, I think if you want high rates of growth for long periods of time, we have to think about how to get, you know, benefits of international trade.
So, I would think human capital and international trade could be two turnaround engines.
Puja Mehra: Do you think, you know, a lot of times, I don't know, it might be oversimplification, I'm not sure. A lot of times, Bihar's economic problems are linked to Bihar's politics. Do you think that is a precondition?
It is necessary for that to change for the economy to address some of these issues that we've discussed?
Prachi Mishra: I would not like to comment about the politics, Pooja, but what I can say is there needs to be, you know, public awareness. You know, people like you, there's need to create public awareness about the economy of Bihar and where it stands currently so that, you know, I think there is, they can take into account, you know, voters can take that into account when they vote, can make choices. Ultimately, that's, you know, economic prosperity for its citizens and for generations to come.
So, that's what I would say.
Puja Mehra: And also, I feel the rest of the country, I mean, we cannot talk about India progressing unless all states are progressing and all states are doing well and there's prosperity also in Bihar. I mean, India does not do well until the time Bihar does well. I think we need to have those conversations as well.
Prachi Mishra: I started with saying that, look, 9% of India's population and yet less than 2% of India's GDP. So, if you really want for the country as a whole, it's a big state. It's a big state.
So, I think it's, and it's the poorest. So, I think if you want to increase averages, even for the country, I think at the rates where we want to go as a country as a whole, I think we really need to, our focus has to be decentralised.
Puja Mehra: And you're doing a great job, Prachi, by sort of casting focus and the spotlight on these issues and I really hope that they will come to the national conversation and catch the attention of policymakers in the state, at the national level, as well as other states. Everybody needs to sort of get onto this agenda. Thank you. Thank you for coming to the show, Prachi.
Prachi Mishra: My pleasure. Thank you for inviting me.
