The Economics Behind a Viksit Bihar and Real Implications of Cash Transfers and Emigration
Insights on what the new government must prioritise to turn Bihar’s potential into sustained prosperity
In this episode, journalist and author Puja Mehra speaks with economist Prachi Mishra, Professor at the Department of Economics, and Director and Head of Isaac Center for Public Policy at Ashoka University and lead author of a forthcoming report on how the Bihar can accelerate its path to Viksit Bihar. Mishra explains why Bihar must aim for sustained double-digit growth to close its large per-capita income gap with the rest of India, and why doing so requires more than traditional agriculture or services-led expansion. She outlines how Bihar can unlock growth by pursuing targeted agro-industrialisation around crops such as maize, makhana and litchi, scaling tourism through distributed cultural circuits and diaspora engagement, developing GCC and special economic and logistics zones, and improving the quality and allocation of public capital spending. Mishra also highlights the need for stronger state capacity — from law and order to skilling and logistics — better revenue mobilisation including property taxes, and clearer fiscal rules to balance transfers and investment. Drawing on empirical analysis and a granular, district-level roadmap, she argues that Bihar’s greatest opportunity lies in strategic industrial policy that links geography, value addition and employment. Tune in for insights on what the new government must prioritise to turn Bihar’s potential into sustained prosperity.
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TRANSCRIPT
Puja Mehra: Prachi, it's so good to have you on the show again. Thank you so much for joining.
Prachi Mishra: Thank you, Puja. Pleasure to be back.
Puja Mehra: And once again, we are talking about Bihar. This is immediately after the election result has come.
I'd love for you to spell out an economic agenda for the incoming government and to say that, you know, what it is that you would like them to do. Also, what it is that they can do.
Prachi Mishra: So, as I mentioned to you, you know, the ISAC Centre for Public Policy at Ashoka University is actually working on a report on an economic roadmap, you know, forward looking for Bihar. And we will be releasing it soon in Patna. It's actually a lot of hard work by a very young team who are extremely eager to contribute towards the goal of Vixit Bihar.
And especially at a time, as you said, when we have a new government with an overwhelming mandate. The Prime Minister himself has said that we need a Vixit Bihar to get to Vixit Bharat. So, let me give you some details.
We discussed some of this in a recent panel with Mr. N.K. Singh and Rajdeep Sardesai as well. So, what we do in the report is we do some macroeconomic simulations for the road to Vixit Bihar. So, for India as a whole, basically, we need a sustained growth rate of 8% to achieve our goal to become a high income economy by 2047.
And this is more or less, you know, accepted wisdom. So, what we do is to repeat these simulations for Bihar. Two scenarios.
One is status quo, where the sustained real GSDB growth of about 8%. And second is a more desirable scenario, which is of a double digit growth rates. And this is really not a pipe dream for Bihar as Bihar has been growing quite fast in recent times.
However, currently, Bihar is about one third of the all India average in terms of per capita income. So, what we show is that under the desirable scenario, Bihar can narrow this gap with rest of India. So, you can actually achieve about 70% of all India average over the next 20 years.
So, what the report does is lay out an economic roadmap with some granular recommendations. So, I can give you some flavour of what the recommendations and what the roadmap would look like. So, if you look at the current composition of Bihar's growth, it's really skewed towards services, much more than all India.
And in the report, therefore, we make a case for strategic industrial policy. And what we mean is industrial policy that is targeted to twin goals of GDP and employment. And there are several engines of strategic industrial policy, which we put forward.
And let me point out a couple of them. First is agro-industrialisation. And we see immense scope there.
And the basic idea is not to think about agriculture in the traditional sense of crops, but to think about its linkages with both industry and with services. And think about the interconnectedness in two dimensions. One is input-output linkages, and the second is geographical connectedness.
And let me give you a few concrete examples. Maize, for example, is a success story in Bihar. The certain districts in Bihar, like Araria is on the northeastern side, their record yields greater than all India average.
So what we argue is that we can actually capitalise on this further. And how can we do it? Through exploiting these geographical and input-output linkages.
So maize is currently very concentrated in northeastern districts like Araria, Supwal, Kishamganj, Katihar. But most maize leaves the state as raw grain, with value addition occurring elsewhere. So we recommend to develop maize-based industrial clusters surrounding these districts.
