CHAPTER - SIX

IMPACT OF LOW C D RATIO ON ECONOMIC

DEVELOPMENT OF BIHAR

Credit Deposit ratio reacts to the changes in some

important parameters in the economy. With this perspective, C D

ratio is placed against the parameters like state of infrastructure,

law and order, basics amenities like primary health, education,

shelter, work availability, size of investment; domestic private and

foreign, ratio of corporate capital formation to the SGDP, size of

capital formation in agriculture sector, and per capita income.

The data collected from 28 states of the India in 2005

shows that, reaction of C D ratio is seems to be positive, where it

was up to the mark and negative in those states where it had

opted downward trend. Empirical study shows that relation of C D

ratio with infrastructure is mildly positive, but the relation of C D

ratio with law and order and per capita income is positive. So,

poor C D ratio of state has adversely affected the economy of the

state. Comparing with other states, having better C D ratio proves

this axiom also.

Opportunity to Grow and low C D ratio

High income inequality, which prevails in throughout

the country is not only single injustice, but in poor states

particularly in Bihar, unequal opportunities and the resulting

unutilized economic potential makes it much more difficult to

achieve basic development goals. Historically, the state of Bihar

was not poor as it is. Endowed natural resources of undivided

south Bihar and fertile soil of north Bihar was the source of

economic growth for country as whole.

But now, Bihar is worst off amongst all the major

states in all development indicators. There is progress, but it is

very slow. One can see the progress in an all India perspective.

The rate of progress in primary enrollment, the ratio of female to

male literacy and access to sanitation is disappointing. The State

will not be able to achieve the desired norms even by 2015 as per

the current rate of progress.

Variations in opportunity to grow are not only

interstate phenomenon, but it more of intra in its nature as seen

in the form rural – urban divide and inter districts variation

prevailing in the state of Bihar.

The situation in rural areas is even more acute. Full

immunization covers only a small fraction of children and has

been declining during recent years. There are wide inter-district

variations. Kishanganj district appears to be at the bottom, while

Patna and Muzaffarpur rank at the top for most indicators.

Collected statistics reveals the facts.

Table No. 29

Selected Development Indicators for Bihar and India

Indicator 1993 1999 Target 2015 Bihar India Bihar India Bihar

Poverty headcount (%) 36 45.9 28.6 39 28

Children Malnutrition (%) 53.4 62.6 47 54.4 32

Infant Mortality rate 78.5 89.2 67.6 72.9 27

Child Mortality under 5 yrs 109.3 127.5 94.9 105.1 41

Maternal Mortality - - 408 451 109

Immunization 35.4 10.7 42 11 100

Births attended by skilled

health staff (%)

34.2 10.7 42 11 90

Net Primary enrolment (%) 71 54 77 52 100

Male Literacy (%) 64.1 52 76 60.3 -

Female Literacy (%) 39.3 22.9 5.3 33.6 -

Ratio of female to male

literacy

0.61 0.44 0.71 0.56 1

Access to improved water

resources (%)

68.2 63.6 77.9 75.4 80

Access to improved

sanitation (%)

30.3 16.5 36 16.8 25

Household with electricity as

source of lighting (%)

- - 55.8 10.3 -

Source: Bihar: Towards a Development Strategy, World Bank Report

Data shows that, the state of Bihar is far away from its

midterm target of the long run growth strategy. The state’s

performances on most of the socio-economic indicator are at

subsistence level, in some cases it is below than this.

Here one thing I, would like to mention that schemes

like RIDF can improve the facilities in the category of basic

amenities infrastructure, which in turn improve the life quality of

the mass of the state. This also helps in maintaining high C D

ratio of the state.

Rate of Economic Growth and low C D Ratio

Traditionally, economic growth of a State is measured

in terms of its Gross State Domestic Product (GSDP) at constant

prices. This growth performance was 4.9 percent during the

1980s, which was below the national rate of 5.6 percent, and then

no growth during the first half of 1990s when the national average

was 5.4 percent. Over the period 1994-95 to 2000-01, the growth

rate of the new state of Bihar averaged 3.8 percent which is less

than the two-thirds of the national growth rate of 6.1 percent per

annum.

Comparisons in terms of per capita income growth are

more disappointing. This is mainly due to high population growth

rate, which was 2.5 percent per annum between the 1991 and

2001 censuses. It was the highest in the country and the national

average was just 1.9 percent. In fact, unlike the other States,

Bihar’s growth rate in the 1990s was higher than 2.1 percent

experienced in the 1980s. This has aggravated the population

pressure and depressed income growth.

Table No. 30

Growth Performance: 1981-82 to 2001-02

BIHAR

Sectors 1981-82 to 1990-91

1991-92 to 1995-96

1994-95 to 2001-02

Primary 4.6 (-) 2 0.8

Secondary 5.2 0.5 10.5

Tertiary 5.6 2.2 6.4

G D P 4.9 0.0 3.8

INDIA

primary 3.6 2.3 3.0

Secondary 7.1 6.3 6.4

Tertiary 6.5 7.0 8.0

G D P 5.6 5.4 6.1

Source: White paper on state finance and development Bihar (page no. 4)

Collected statistics presents critical picture of the

state. It would be unbelievable fact for someone that in the initial

years of economic reform of the India, one of the most potential

states like Bihar has recorded zero rate of GDP growth.24

24. Towards a Development Strategy, World Bank Report (Table 2.1,p 23)

The back bone of state’s economy as well as national

economy i.e. primary sector has recorded negative rate of growth

during the same years. More drastically, after the period of

negative growth, the state has witnessed a marginal increase

during the next six years which is close to 0.8 percent on average

basis.

