Can Bihar industrialize?


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AFTER bifurcation in 2000, the level of industrialization in the present state of Bihar has further slipped, since industry earlier was primarily concentrated in the Chota Nagpur belt, now part of Jharkhand. Moreover, the net domestic product in Bihar is Rs 32004 crore, of which the share of the industrial sector is a mere Rs 1020 crore. Industry thus accounts for only 3.2% of the state domestic product in contrast to the national average of 20.1%, making Bihar one of the least industrialized states in the country.

Bifurcation led to not only a decline of industry in Bihar, it also drastically altered the regional representation of different industries. Currently, food, tobacco, leather and non-metallic mineral products make up the base of present industry in Bihar. What has been lost is the industry based on coal, refined petroleum products, basic metals, motor vehicles and trailers, all of which were salient features of the industrial map of erstwhile Bihar.

Further, of a total of 1528 industrial units in the state, only 236 are medium or large units. The geographical spread of these units is also skewed. Out of the 38 districts in Bihar, as many as 10 districts have no medium or large scale industrial units and another 11 districts have less than five units each. Most of the medium and large-scale units are concentrated in Patna, Magadh and Tirhut divisions. The situation regarding small-scale industry is no different, though the tiny sector and artisan units are more evenly spread throughout the state.

The lack of industrialization has often been explained by factors like natural endowment, infrastructure support, local availability of skilled manpower, size of local and export markets, industrial policies of both the central and state governments, and so on. Each of these factors open up a plethora of questions as to the role of ‘policy’ failure to overcome these limits to industrialization in the state, crucial in a scenario where agriculture is overcrowded due to a dearth of employment opportunities in the rural non-agrarian sector.

In many ways Bihar is a classic case of an enclave economy, illustrative of the contradictions between investments, public and private, and the prevalence of non-capitalist predatory accumulation. Thus, while there were centres of heavy industry – steel in Jamshedpur, iron and coal in Dhanbad, cement in Dalmianagar and Dehri-on-Sone, oil in Barauni, to name a few – these were either in the control of a few families or worse, the mafia, as in Dhanbad. Most of the big industry was not just regionally concentrated, it developed few linkages – upstream and downstream – with the local market. The only exception, if at all, was sugar, with nearly 40% of sugar capacity falling in the cooperative sector. In most other cases from heavy industry to leather and paper – both the ownership and the spillover effects remained narrow. Overall thus, the industrialization process failed to impact on agrarian misery and exploitation. And, post bifurcation, most industry went to Jharkhand.


To understand the specifics of industrialization requires a holistic view of Bihar’s history and the role of institutional barriers to non-agrarian investment. As with everything else in Bihar, the specific nature of industrialization too can be traced to the imposition of the Permanent Settlement under the colonial state in 1793. One impact of the new land revenue system was the creation of a complex hierarchy of middlemen, with rent-seeking zamindars on top and an immiserized peasantry with no ownership rights at the bottom. Worse, those at the top who extracted surplus through produce and money rent, and extra-legal cesses such as awabs, salami and begar, were under no compulsion to deploy the surplus in either improving agricultural productivity or diversification in non-farm activity.

Thus the Permanent Settlement more or less ensured that the only option for the marginal tenants trapped in this ever expanding system of exploitation was in outmigration to feed the employment needs of colonial industry in the seats of colonial capital like Calcutta and as indentured labour in far away plantations in Maldives, Guyana and Surinam. Bihar, in spite of its rich mineral endowments became a typical ‘colonial hinterland’ providing a systemic source of raw materials and labour supply to colonial industrialization or plantation economies in distant lands.

Similarly, steady supplies of Bihari migrant labour were vital to the needs of ‘Indian’ industry that developed around textiles in Bombay and Ahmedabad in the first three decades of the twentieth century. Simultaneously, the warped nature of absorption of the agrarian surplus meant that there was no incentive for landlords to diversify into trade or industry. Thus lack of industrialization in Bihar, except for the efforts of the Tata group in Jamshedpur, was a product of explicit colonial policy towards maintaining the hinterland as a feeder economy for the main centres of colonial capital.


Even as independence resulted in zamindari abolition, there still remained a host of problems that required tenancy reforms and a system of abolishing intermediaries to fulfil the commitment of ‘land to the tiller’. Unfortunately, since these policies were never pursued for a variety of reasons, the agrarian surplus remained confined to a thin upper layer of rich farmers.

There were other ways in which the post-independence policy regime worked against both a broadening and deepening of the industrial base. Central to it was the Freight Equalisation Policy of 1948 for coal and iron. Essentially, the policy denied the eastern zone of the country any advantage of proximity to these mineral resources, indirectly facilitating further industrial development in the already advanced western regions of the country. To make matters worse, similar policies were not introduced for other intermediary products produced in the western regions, thereby increasing costs for industries elsewhere using these resources. This double bias crippled industrialization in Bihar with available capital shifting to the West.

Part of the story behind missing the ‘heavy industry’ boom of the 1960s was the functioning of the license-control Raj. Not only did many established industrialists manage to capture licenses without actually ever implementing the proposed project, sanctioned licenses too mostly went to other states.


The situation worsened as a result of a slowdown in public investment. This correlation between public investment and industrial growth was clear to state functionaries in the Congress. K.V. Ganesh, Minister of State for Finance, admitted to Parliament that: ‘…right from 1962 when public investment decreased, there had been stagnation in industrial growth. Public investment and industrial growth have somehow become correlated as far as economics is concerned’ (Lok Sabha, 25 March 1972, 12).

This adversely affected a number of industries which catered to mass consumption as also those with strong linkages to public investment. In addition, the sluggish rate of public investment added to infrastructure constraints on private economic activity. In the late 1960s and the 1970s, any effort on the part of the state to accelerate growth through deficit-financed expenditures either resulted in inflation or in a balance of payments problem, or in a combination of the two.