And these clusters, for example, would include feed mills to convert the maize into feed and supply to the poultry industry, or starch factories which use maize as inputs, developing poultry industry itself around these maize clusters. And the idea is that this could create multiply effects for both manufacturing, as well as services such as transport, logistics, and food services sectors. Other areas of agro-industrialisation, such as Makhana and Lichi, and there we recommend scaling up both these to exploit their true potential.
Think about it, marketing Makhana as Bihar's signature export, analogous to Quinoa from Peru, would require much larger scaling up and creating this whole marketing machinery. And these would have spillovers for manufacturing, both for production and exports, and for services. So we recommend, for example, developing dedicated Makhana processing parks in certain districts like Madhubani and Darbhanga.
Overall, Bihar has important choices to make on the developing path and learn from other states as well. Even within agriculture, different states have followed different paths. If you look at Madhya Pradesh, totally crop-based.
Tamil Nadu, very livestock-based. Orissa has been more balanced. And like Orissa, we argue that Bihar could have a more balanced road path spread across different crops, traditional like pulses, high value like Lichi and Makhana, in addition to livestock and fisheries.
So what is important to realise is that Bihar has comparative advantage, emanating from structural endowments such as water and, of course, cheap labour. And livestock and dairy, for example, remain dramatically underutilised relative to available resources and market potential. Let me just shift to the second area for industrial policy for Bihar, which the report digs deep into, tourism.
The tourism's economic contribution to Bihar's state GDP is 2%, substantially below the national average, which is 5%, and dramatically behind neighbouring states like West Bengal and Madhya Pradesh. As you can guess, Puja, Bihar possesses globally significant Buddhist heritage sites, diverse cultural circuits, and unique festivals. And yet it captures nearly 3% of both India's total domestic tourist footfall and even 3% of foreign tourist arrivals.
And not only that, the tourist footfall is really concentrated in few districts. Only five districts attract about 80% of the tourist footfall, leaving vast areas underutilised. So what we argue in the report and make a case that breaking this extreme geographic concentration is what we would like to recommend, and this would require strategic circuit development across multiple districts, creating distributed tourism economies.
Diaspora-driven heritage tourism is another area. Bihar has a large global diaspora, and annual returning emigrants really represent a large untapped resource. Wellness and medical tourism is another area.
So overall, we see tourism as another area of untapped potential. Again, we have granular recommendations in several areas of strategic industrial policy mapped into the geography of Bihar, and we hope to see some of these executed as soon as possible. So bottom line, I think strategic industrial policy can help Bihar achieve the twin goals of GDP and of employment.
So 60% of Biharis are less than the age of 25. Demographic dividend, which we talk about for India as a whole, is actually coming largely from Bihar. But at the same time, Bihar ranks high in youth and unemployment.
Therefore, targeting specific sectors with both employment and GDP goals is what we make a case for in the report.
Puja Mehra: Very impressive, Prachi. Bihar's potential was never really in doubt. The point always is how to get to them the various prerequisites for industrialisation, you know, credit, power, freight, land, skills, those kind of issues.
In the case of Bihar, I've never been to Bihar, so I don't know. I'm only going by what I read. Law and order is always talked about a great deal.
So do you also recommend about these prerequisites that need to be addressed for the recommendations that you're making to fructify?
Prachi Mishra: Yeah, absolutely. I think law and order and, you know, some of the enabling conditions, what we go into detail in the report at length. We also argue that Bihar has potential for GCC sector.
And GCC, you know, not only GCC for the rest of the world, but GCC from within India. As wages are rising in rest of India, Bihar could be GCC for rest of India, forget about rest of the world. But of course, there needs to be an ecosystem for that in terms of education, skilling, adequate law and order.
And we have some interesting examples and cases also in the report. There are regions in China from which we can learn in terms of, you know, literally economic transformation and how they built successful SEZs. And we identify particular areas where Bihar could develop special economic and logistic zones in certain areas and have an inland container port area as well.
So I can guess the answer is yes, I think we will delve into some of the details in the report.
Puja Mehra: And just to go back to the initial point you made, which is that at present services dominate industries in the Bihar economy. What are the services that Bihar does well in?