Relating the phenomenon of negative growth with

other factors like public investment in agriculture sector and

credit deployment by commercial banks in Bihar, we find that,

this was the era of decline in public investment in the area of

agriculture caused by policy changes and heavy financial crisis of

the country as well as for the states. Neither, the union

government nor the state government was in a position to invest

in the area of agriculture so; the entire hope for investment was

laid on the support received from banks and some specialized

institutions for it. However, both were failed to do so, the reasons

may be lack of policy implication or willingness to lend.

During the same period the state of Bihar has received

least support in the form of formal sector credit. During the same

period the state has recorded low C D ratio which resulted into

poor capital formation in comparison to large industrial states.

Growth Divergence and low C D Ratio

In addition to internal inequality, growth divergence

among states is critical. Richer states have better endowments

which give them preferential access to capital markets and money

markets and make them less vulnerable. The available statistics

proves that the richer states have benefited more from the money

and capital market resources than the poor states in the era of

private investment.

In the wake of economic reforms initiated in 1991, the

role of private investment has acquired a special significance in

the context of economic development of various States of the

Union of Indian.

Indeed, there has been an element of competition

among States ever since for attracting private investment, both

domestic and foreign. Those states have able to manage

successfully private investment where social and economic

infrastructure was relatively in better position than their counter

parts. Private investors had moved in such states where, forward

and backward linkage was sufficient for industrial activities.

The state of Bihar where poor credit deployment has

destroyed the backward and forward linkage of the state could not

attract the private investment as per its market potential.

Empirically it has found that index of infrastructure and demand

for bank credit is closely co related. The collected statistics of

socio economic parameters and C D ratio proves the facts.

Table No. 31

Socio-economic parameters- infrastructure index-

C D ratio, 2005

States Infrastructure index

Law and order

PCI C D ratio

Punjab 3 o.58 16920 43.4

Maharashtra 2.55 o.97 17461 81.4

Gujarat 2.32 1.02 17094 83.8

Tamil Nadu 1.99 1.82 14434 89.6

Bihar 0.2 0.29 4352 25.6

Source: National Readership survey-2005

Here, we see that there is positive correlation between

infrastructure index and C D Ratio; excluding the state of Punjab

all the three states namely, Maharashtra, Gujarat, and Tami Nadu

have acquired high point on infrastructure index in comparison to

the state of Bihar. Apart from this these three states have also

performed well on the front of maintaining C D Ratio in the states,

whereas the state of Bihar has performed poor on the front of C D

Ratio.

No doubts, law and order and state of infrastructure

are one of the important determinants of private investment but

this relationship is not one way rather it is two way relations.

C D Ratio as a Endogenous Factor and Investment Climate of

the state of Bihar

An empirical finding proves that, one of the important

financial indicator; bank credit to the proportion of total bank

deposits, technically known as Credit Deposit Ratio plays

important role in attracting private investment for a particular

region. Collected statistics shows that, those states benefited more

in the era of foreign private and domestic private investment

where recorded C D Ratio was naturally high. High C D Ratio

maintained by SCBs of a particular state or region has helped the

state in attracting more private investment in comparison to those

states where C D Ratio was not up to the mark.

High C D Ratio indicates the state of better investment

climate25 besides, it is perpetuating in its nature so it create

cumulative effect on internal investment as well as on external

investment. The presented table supports the above analysis.

25. Economy and Political Weekly, July 2002 (P,23-25)

Table No. 32

Investment Proposals and Disbursal of Financial Assistance

for Investment

Sr. No.

States Percentage share of investment proposals

between August 1991 and March 2000

Cumulative share of financial assistance

disbursed by all India Financial Institutions (up to March end

1999)

Cumulative financial assistance disbursed by State Financial Corporation’s (up to March end

1999)

1 Andhra Pradesh 7.5 7.2 7.8

2 Gujarat 17.3 13.5 9.3

3 Haryana 3.4 2.5 4.8

4 Karnataka 4.5 6.1 15.5

5 Kerala 1.1 1.7 4.4

6 Maharashtra 21.7 21.0 11.5

7 Punjab 4.4 2.4 3.6

8 Tamil Nadu 6.8 9.0 10.6

Subtotal - (1 to 8) 66.7 63.4 67.5

9 Assam 0.7 0.5 0.5

10 Bihar 1.1 1.4 2.0

11 Madhya Pradesh 7.2 5.1 3.2

12 Orissa 2.6 1.8 3.7

13 Rajasthan 3.8 4.5 6.1

14 Uttar Pradesh 8.5 7.9 11.1

15 West Bengal 3.5 3.9 2.5

Subtotal - (9 to 15) 27.4 25.1 29.1

All India 100 (Rs.908888 crore)

100 (Rs.312502 crore)

100 (Rs.20896 crore)

Source: Annual Report 1999-2000, Ministry of Industry, Govt. of India

The total investment proposals received by all the

States and UTs since the inception of economic reforms in August

1991 till the end of March, 2000 are worth Rs.908, 888 crore. The

disparities are obvious. The group of forward States accounted for

two-third of the amount while the group of backward States

accounted for just over 27 per cent of the amount. Indeed,

Gujarat and Maharashtra together accounted for 39 per cent of

the investment proposals, which is significantly more than the

total investment proposals received by all the States in the second

group. While Gujarat which accounted for less than 5 per cent of

the population of the country, received over 17 per cent of the

private investment proposals; Bihar which accounts for more than

10 per cent of the population of the country, received just a little

over one per cent of such proposals. This is a clear pointer to the

direction of private investment in the coming years.

Per Capita Income and low C D Ratio

During the decades of 1980 and 1990, the expansions

of banking network and credit facilities have also supported the

incremental process in the per capita income of the states.

However, the increment in per capita income is more in such

states where banks has extended enough credit either to

agriculture or to industrial sector than states where banks has

not performed satisfactory. Collected statics reveals the facts.