Overall thus, Bihar’s lack of industry is a direct product of apathetic national policies that created structural and institutional constraints for industrialization in the state.

So far we have argued that Bihar’s industrialization faced policy apathy for more than 200 years since the Permanent Settlement. Bifurcation of the state led to an even more skewed situation with much of the industry going to Jharkhand. Many questions follow from this assertion. If many of the constraints of the past were policy driven, will the policy regime in the current neo-liberal framework facilitate industrialization? This debate needs to be raised in the public sphere in Bihar for finding a way forward.


During the tenth plan period, the industry sector in Bihar recorded a growth rate of 9.80 per cent. What this apparently healthy growth rate hides, however, are a range of structural weaknesses. For a start, the industrial sector in the state is overwhelmingly dominated by unregistered units which account for more than half of total income. Further, as revealed by the Annual Survey of Industries (ASI) data for 2002-03, more than 85 per cent of the net value added is accounted for by food and beverages, tobacco and petroleum products, clearly demonstrating the narrow base of industry. Even more disturbing is the fact that as against Rs 3032 crore as total fixed capital, Rs 1378 crore as total working capital and Rs 5172 crore as total invested capital, as much as Rs 3875 crore is outstanding loan against these factories. Little surprise that despite Rs 8877 crore as aggregate value of output, the net value added was only Rs 614 crore and net income even lower at Rs 512 crore.

As highlighted earlier, most of the industry in the state falls in the small-scale sector, and here too, the vast numbers are accounted for by the tiny units whose output and employment potential is extremely low. Note that while the small/medium/large scale industrial units are both few in number and geographically concentrated, it is the tiny and artisan based industry which is spread all over the state.

Finally, is the problem of industrial sickness. As recently as December 2006, there were 259 large and medium units in the state, out of which 18 units had been declared sick. The recently published Bihar Economic Survey argues that the high level of industrial sickness in Bihar is due to inadequate infrastructure facilities – the lack of working capital, non-availability of raw material, inadequacy of a road network and communication services, poor and uncertain power position and weak research support. Besides, unsatisfactory credit availability, abnormally high interest rates, delay in granting term loans and rigid attitude of banks and other financial institutions in the state are also some other inhibiting factors.


Fortunately, the government has realised the need for accelerated development in the industrial sector. Recently a State Investment Promotion Board has been set up and a new Industrial Incentives Policy 2006 formulated after discussions with concerned parties representing both the government and the private sector. The main features of the new policy are VAT reimbursement, capital subsidy for captive power generation plants, abolition of annual maintenance guarantee and monthly minimum guarantee and exemption of electricity duties. Recently the Cabinet has also approved a single window clearance system for all new industry.

Finally, in addition to announcing a slew of new policies, concessions and incentives, the government has initiated the process to set up a corpus for revival of sick/closed industries.

While all these policy announcements have generated substantial enthusiasm, there is some skepticism about how well they will work as also about the commitment of the state government to vigorous industrialization. It bears repetition that the ruling NDA is a coalition of the BJP and the JD(S). The former draws heavily on the upper caste/class elite, unwilling and unable to challenge the power of the landed elite who historically have neither invested in agricultural modernization nor diversified into non-farm activities. The JD(S) in turn draws on socially backward and marginal groups who not only have little investible surplus but for the moment seem more interested in pursuing a politics of ‘social justice’. The only agenda that the two can agree on is sushasan, good governance.


On the whole, the Industrial Incentive Policy is a product of this ‘sushasan’ initiative. It is a standard package of concessions with substantial incentives to encourage new investments in line with the policies pursued by more developed states. Such policies have become necessary under the current neo-liberal economic order in which states are competing for investments. However, given the historical causes of non-industrialization in Bihar, the likelihood of this policy to significantly change the industrial landscape is marginal. The reasons for non-industrialization in Bihar are complex and have more to do with national policy for the last sixty years or more. These have to do with institutional structures of landholding patterns, the undermining of competitiveness through policies like freight equalization and an abysmal infrastructure scenario.

Thus the problem of industrialization cannot be solved by a one-time incentive policy at the level of the state. When more developed states offer similar concessions and are also in a position to provide better infrastructure, why would new investments come to Bihar? Moreover, policies of land acquisition for mega industrial parks seem to be totally misplaced when such efforts have met with little success in Bihar in the past. In the current conjuncture, when the basis of such industrial agglomerations is being questioned with respect to the effects on agriculture, acquisition of such large amounts of land appears even more suspect.

For states like Bihar, industrialization will remain a distant dream unless we can visualize an alternative industrial structure. Not only does the state have to set right historical wrongs, national policies too have to be revised to specifically encourage investment in backward states and regions. How far this will happen in a situation in which the state seems keen to recede from its developmental role remains an open question.



A. Banerjee and L. Iyer, History, Institutions and Economic Performance: The Legacy of Colonial Land Tenure Systems in India, Department of Economics, MIT, June 2002.

Bihar Development Report, 2006, Institute of Human Development, New Delhi.

Bihar Economic Survey 2006-2007, Ministry of Finance, Government of Bihar, Patna.

A.N. Das, Agrarian Unrest and Socio-economic Change 1900-1980, Manohar, New Delhi, 1983.

Government of Bihar, Cabinet Notes, November 2005-November 2006, Patna.

Government of India, Annual Survey of Industries 2002-03, New Delhi, 2003.

Lok Sabha Debates, Records of Proceedings, 25 March 1972.

U. Patnaik, The Long Transition: Essays in Political Economy, Tulika, New Delhi, 1999.