Prachi Mishra: So there's a lot of low productivity services, like in India, I think like in the whole of India, there's very inverse relationship between productivity and employment. And this is actually based on work done by Rana Hassan at Asian Development Bank, where he shows that, you know, most of the employment is actually in agriculture, which is low productivity. And higher productivity services create very little employment.
So when you think about services, of course, you know, health education are booming. There are lots of coaching institutes, a lot of clinics, educational institutions. But at the same time, I think there are a lot of low productivity services like traders, retail trade, you know, hotels and restaurants have also boomed, but I think there's still less capacity there.
Puja Mehra: Right. And I wanted to get from you a sense of you said that Bihar economy has been doing rather well relative to the past, I suppose. I wanted to get some sense from you of some of the parameters, you know, of this performance.
How should we compare this performance with Bihar's past so that we get an idea of how it has improved? And if you could also compare this with other states, just so that we can sort of get a sense of where Bihar stands vis-a-vis the rest of the states, because so much gets said, it's important to know what is the truth.
Prachi Mishra: I think in a number of areas, Bihar's recent performance has been impressive. So if you look at GSDP growth rates from, say, MOSP, Bihar has reported 8% real growth after the post-COVID normalisation. And if you look at the average of last one and a half decades or so, it's close to 7.5%. As I said, if you look at sectoral composition of growth services sectors, more than 60% of Bihar's economy, and that's growing at an average of about 9%. If you look into specific areas, such as infrastructure, I think road and rail connectivity have improved dramatically. Agriculture, we did talk about maize and makhana, these all success stories. But remember, again, that the base is very low for Bihar, and for a number of historical reasons.
So per capita income is still one third of the India average. And not only that, the income is very concentrated in a few districts. So we looked at data from the Economic Survey of Bihar.
So Patna has a per capita income, and we are talking about per capita income, so it's annual, about 1.5 lakhs rupees. Begusarai is the second richest, which has about 50,000 rupees. If you exclude these two, per capita incomes are very low.
So I think in addition to balanced development, we talk a lot about balanced development for the country as a whole. We also have to think about balanced development within Bihar. So given the low base, I think catching up in convergence will be challenging and will take time.
And India is growing fast, and as you said, several states are growing even faster. So my calculation suggests that it will take Bihar more than 15 years to catch up to Orissa, and multiple decades to catch up to all India average. Therefore, as I said, Bihar must shoot for double digit real growth to accelerate this process of convergence.
And importantly, as you agree, there is enough potential to harness.
Puja Mehra: Absolutely. And one question that you will, when you present your report, I'm sure many people will ask you, which is that Bihar is a source of low cost labour for so many states, for so many industries in other states. What are the employment opportunities at present for this labour in Bihar?
And what is the trend? Are we seeing still an increase in out migration from Bihar? Or is it, I don't want to say arrested, because that makes it look like it is not desirable, but still it is often exploitative.
And from that point of view, I'm interested in knowing if there are more job possibilities in Bihar.
Prachi Mishra: Let me take a step back. And now this whole narrative of migration from Bihar, and how to stop this migration, you know, palayan rokna hai, I think makes little sense. And let me explain why.
And you know, I studied international labour flows for years. And if you think about, you know, why do people migrate? Now, there's a huge literature on migration, international, sub-national, and it's well established that anywhere migration is determined by two things, push factors and pull factors.
And you can guess, you know, push factors are low earnings in any home or state, home state or country. Pull factors includes, you know, relatively higher earnings, network effects. And the third is non-pecuniary compensating differentials.
For example, I am from Bihar, my family is based there, my roots are there. For me, these are non-pecuniary compensating differentials, and they can be large as well. So any migrant evaluates whether the earnings differential and any non-pecuniary compensatory differential is enough to cover the migration costs, and he or she is able to send remittances back.
So even if you have the best employment opportunities, can you really stop migration? I think it's very hard. As I talked at the beginning, you know, even with a desirable scenario of double-digit real growth rates, Bihar's per capita income will be 70% of all India average in the next 20 years.
So there will still be a 30% gap. And the migrant will evaluate the gains in the decision to migrate. The literature has established, by the way, the biggest gains from migration are to the migrants themselves.
But actually these migrants can raise wages back in the home country or home state, which is also therefore improving for the home state. So I think the world has moved beyond. Jagdish Pavati was, you know, my thesis advisor.