Table No. 33

Per capita GSDP as a percentage of GDP

(Three-year average of incomes at current prices centered on)

States 1981-82 1985-86 1990-91 1997-98

Forward group

A P 87.4 82.4 92.5 92.9

Gujarat 125.3 124.4 118.8 137.4

Haryana 146.5 139.9 146.6 139.4

Karnataka 92.8 93.7 95.4 107.2

Kerala 90.5 90.9 87.8 116.4

Maharashtra 143.0 134.7 144.7 167.5

Punjab 168.6 165.0 169.7 146.5

Tamil Nadu 92.8 97.0 100.0 119.5

Backward group

Assam 83.6 92.1 83.1 62.2

Bihar 58.8 60.6 53.5 44.2

M P 80.8 74.8 78.1 73.5

Orissa 75.0 74.7 66.9 61.8

Rajasthan 76.6 74.0 79.3 81.1

Uttar Pradesh 75.8 71.9 70.6 64.4

West Bengal 103.3 102.9 91.7 85.1

All India 100 100 100 100

Source; EPW, Research Foundation

The table sharply focuses the differential growth in per

capita incomes of the two groups of States over the last two

decades, especially during the last decade. All the States in the

forward group, except Haryana and Punjab have improved their

relative position over the last two decades. Further, these

improvements were more spectacular since 1990-91, especially in

Gujarat, Kerala, Maharashtra and Tamil Nadu. It is noteworthy

that the relative decline in per capita incomes of Haryana and

Punjab was a phenomenon of the 1990s. Per capita incomes of

four out of eight States in the group were below the national

average in the eighties. But by late nineties, all except Andhra

Pradesh have gone above the national average.

In contrast, all the States except Rajasthan in the

backward group experienced relative deterioration in terms of per

capita income. And the deterioration was more marked after the

reforms. This especially is true of Assam, Bihar, Orissa, Uttar

Pradesh and West Bengal. Indeed, West Bengal was the only State

in this group, which had above national average per capita income

to begin with. Improvement depicts in those state where

penetration of agricultural credit has increased.

Incidence of Poverty and C D Ratio

It has been also observed that fall in public investment

in the area of agriculture has worsen the situation of those states

where the local money lenders had played a vital role in meeting

the credit requirements of locales. These were such states where C

D Ratio was drastically low. Absence of easy availability of formal

sector credit has pressurized the small and medium farmers to

borrow from local money lenders for their needs at high rate of

interest which resulted into debt trap.

The incidence of poverty has increased in such states

which are clearly visible in the studies presented below.26

Table No. 34

% share of poor in the two groups of States individually and collectively

States 1983-84 1987-88 1993-94 1999-2000

Forward Group

Andhra Pradesh 5.10 5.22 4.81 4.57

Gujarat 3.65 3.98 3.28 2.61

Haryana 0.92 0.83 1.37 0.67

Karnataka 4.64 5.17 4.88 4.01

Kerala 3.31 2.88 2.39 1.58

Maharashtra 9.01 9.65 9.53 8.76

Panjab 0.89 0.82 0.78 0.56

Tamil Nadu 8.05 7.53 6.31 5.01

Backward group

Assam 2.41 2.47 3.01 3.63

Bihar 14.31 13.71 15.40 16.36

Madhya Pradesh 8.61 8.61 9.32 11.47

Orissa 5.62 5.40 5.01 6.50

Rajasthan 3.93 4.65 4.01 3.14

Uttar Pradesh 17.24 17.47 18.87 20.36

West Bengal 9.87 9.24 7.95 8.20

All India 100 100 100 100

Source: Planning Commission of India

26. Scaling-up Microfinance for India’s Rural Poor, Priya Basu, (World Bank) and Pradeep Srivastava, National Council of Applied Economic Research, India, June,2005

The table shows sharp decline in the share of poor in

the forward States since 1987-88, especially after 1993-94 is

commendable. The two together imply that the main beneficiaries

of the overall decline in poverty in the country have been the fast

growing States in the forward group. This, in a sense,

unequivocally establishes the close positive relation between

poverty reduction and economic growth.

In contrast, the share of the poor in the seven States in

the backward group has gone up significantly. Now they account

for about 70 per cent of the poor in the country. As the table

indicates, each one of the States in this group, except West

Bengal, experienced considerable increase in the share of the

poor. West Bengal’s exceptional experience was mainly on

account of the fast growth in agricultural production and the

associated rural prosperity. Again, the positive association

between poverty reduction and economic growth, especially

agricultural growth is to be noted which in turns depends upon

rate of capital formation and use of modern practices supported

by adequate credit deployment by formal sources.

Size of NSDP and C D Ratio

As Schumpeter says credit is engine of growth,

because it creates commands over the necessary purchasing

power. In this context, adequate size of C D Ratio may works as a

stimulating factor for the economies. Statistically, we observe

about the SGDP of the Indian states and C D Ratio realized by

them shows a distinctive trend. In an study conducted by

Planning Commission of India on relationship between C D Ratio

and SGDP of the states reveals the facts, which are presented

below.27

Table No. 35

Credit Deposit Ratio in Major States of India (2003-2004)

Category of states Number of state

Number of districts

Below 40 40 to 50

Above 50

per capita SDP less

than national average

9 196 (100) 129 (66) 26 (13) 41 (21)

per capita SDP more

than national average

11 187 (100) 60 (32) 33 (18) 94 (50)

Total 20 383 (100) 189 (50) 59 (15) 134 (35)

Source: Planning Commission of India, figures in brackets shows % of credit taken

on utilization basis.

