Why Are Some Indian States Less Industrialised Than The Others?

Freight Equalisation Policy (FEP) was adopted by the government of India in 1952 to facilitate equal growth of industries all over the country. This meant that a factory could be set up anywhere in India, and the central government would subsidise the transportation of minerals. The policy was aimed at promoting equitable industrial development by subsiding long-distance freight transportation. The policy applied only to certain commodities such as iron, steel, cement and others that were deemed essential for industrial and economic development. The policy did not include raw materials such as cotton.

The vision and rationale behind the introduction of the policy was to facilitate equal industrial growth across the country. Subsiding freights meant that commodities that required setting up of factories and industrial development could be transported from mineral-rich states to coastal trade hubs and markets in other parts of the country, where production facilities would find it easier to facilitate transportation, trade, and production. Industrialists would get aluminum, coal, iron, etc at the same price as they used to in mineral-rich states.

However, the vision for an industrial equity and equal economic growth was put forward in the form of a slightly miscalculated policy that ended up hurting the very idea and essence of it. The policy hurt the economic prospects of the mineral-rich states of Bihar, Jharkhand, West Bengal, Madhya Pradesh, Chhattisgarh and Odisha. FEP took away the competitive advantage of the eastern parts of the country, weakened the incentives for private capital to establish production facilities in these areas, and benefited the western, southern and northern regions. According to Professor Stuart Corbridge:

The policy discouraged the establishment of resource-processing industries in eastern India, as opposed to the extractive industries, which seem to have imposed on the region a version of the resource curse noted more frequently in Sub-Saharan Africa.

Former President of India Shri Pranab Mukherjee too described the policy as a bane for the eastern states, particularly Bihar and Jharkhand. Endorsing the long-standing contention that FEP had played a major role in inhibiting the development of India’s eastern region, the former president at the ADRI conference in Patna in 2017 said, “despite having mineral resources and fertile land, Bihar, and now Jharkhand too, could not make the desired progress.”

The economic marginalisation of states such as Bihar began in the colonial era through the establishment of an exploitative landlord class, which constantly resisted economic and social development even after independence in 1947. This was further marginalised by the introduction of FEP, which nullified the comparative advantage of the state in natural resources, combined with the relatively low financial resources that the central government received over the consecutive plan periods. Adding to it, the FEP did not apply to raw materials such as cotton, depriving the eastern states of a fair opportunity to set up cotton and textile mills. States such as Maharashtra and Gujarat maintained their hegemony by continuing the economic imbalance.

Manufacturing companies prefer to minimise their transportation costs. Those using iron and steel to manufacture goods earlier preferred locating themselves around the steel plant, thus leading to an industrial boom. Following the implementation of the FEP, however, the decision to set up a factory was primarily influenced by the availability of cheap labor, the price of land, ease of trade and market, and other benefits offered by state governments. Transportation cost no longer remained a factor.

The inclusion of a limited number of commodities and their nature of being an ‘essential’ item in the policy to achieve balanced development deprived the eastern states of a fair opportunity, with no significant compensation granted to them. As a result, even after the removal of the policy in 1993, these states could not catch up with more industrialised states. The Freight Equalisation Policy, in its idea, was a miscalculated policy towards the vision of a greater good, that missed the very purpose and vision of inclusivity.

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