He was one of the first to apply this term, you know, brain drain. And in a seminal paper, he himself has changed his view that brain circulation, remittances, tapping the diaspora proactively is actually the way forward. So I think this whole migration debate, palayan rokna hai and all, I think really misses the forest or the trees.
Puja Mehra: Right. And the public discourse around Bihar and its economy has largely been on the cash transfer scheme, the cash transfers for women, which is now becoming increasingly a politically important tool for not just Bihar, but other states also. I wanted your view on the economics of it.
What role is this likely to play in the larger plan that you're suggesting? And two, are you satisfied and convinced about the economics of it? Because although originally it is economists who had recommended cash transfers as a way of doing welfare, but now it seems to have become a political tool to the extent that many economists are beginning to suggest that politicians may be taking the easy way out by just giving cash transfers and not paying enough attention to other public goods like health, education, etc.
And also there are concerns about affordability, the fiscal affordability of cash transfers. So all of this, what is your view?
Prachi Mishra: So Puja, I think you raise a very important point about transfers or, you know, so-called feebies. These transfers are manifesting themselves in this new competitive federalism, I think what you point out too. And these can be costly.
So our report will take a deep dive into Bihar's fiscal performance. And we ask, how can Bihar, again, the report is very forward-looking. So how can Bihar garner resources to fund its growth, especially given the multiple demands on its limited resources, including on transfers?
And in the report, we talk about the need to regulate, deregulate, and kickstart. So balancing these three, getting into partnerships with the private sector, and taking a very proactive approach here could help. And we bring two interesting examples in the report.
One is international, as I mentioned. Henan region in China is actually very interesting and how it underwent an economic transformation with a state-led proactive approach. The region is landlocked, yet it overcame its geographical disadvantage by successfully creating a special economic zone.
So Bihar could emulate this by creating a special economic and logistic zone. You know, there are certain areas, I know you haven't travelled to Bihar, but this district of Hachipur, which can connect the Ganga waterway with rail and air freight to function as an integrated inland port. The second example on the fiscal side is from within India itself.
The first example is more about, you know, state taking a proactive approach, overcoming some of the geographical disadvantages. So this is more about, you know, regulate and kickstart. The second example is from within India, from Orissa.
And this example was actually covered in the RBI state finance report. It's remarkable how its fiscal performance has improved. You know, starting about two decades ago, Orissa started to reduce its very high debt to GSDP ratio.
What this means is that, you know, if you reduce, if you deleverage, then you actually also reduce your interest payments. You create fiscal space and actually Orissa managed to spend it on increased capital spending. The important lessons here for Bihar, Bihar's debt to GSTP and fiscal deficit to GSTP are among the highest.
And its own tax revenues are among the lowest. So really, you know, raising resources will be key. One of the areas which we identify is to increase the property tax base and perhaps also tax rates.
Property prices in Bihar, especially in key cities are really soaring. So this is really a potential there to raise revenues. We also find that the scope for efficiency within the existing spending envelope.
So for example, CAPEX allocations in Bihar are hardly towards agriculture, urban development. So our focus on strategic industrial policy actually requires to utilise the scope for more efficient allocation, even within the existing spending envelope. So bottom line, there is scope to raise resources to fund Bihar's growth and to build partnerships with the private sector where it's needed.
Puja Mehra: But are you convinced about the cash transfer scheme? Or let me say, do you continue to be convinced about the cash transfer scheme? Because most economists to begin with are.
Right.
Prachi Mishra: You know, I don't think it would be appropriate for me to comment on that. What I can say is that cash transfers are costly. I think there are fiscal implications.
So you have to finance the cash transfers. Either you raise your own resources or you borrow. If you borrow, you build debt stock.
Your interest payments are higher. And therefore, you have to trounce out spending on health, education, infrastructure, all, you know, what is needed for India, but, you know, in particular for Bihar. So I think it's costly.
It costs and there is a budget implication for that. And that gap has to be filled either through revenues or through financing from other sources. The point is that there is scope for raising Bihar's own tax revenues.
Property is clearly an untapped resource. It has to, you know, in terms of increasing the tax base to more efficient tax administration, but also possibly increasing the tax rates as well. Because, you know, property values are increasing in Bihar.
Puja Mehra: In fact, for all states and all cities, even Delhi, Bombay, I'm sure can do a lot better than they do right now on property tax.