The extent of deployment of credit in a given state

could be measured by Credit deposit Ratio. Data on distribution of

credits, for states having per capita SDP above national average

i.e. developed states and states having per capita SDP less than

national average i.e. less developed states shows that the

27. Data book for DCH; 10 April 2012 Page 41 of 232

proportion of districts having CDR less than 40 is higher (66 per

cent) in less developed states as compared to the developed states

(32 per cent) indicating a wide disparity in deployment of credit in

major states. However, the case is severing in case of Bihar,

because out of 38 districts of newly formed Bihar, 33 districts are

witnessing C D ratio less than 40% resulting lowest per capita

NSDP. Lower C D ratio has created cumulative effects on state’s

economy.

Table No. 36

Per capita NSDP at FC (Rs in Thousands)

tates 9-00 0-01 0-02 2-03 3-04 4-05 5-06 6-07

ihar 786 554

13.27)

994

-8.54)

658

11.08)

117

-8.13)

772

10.71)

745

-0.40)

233

22.06)

ujarat 8864 7227

-8.68)

8200

5.65)

9509

7.19)

2387

14.75)

3346

4.28)

6268

12.52)

8335

7.87)

aharashtra

3011 1892

-4.86)

2258

1.67)

3447

5.34)

4859

6.02)

6603

7.02)

8863

8.51)

0982

7.34)

ll India 5839 6133

1.9)

6762

3.9)

7075

(1.9)

8263

(7.0)

9257

(5.7)

0858

8.1) /A

Source : Hand book on statistics by RBI. Figure in bracket shows % change over the

previous years.

During the years the state of Bihar has recorded

continuous lowest per capita income more specifically; it is two to

three times lower than some states like Gujarat and Maharashtra.

Growth is steady and continuous process but the continuity

depends on stimulations; stimulation in the form of investment,

stimulation in the form of institutional reform, and more general,

stimulation in the form of desire to do something so, it would be

very difficult to say that lowered C D Ratio of particular years has

pushed the state of Bihar in backward direction, it is consecutive

effect of long ignorance.

During 2002-2007 the state of Bihar has recorded

4.46 percent growth rate in per capita NSDPFC while during the

same period Gujarat has recorded 8.71 percent and Maharashtra

has witnessed 5.98 percent rate of growth and at all India level it

is 5.32 percent. However, if we do not consider abrupted rate of

growth of 22.06 percent of 2006-07 by the State of Bihar then the

realized rate of growth in per capita NSDPFC by Bihar is 1.01

percent much lower than the national rate of growth.

The flow of credit is one of the key instruments to

regulate various economic activities. The credit is deployed by

commercial banks based on the deposits mobilized from the

public after making allowances for statutory requirements

prescribed by RBI from time to time. The C D ratio has become

more important after the nationalization of banks to assess the

credit deployment by commercial banks to benefit the economy in

general and the targeted group in particular.

Priority sector lending and C D Ratio

Size Priority Sector Lending (PSL) normally depends

on the C D ratio, that is, higher the C D ratio, higher will be the

flow towards the PSL. The flow towards PSL is decided by the flow

of net bank credit which in turn depends on C D ratio. As per the

RBI stipulation, at least 60 per cent of the CD ratio should be

achieved by Commercial banks with 40 per cent of the net bank

credit to priority sector. Over the years, deposits and advances

have grown' enormously in India. Since 1991 the growth of

deposits has increased by 130.30 times while growth of advance

increased by only 90.04 times indicates the reduced credit flow

from banks which widens the gap between the deployment of

credit and mobilization of deposits.

The gap is wider in Bihar. Lower C D ratio affects

weaker section more, along with other borrowers which reduce the

rate of growth.28 The table presented below revels the facts.

28. Economic and Political Weekly August 4, 2007

Table No. 37

Share of Debt from Formal Sources in Total Debt of Rural Dalit and Non-Dalit/Adivasi Households, State-wise, 1992 and 2002 in

percentage terms.

States Dalit HH Non Dalit HH

Non Dalit/ Adivasi HH

All HH

1992 2002 1992 2002 1992 2002 1992 2002

Bihar 65 25 74 54 73 53 72 37

Gujarat 69 80 72 66 71 67 74 67

Mah. 72 90 81 84 81 84 80 85

U P 73 47 66 61 65 67 67 56

All India 61 45 65 59 65 59 54 57

Source: NSSO Report (1998, 2006).

In the state of Bihar, the weaker section of society has

received lowest credit from any formal source in comparison to

those states where C D Ratio is sufficient for the states. The rural

Dalits of Bihar have received only 25 percent of their credit

requirement from the formal sources which is about 50 percent of

national average. The conditions are same for others group also.

In case of entire rural household (HH) of the state the percentage

is very low than the national level. However, those states have

maintained good proportion in all respect where the percentage of

C D Ratio was high.

Poor bank support to the rural Dalits as well as

general household of the state has created more measurable life

for them. Most of rural households depend on informal source of

credit to meet its various requirements.

Size of Private Investment and C D Ratio

Investors generally prefer to invest in the regions

having better developed institutions which are presumed to

ensure lower investment risk. Poor states have less diversified

economies and products making them much more vulnerable to

attain even average rate of growth.

Greater variation in investment especially in terms of

FDI has created larger impact on growth and development of rich

states. In a developing economy, like India where agriculture

sector plays vital role in all respect, faced structural constraint in

the area of new job opportunities. However, still agriculture and

allied sector provides largest job opportunities in India and Bihar

too.

In a high populated economy where new job

opportunities may most awaited economic phenomenon the

industrial sector contributes more for the same. Role of

entrepreneur and enterprises are well defined in the literatures of

Schumpeter; Schumpeter considers, ‘innovation’ as engine of

growth.29 Innovation materialized the prosperity, in the form of

employment, output, and income but for less developed economies

capital is big constraint.

We know,

Y = C + S

Here, Y stands for income, C stands for

consumption, and S stands for saving.

