Bihar's Economic Transformation: Ruchir Sharma Analyzes Growth Challenges and Investment Potential

The investor remarked that Bihar was "terrible in every way" in 2005, but witnessed significant transformation over the next decade.

Purnea (Bihar):

With the first phase of voting completed in Bihar and the second phase approaching, NDTV conducted an interview with Ruchir Sharma to discuss Bihar's growth potential and what the next state government should prioritize to attract global investment.

In a special edition of 'Walk The Talk' filmed from Bihar's rural heartland, including visits to a makhana farm and processing factory, the renowned global investor and author shared his observations with NDTV's CEO and Editor-in-Chief Rahul Kanwal. Sharma noted that while Bihar experienced exceptional growth between 2005 and 2015, it now seems to be struggling to advance to the next developmental stage.

He highlighted concerns about excessive welfare spending, which potentially diverts resources from crucial infrastructure investments needed for sustained long-term growth.

Reflecting on his current visit to Bihar during the election period and the state's transformation, Sharma stated, "I have been in Bihar for four days on this trip. My first trip was in 2005 and there has been a dramatic shift since then. Between 2005 and 2015, we saw a remarkable change in the state. Since then, Bihar has begun to stagnate somewhat. The kind of poverty I have seen on this trip has been heartbreaking. Even in places close to Patna, we saw young children trying to get fish from a pond filled with filth."

"I have consistently said about India that it is a country that disappoints both the optimist and the pessimist. After the optimism that I felt for Bihar, this trip has been a bit dispiriting. The change (in the past 10 years) has not been as dramatic as it should have been for what is the poorest state in India," he emphasized.

The investor described Bihar as "terrible in every way" in 2005 but acknowledged significant improvements during Chief Minister Nitish Kumar and BJP's subsequent terms. Road infrastructure and law and order saw massive improvement from 2005 to 2010, followed by enhanced electrification in the next five years until 2015.

"After 2015, the next step should have been the creation of new industries and employment. I think that's where the state is stalling and struggling to find its next growth model," he observed.

Analyzing economic data, Sharma explained that Bihar's per capita income began closing the gap with the national average between 2005 and 2015, rising from approximately 30% to about 35%. However, this gap has widened again over the past decade.

"Bihar's per capita income today, at about Rs 70,000 a year, is less than 30% or approximately 30% of India's per capita income, which is about Rs 2 lakh," he pointed out.

Issues, Way Forward

When asked what measures a new government should take to instill confidence in global investors regarding Bihar, the author acknowledged the state's abundant talent but highlighted persistent weaknesses in the education system. He noted the challenge of retaining local talent and the sluggish growth in real estate and construction sectors.

"My big fear about Bihar is that the state seems to be getting stuck in a welfare trap. Even in this election, nearly 3% of GDP has been announced in pre-poll welfare schemes. When China was at a similar stage of development, it was investing everything in infrastructure and nothing in welfare, because it was practising ruthless capitalism. In India, we are still investing a lot in welfare," Sharma explained.

"Prime Minister Narendra Modi tried to shift the balance towards infrastructure, but it seems to me the amount being spent on welfare by states has gone up significantly. It is a welfare trap. A big factor in this election is the Rs 10,000 given to women by Nitish Kumar's government, but now Tejashwi Yadav is promising Rs 30,000. That's the kind of vicious loop states get stuck in," he cautioned.

Women Factor

Sharma observed that digitization has significantly reduced leakages in welfare schemes. He noted that while the Bihar election appeared closely contested a few months ago, the NDA now seems to be leading, primarily due to the Rs 10,000 financial assistance provided to women.

"Nitish Kumar's superpower has been how popular he has been with women and even the BJP has figured out that one possible way to cut across caste lines is to consolidate the women's vote," he remarked.

Sharma also mentioned that unlike the 2020 Assembly elections, there is no visible anti-incumbency sentiment in Bihar currently. "Nitish Kumar still enjoys a lot of goodwill," he added.

Prohibition

Regarding the prohibition policy and its popularity, Sharma cautioned that good politics doesn't always translate to good economics.

"When we travelled, we realised drug abuse has gone up and the illegal liquor business has also picked up. In Bihar, hardly any revenue is being generated by state activity and, by implementing prohibition, you have taken another source of revenue away. This is a balance that every state has to get correct. It's one thing for a state like Gujarat to do it and another for Bihar, which does not have that much of a local economy," he concluded, though noting that women generally remain supportive of the prohibition policy.