Prachi Mishra: I think the need for states like Bihar is even more. I think because the deficit is high and it wants, you know, there's aspiration to grow even higher. And the need for funds is much greater.
You know, we ask the question for the country as a whole, where will, you know, how will we fund the growth? For states like Bihar, it's even more relevant. You know, we want to grow at much higher rates.
How will we fund the growth? And that's needed to accelerate the process of convergence.
Puja Mehra: And my next question, you know, I don't want to seem like I'm not a part of this discourse at all, but it is my job to ask this question, which is that there is brewing resentment in the western and the southern states because they contribute more to the tax collections that the centre then distributes amongst different states under the recommendations of the various finance commissions, successive finance commissions, and states such as Bihar contribute less.
So they are seen as, Bihar and some of the other states are seen as states that sort of get more from the kitty than what they contribute. And, you know, Tamil Nadu, Maharashtra, Gujarat, etc., contribute more, and what they get is relatively less. So there is this whole narrative about states like Bihar, I'm putting this in quotation marks, getting rewarded for their underperformance and states like Maharashtra and Tamil Nadu getting, again in quotation marks, getting penalised for their better performance on various parameters that go into deciding how the divisible pool of tax collection is to be divided across states.
Now, this resentment will now, you know, begin to show up when we get the new 16th Finance Commission recommendations. The report was just submitted yesterday by the 16th Finance Commission. So I wanted you to say something about, one, this narrative, and two, given it is being stretched by many economists included, to suggest, you know, that the resentment between the penalised and the rewarded states is now going to deepen so much, or has already deepened so much, that some sort of national security related concerns are being raised.
So even if we don't go that far, by when do you think this equation, especially vis-a-vis Bihar, can begin to change a bit? When will Bihar's dependence on FC transfers sort of begin to reduce?
Prachi Mishra: So Puja, this is a broader question, right? I mean, if you go back to independence, our forefathers had envisaged balanced development across states, and therefore we have the transfers, the Finance Commission decides the horizontal devolution, so-called horizontal devolution of tax revenues across states in India, so distribution of the pie through a formula. And the formula, as you pointed out, gives a large weight to need, and need is measured, you know, by population, by per capita, income distance, etc.
For the first time, I think, to my understanding, the 15th Finance Commission actually gave weight for performance at 15 percent. So demographic performance and tax and fiscal efforts. And this is to incentivise the better performing states.
So going forward, I think increasing this performance weight would be one way. And let's see what the 16th Finance Commission horizontal devolution formula is. The other way is, again, you know, I think it brings us back to the previous discussion, is for states to raise their own revenues.
So if Bihar sustains and even increases its already high nominal GDP growth rates, the tax base, you know, will automatically increase. And if it can better utilise potential of untapped revenue resources, such as property tax. So it requires tax efforts, it requires better tax administration, and probably a rethink at the fiscal framework itself.
Puja Mehra: I agree, that's probably the best way forward, because, you know, when the states that feel this tinge of resentment, when they see that the so-called rewarding states are sort of trying to run harder to perform better, I think the resentment will just go away then. Probably. Let's hope so.
Prachi Mishra: I think these are the only two ways to go. Either, you know, you have to reward performance, you have to increasingly reward performance, and states have to raise their own revenue sources. Currently, it's very skewed, you know, the expenditure and revenue raising in states too, for most of the expenditures, but the revenue collections are much lower.
It's totally skewed in the opposite direction. So I think own sources of revenues, and again, there's variation across states, but there's, you know, tremendous scope there, I would say.
Puja Mehra: For the purpose of your report, have you been in touch with officials in the states? Do you have a sense of the mood over there?
Prachi Mishra: No, the report is in collaboration with ADRI, Asian Development Research Institute. So of course, the idea is to release the report, you know, once the new government takes over. The idea is to present the report to the new government once it comes into place.
Puja Mehra: I hope they will find it, I mean, I know they will find it useful, but I hope they will begin to act on it almost immediately.
Prachi Mishra: Yeah, I think we are hoping, at least, that, you know, some of our recommendations can be executed as soon as possible, you know. I think a lot of work is going on. The idea is to just, you know, build on that, and to sustain these growth rates and grow even faster over the next two decades.
Puja Mehra: Thanks. Thanks so much.
Prachi Mishra: Thank you, Puja. Pleasure.