So, small size of income reduces the size of saving for

required level of high investment and output therefore there is a

big gap between Ex-ante saving and Ex-ante investment. In an

open economy model foreign capital may play major role to sort

out this problem. But again, hindering factors like ‘growth

divergence’ may create regional imbalance in the economy like,

India where structural and institutional problems persist since

long time period. Available statistics proves that institutional

ignorance of Bihar has diverted the investment opportunities to

other states and pushed the state in poor condition.

29. Theory of Economic Growth and Technical Progress by Bakul H Dholakia and Raindra H

Dholakia, Macmillan India Ltd. 1998, (P,34-36)

Rich states have enjoyed opportunities with the help of

resources like man, machine, minerals, bank deposits, but

weaken industrial base of the state of Bihar especially after

bifurcation has detracted the domestic, as well as foreign

investment. The State has lost its strong sugar and paper

industries due to crunch of capital for modernization.

Small scale, cottage and tinny industries have died due

to reluctant behavior of financial institutions, like commercial

banks working in the state. Reluctant attitudes of commercial

banks in the state have badly affected the backward and forward

linkage needed for the SSIs. Lowered C D ratio of a high market

potential state has reflected a negative image 30 of the state and

discouraged new investment, employment, output, and therefore

size of disposable income. Here, I would like to present some data

which shows all these facts.

30. Economy and Political Weekly, Oct.2007,(P38-40)

Table No. 38

State-wise Investment Data (1994-95 TO 2004-05)

Name of the states

IEM+LOI (number of proposals)

% of all India proposals

Investment (Rs million)

% of all India

investment

Maharashtra 10.232 19.9 2426410 21.11

Gujarat 6483 12.61 18889160 16.43

Tamil Nadu 4786 9.31 702540 6.11

Uttar Pradesh

4553 8.86 776290 6.75

Andhra Pradesh

3613 7.03 1258110 10.90

Haryana 3097 6.02 336130 2.90

Rajasthan 2450 4.77 409730 3.56

West Bengal 2434 4.73 442220 3.85

Punjab 2312 4.5 538970 4.69

Madhya Pradesh

2097 4.08 449760 3.91

Karnataka 2085 4.06 557150 4.85

Dadra and Nagar Haveli

1520 2.96 217650 1.89

Daman and Diu

704 1.37 42690 0.37

Chhattisgarh 627 1.22 378180 3.29

Kerala 528 1.03 105540 0.92

Pondicherry 523 1.02 79970 0.70

Goa 504 0.98 69940 0.61

Delhi 490 0.95 65190 0.57

Himachal Pradesh

455 0.88 98580 0.86

Orissa 414 0.81 301640 2.62

Jharkhand 357 0.69 111090 0.97

Uttaranchal 341 0.66 63820 0.56

Assam 244 0.47 79160 0.69

Bihar 171 0.33 44680 0.39

Jammu and Kashmir

145 0.28 12020 0.10

Meghalaya 123 0.24 14440 0.13

Chandigarh 38 0.07 4580 0.04

Tripura 20 0.04 17790 0.16

Arunachal Pradesh

13 0.03 1530 0.01

Source: Calculated from the data of Secretariat of Industrial Assistance, Ministry of

Industrial Development.

The data on investment ‘proposed’ proves above axiom,

that a few regional states capture a disproportionately large share

of proposals, enjoying high growth. There is a definite regional

pattern, with the two western states, Maharashtra and Gujarat,

absorbing more than 1/3rd of the total investment proposals from

1991 to 2003. While theses states keeps only 14.3 percent of

India’s total population. These are also, the states where high C D

Ratio is a historic phenomenon.

But, in case of those states where C D Ratio is

historically low like the state of Bihar; have failed to attract private

investor. The impact of poor C D Ratio of state also seen in the

latest global meet of investor in state capital, when some leading

industrialist of the India has raised their doubts regarding the size

of past investment in Bihar. Starting from the period of 1994 to

2004-2005, the state of Bihar has recorded only 0.33 percent of

total investment proposal which is about 0.39 percent of all India

investment size. Low C D Ratio of the state has badly affected the

investment climate of the state.

Size of FDI and C D Ratio

FDI provides much needed resources to the developing

economies such as capital, technology, managerial skill,

entrepreneurial ability, brands, and access to markets these are

essential for developing regions to industrializes, develop, and

creates jobs attacking the poverty situations. After the reform of

1990 India as a whole emerged as big clement of FDI after the

China.

However, the distribution of FDI is not homogeneous

for throughout the country, hindrance in the form of geographical

location of the state, infrastructure, state efforts, business

climate, past records, and availability of inputs are important.

MNCs check many things before deciding location and

size of investment and one of them is banking environment

operating in that area.

Empirical finding says that banks are prime source of

funding to business activities in less developed regions because of

capital market imperfection and dominance of unorganized sector

business enterprises. However, these enterprises are important in

linkage or in cost reduction process for MNEs.

Starting from 1990 to till now Bihar has received

negligible share in FDI. Along with Jharkhand, Bihar has received

only 50 mn FDI out of which Bihar’s share was lowest 12.5 mn in

2006-2007. Utter Pradesh together with Uttrakhand has received

180 mn during the same period. States like Odhisa, Rajasthan,

and Madhya Pradesh including Chhattisgarh, so called member of

BIMAROU states except the state of Bihar have managed their

rank in the list of top ten FDI destination in India.

It is known unfortunate with us, that workers of rich

state are working with MNEs at better terms and conditions in

their home states or in any part of the India, and workforce pool of

Bihar is bridging the gap of their unorganized sector requirement

of labour force through regular immigration from state.

The status of FDI in different states of India, during

the period beginning from the year January 2000 to October 2006

corroborates the growth of Indian states in sync with the Indian

economy. Foreign Direct Investment on Maharashtra covers

Mumbai, Dadra and Nagar Haveli, and Daman & Diu. The total

FDI Inflows in Maharashtra economy from January 2000 to

October 2006 was estimated to be around 25,685.45 crores.

