Nehru's Freight Equalisation Policy(FEP) destroyed UP and Bihar

> The process of marginalization has further been reinforced by the federal central government’s policy of ‘freight equalization’, which nullified the comparative advantage of Bihar and UP in natural resources by subsidizing railway freights of industrial inputs like coal, iron ore, steel, cement and other bulk resources. This, combined with relatively low financial resources received from central government over the consecutive plan periods, has undermined these states’ capacity to invest in health, education, and other social and physical infrastructure and resulted in low human development. The poor performance of Bihar and UP may be attributed to low human capital, weak institutions and poor infrastructure coupled with political instability and social conflict rooted in sectarian politics based on caste, class and ethnic division. > Bihar and UP are also rich in mineral resources and forests. More than 40% of India’s coal, 32% of its bauxite, 59% of its copper, 17% of its iron ore, about 80% of its silver and 60% of its mica comes from Bihar (Sharma, 1985). UP is also rich in mineral resources. > While the freight equalization policy was cancelled in 1992, Bihar and UP had already fallen behind and in addition they continued to be constrained by an unfriendly investment climate arising from weak physical and social infrastructure and poor governance. While state–business relationship have improved significantly since the mid-1980s in most states of India, it deteriorated in Bihar and minimum progress was made in UP (Cali & Sen, 2011). The poor economic environment brought about by conflict and poor governance reduces the security of property rights, increases costs and the risks in investment. It drives investors to safer places and quick-earning activities. As a result, private investment in Bihar is only 2.68% and in UP 12.22% of gross state domestic products, while the average is 16.45% in major 14 states (Ahluwalia, 2000). https://www.tandfonline.com/doi/pdf/10.1080/21681376.2014.943804 > Over the past half-century, the western (and southern) states benefiting from FES have enjoyed India’s highest rates of manufacturing growth, while the resource-rich eastern states have fallen from being manufacturing powerhouses in the 1950s and 1960s to being among India’s poorest states today. > We find evidence consistent with these claims: FES achieved exactly the opposite of its purported goal, exacerbating inequality between western India and the resource-rich east. Specifically, we show that FES led industries using the equalized iron and steel to move farther from the bases of raw materials production in eastern India. The empirical strategy relies on a triple-difference, studying how output in a state-industry is affected by the state’s distance from the sources of iron and steel, interacted with the intensity of iron and steel use in the industry’s production. We also show that input linkages magnify these effects, with eastward relocation occurring not only for the direct users of the equalized materials, but also for their downstream neighbors and for industries with higher Leontief input shares of these materials. > In 1950, West Bengal and Bihar accounted for 92 percent of all iron and steel production in India and 48 percent of all manufacturing output in engineering-related industries. These areas enjoyed a natural advantage in manufacturing, due to their proximity to raw materials, particularly iron ore, as depicted in Figure 1b. They were also rich in coal and other important mineral resources. https://barrett.dyson.cornell.edu/NEUDC/paper_316.pdf