Sectors which have been heavily benefited from foreign

investments in Maharashtra include Engineering, Electronics

Hardware, Automobiles and Auto Components, Consumer

Durables, Chemicals, Petrochemicals, Pharmaceuticals,

Information Technology and Biotechnology.

Gujarat has received Rs. 4,112.73 crores, about 3.7

percent of the total foreign direct investment in India during the

same period. FDI inflows in Gujarat have led to rapid development

in the industrial sector in this state manufacturing sector has

received approx 23 percent FDI followed by construction and

financial services.

Historically, these sectors have greater contribution in

total employment in the economy after agriculture and allied

activities. With increasing volumes of Foreign Direct Investments

Gujarat has emerged as one of the most rapidly developing state

in India. Impact of FDI on Gujarat Economy has proved to be

beneficial for the various industries in the state have grown,

developed and also extended the benefits to self employment

opportunities due to growing business activities. 31

As per NSSO 64th round survey on employment and

unemployment condition in India, in 2007, 59.8 percent of total

work force of Gujarat was self employed. This eye opening fact is

more important because out of 59.8 percent, 56.2 percent was

engaged in manufacturing activities having strong tie up with

MNEs due to linkage effect of FDI.

Evidence indicates that MNCs tends to promote higher

pay in the regions where they operates. The positive wage effect

31. The Hindu (e-edition), November 25, 2011

also covers those workers who are not directly involved in MNCs

but participating in supply chain established by MNEs. One more

surprising fact is that these effects are larger in backward regions

than the comparatively advanced regions. Domestic firms that

engage with MNCs are also more likely to provide training course

to their employees.

Agriculture Growth and C D Ratio

Institutional agricultural credit has played a significant

role in the fast and widespread adoption of modern production

technologies and promotion of private investments on farms

through its increasing as well as cheap supply.

The basic objective of agricultural credit policy

remained focused on adequate availability of credit at lower rates

of interest at a time when it is required. Institutional credit is

supplied in the form of production credit and investment credit to

the farming sector for incurring expenditure on; variable

production inputs like fertilizers, seeds, agro-chemicals, labour

hiring, machinery hiring, fuel and oil, electric motor charges, etc.,

and private capital formation such as irrigation facility, tractors

and other machinery, land development, etc.

The recent agrarian crisis has provoked policymakers

to argue that the formal banking sector has focused more on the

consumer and services sectors, as they were experiencing high

growth, whereas agriculture sector was ignored, which created

credit supply constraints, leading to deceleration in growth as well

as over dependence of farmers on non-institutional finance.

Under the common assumption for all regions, the

Government of India advised the financial institutions to double

the supply of agricultural credit in three years, from 2004 to 2007.

However, another fact is that, ‘sectoral credit

constraint’ may be problem for some states. But, for state like

Bihar problem is associated with ‘total credit constraint’.

Doubling the agriculture credit could be beneficial for

those states where the volume of credit deployed to agriculture

sector is at par with national average. The Debt and Investment

Survey32 of 2003 brought out startling results on debt position in

different states of India.

The amount of debt was higher in the developed states

and highest in Punjab, at Rs 41,576 per farm. While in Bihar it

is unbelievable Rs 147 per farm. For an agrarian society;

32. NSSO, Report no. 503, Fourth Series (P39/T-26A)

unfortunately, agriculture lies on back foot, credit is life line

because it is relevant even in day to day life of a farmer. High

influence of local money lenders in the state proves this axiom.

Empirically, 33 the association of variable inputs with

production credit disbursement was found to be very high and

significant. The research study over Correlation matrix of

important variables with production and investment credit in

Punjab, during 1993-94 to 2005-06 shows positive correlation

between production credit and fertilizer-use, it was as high as

0.86, indicating the role of short-term credit in promoting

fertilizers in the state. As a matter of fact, fertilizer is supplied at

the doorsteps of the farmers as a kind component of the short-

term loans through Primary Agricultural Cooperative Credit

Societies.

Tractorization, especially on small and semi medium

holdings, is largely financed by easy availability of institutional

credit in the state. Farm level studies have shown that 36 per cent

of such farms own tractors. Same is the story with respect to

investments on tube wells.

33. Agricultural Economics Research Review Vol. 21 (Conference Number)

2008 pp 407-414.

The number of tube wells has gone up from 6.0 lakh

in 1993-94 to 11.9 lakh in 2005-06 and the proportionate area

irrigated by them has increased from 57.3 per cent to 72.3 per

cent during this period. Such investments by resource-poor

farmers were supported by the institutional finance. Thus, the

correlation coefficient of investment credit with tractors and tube

wells was more than 0.81, indicate their strong association. The

share of investment credit in the private capital formation was 83

per cent in 2003-04.

A production oriented agriculture system implies credit

widening as well as credit deepening. The formers refer to

inclusion of more and more farmers within the institutional credit

network whereas letter refers increasing credit per hectare. It has

been usually accepted that there is lower utilization of HYV seeds

chemical fertilizer, pesticides, and modern equipments than the

national average in general and other agricultural state in

particular due to structural-institutional barriers.

Therefore, there is urgent need to remove theses

barriers to realize the potential of state. Expert group34 headed by

34. Bihar’s Exposure Towards the Banking Sector; A Report of the Special

Task Force on Bihar, Government of India July 2007 (P26-30).

Mr. S C Jha has identified some serious constraint in the area of

agrarian reform in the state like continuous declining in the

average size of land holding and problem in the infusion of bank

credit to agriculture sector.

Bankers argued that lack of poor demand of bank

credit from business community is also one of the reasons behind

low C D ratio in the state, but here situation is different state’s

agriculture need heavy investment to realize its potential. Since

Bihar is a predominantly agriculture state, the poor performance

of its agriculture growth has not only accentuated the problem of

rural poverty but also kept the whole economy of the state

downward giving result in declining trend in socio-economic

development.

If we look at the socio-economic indicators of particular

state the situation becomes more clear how the state having heavy

market potential and climatic endowment, lagging far behind the

development experienced at the all India level. Becoming the state

having lowest per capita is different thing and state with least per

capita income is different. The former represents only quantitative

aspect while letter explain qualitative too.

Infrastructure and C D Ratio

The condition of infrastructure in Bihar is abysmal

whether it is economic or social. It is common paradigm in

development Economics that infrastructure has a positive role in

economic development. Though infrastructure is an all embracing

concept, physical infrastructure is a good proxy so far its impact

on economic growth is being concerned by an expert group.

An expert group has examined the relationship

between levels of infrastructure- bank credit- economic

developments during the period of 1990-2003. The result is

significant and interesting.

It shows that demand of loans from commercial banks

depends upon the growth rate of state domestic product and state

of infrastructure. The sign of coefficients are positive and these are

significant. From the result it is evident that demand for loans

from commercial banks in Bihar will lower because of its poor

show in both growth rate and infrastructure. The poor

infrastructure has its toll on the overall industrial scene in the

districts of Bihar. Here, is a report of the scene of Gaya district.

“The decline of infrastructure such as road and power

as also the growing violence in the district is mainly responsible

for the slow-down in the tourist inflow.”35

General Assessment of the Impact of C D Ratio

The irony of development is that recently planning

commission of India has identified 100 backward districts of the

country out of which 38 are from Bihar. This revel a paradoxical

situation as the poor socio economic development is in sharp

contrast to its endowment of natural resources and vast man

power. At the time of independence the state was not so,

depressing as it is. It has registered an annual compound growth

rate of 3.95 percent against the national average of 3.3 percent in

1950.

Economists have no consensus on the precise causes

of growth, success, and failures with recent studies regarding the

complexities of economic growth. The searches for answer should

not merely focus on economic factors, but should also take into

account each state’s history and institutional setting. Analysis

should focus on the binding constraints on growth such as the

limitations to mobilizing sufficient domestic finance, low label of

35. Study report of Expert committee on Credit Absorption Capacity in Bihar June, 2003. (P-9)

human resources and technological capabilities, insufficient basic

and social services weakness in governance, and poor market

regulations.

Productivity growth in backward regions could be

realized through technological innovation and financial supports.

For developing economies, however, growth and development are

much less about pushing the technology frontier and much more

about promoting productive activities with higher levels of

productivity. Such structural change can be largely achieved by

adopting and adapting modern technologies, socio-economic

reforms, entering national/international markets for

manufactures and services, and through the rapid accumulation

of physical and human resources.

The industrial sector typically contributes more

dynamically to overall output growth, because of its potential

higher productivity growth, which results from increasing returns

to scale and gains from innovations and learning-by-doing.

Manufacturing’s greater dynamism is also derived from its

capacity to forge greater vertical integration among different

sectors of the economy by processing raw materials and

intermediate industrial inputs. Modern services are also a source

of productivity gain and often essential for fast growth.

The growing international trade in services offers new

opportunities for export development. Besides the growth of

industry and modern services, the ability to continue to generate

new dynamic activities is crucial for rapid economic progress.

Over the past decades, such dynamic transformations have clearly

characterized the some growing states of the India.

States experiencing relatively little structural change

have lagged behind, particularly in eastern and north-east region.

Sluggish long-term growth in the low-income states of India has,

in fact, been associated with deindustrialization. In these states,

growth has been limited to low-productivity services, with

agriculture and industry remaining nearly stagnant.

Fast growth in western and South India, by contrast,

has been linked to strong expansions of both the industrial and

service sectors, and a rapid decline in the importance of

agriculture.

These economies also show sustained increases in

labour productivity as labour shifts from low- to high-productivity

sectors, including modern services. Nonetheless, low growth

performance has also seen employment shifts to services.

However, in contrast to western and south India, services in north

India have experienced modest productivity growth, as many have

sought employment informal services due to lack of sufficient job

creation in other parts of the economy. Dynamic structural

change thus requires strengthening economic linkages within the

national economy as well as productivity improvements in all

major sectors. The degree of integration of the national economy

also influences the likelihood of net gains from international trade

and investment.

Long-term sustainable economic growth depends on

the ability to raise the rates of accumulation of physical and

human capital, to use the resulting productive assets more

efficiently, and to ensure the access of the whole population to

these assets.

Financial intermediation supports this investment

process by mobilizing household and foreign saving for investment

by firms; ensuring that these funds are allocated to the most

productive use, and spreading risk and providing liquidity so that

firms can operate the new capacity efficiently.

Financial development thus involves establishment

and expansion of institutions, instruments and markets that

support this investment and growth process. Historically, the role

of banks and non-bank financial intermediaries has been to

translate household savings into enterprise investment, monitor

investments and allocate fund, and to price and spread risk.

Financial development and economic growth are very

clearly related, and this relationship has occupied the minds of

economists from Smith to Schumpeter, although the channels and

even the direction of casualty have remained unresolved in both

theory and empirics.

Moreover, the wide role of banking institutions in

under developed economies might maximize economic growth.

Empirical studies of the relationship between indicators of

financial development and rate of economic growth proved key

conclusion. That greater financial depth i.e. higher ratio of total

financial assets to national income or output is associated with

higher levels of productivity and thus income per capita.

The traditional development finance model; based on

bank-based systems, directed credit, public development banks,

capped interest rates, area based approach, and active monetary

intervention that had been established in India after the post-

nationalization decades has become a core element of the

economic reform and structural adjustment process.

The various aspects of traditional finance model,

specifically bank based credit system and capped rate of interest

occupies significant place even in the literature of Keynesian

Economics; as Kurihara has rightly stated that, the availability of

credit and the rate of interest could be shown as capable of

affecting the rate of growth of output under specific condition.

Kurihara supports this view by providing important place of

Keynesian views in his writings.

According to Keynes, 36 keeping the rate of interest

constant, one may see the existing relationship between credit and

growth in two ways.

� Closed economic system, and

� An open economic system.

To see the effect of change in quantity of money on real income

under the closed system, we may express a saving investment

equilibrium condition in the form of; 37

36. The Keynesian Theory of Economic Development; Kenneth K. Kurihara, page no. 135

37. To show the effect of change in the quantity of money on the real income growth

of an economy, the author has modify Keynesian Liquidity Preference Theory by taking only that part of total quantity of money supplied and demanded to hold which depends on income, i.e. transaction and precautionary motive ( L1=f(Y)). This, modification has made us enable to deal only with a choice between money and commodities instead of choice between money and securities.

I=S+ΔM1-ΔL1 (1)

Here, I, stand for net investment

S, stand for saving

ΔM1, an increase in the quantity of transaction money

supplied by the banking system, and

ΔL1, an increase in the quantity of transaction money

demanded by business communities.

Equation (1), indicates the possibilities of investment

exceeding saving, I > S by an amount equal the excess of

additional transaction money supplied over additional

transactions-money demanded, ΔM1 - ΔL1.

Further, on the basis of equation (1), we may

derive following more identities.

I=bΔY, (2)

S=sY, (3)

ΔM1=mY, (4)

ΔL1=⋋Y. (5)

Here,

‘Y’ stands for net national real income,

‘b’ capital-output ratio,

‘s’ the saving ratio,

‘m’ the ratio of additional transaction money supplied

to income, which is monetary policy parameter to be manipulated

by banking system in response to changing need of the business

community and accordance with overall monetary objectives, and

‘⋋’ the ratio of additional transaction money demanded

to income.

By taking equations (1) – (5) into consideration,

equation (1) may be written as;

bΔY=sY+mY-⋋Y=(s=m-⋋) Y, (6)

On the basis of above we get the rate of growth of

output involving monetary parameters:

ΔY/Y=s + m-⋋/b, (7)

This indicates that, keeping s and b constant, the

growth rate will rise

If, m-⋋ is rising, and

It will be constant or falling accordingly as m-⋋ is

constant or falling.

The policy implication of equation (7) for an

underdeveloped but growing economy with a low ‘s’ and high ‘b’

must be seen in the form of prosperity of the economy.

In an open economy model of under developed region,

justify Keynes’s optimistic emphasis on the increasingly important

role of world bank lending operations for developing the resources

and productive capacity of the less developed countries and for

rising the standard of life and the condition of labour everywhere .

Thus we see that there is vast importance of credit in

the growth and development of underdeveloped region. In the

state like Bihar capital market accessibility is very limited; the

banking institutions can provide a smooth credit pool to the

various sectors of the economy.

The new standard model of financial depth reflects the

imperatives of financial development based on the banking reform

under way in Indian economy since 1990.

Reforms of banking sector allows financial deepening

which reflects an increasing use of financial intermediation by

savers and investors and the monetization of the economy, and

allows efficient flow of resources among people and institutions

over time. This encourages savings and reduces constraint on

capital accumulation and improves allocative efficiency of

investment by transferring capital from less productive to more

productive sectors.

The efficiency as well as the level of investment is thus

expected to rise with the financial development that reform

promotes like considerable reduction in SLR from 40% to 25%,

low ranged CRR i.e. minimum 3% to maximum 15%, expansion of

priority sector list over the periods, vast geographical coverage of

banking network, and competitive rate of interest. Allocation of

credit by commercial banks rather than by capital market is cost

effective in a particular situation.

Another important function of financial system is to

collect and process information on investment project in a cost

effective manner, which reduces cost of investment for individual

investors. The productive capacity of the economy is determined

by the quality as well as by the quantity of investment and

capacity utilization is as important as the installed capacity.

Easing credit constraints, particularly working capital, is expected

to improve the efficiency of resource allocation and thereby reduce

the gap between actual and potential output. In fact, financial

systems serve five broad functions.

1. They produce information ex ante about possible

investments.

2. They mobilize and pool savings and allocate capital.

3. They monitor investments and exert corporate governance

after providing finance.

4. They facilitate the trading, diversification and management

of risk.

5. They ease the exchange of goods and services.

While all financial systems provide these financial

functions, and each of these functions can be expected to have an

impact on economic growth, there are large differences in how well

they are provided. There are three basic characteristics of

financial systems that are now regarded as capturing the impact

of these five functions on economic growth;

1. The level of financial intermediation;

2. The efficiency of financial intermediation;

3. The composition of financial intermediation.

The size of a financial system relative to an economy is

important for each of the functions listed above. A larger financial

system allows the exploitation of economies of scale, as there are

significant fixed costs in the operation of financial intermediaries.

As more individuals join financial intermediaries, the latter can

produce better information with positive implications. A larger

financial system can also ease credit constraints: the greater the

ability of firms to borrow, the more likely that profitable

investment opportunities will not be by-passed because of credit

rationing.

A large financial system should also be more effective

at allocating capital and monitoring the use of funds as there are

significant economies of scale in this function – and thus by

implication it is difficult for ‘small economies’ (in terms of per

capita) to sustain a modern financial sector. Greater availability of

financing also increases consumption and investment patterns.

More generally, a large banking system with more beneficiaries’

allocate the risks in better ways, which can, in turn, boost

investment activity in both physical and human capital, leading to

higher growth rates.

The channels linking the size of the financial system

and growth implicitly assume a high quality of financial

intermediation i.e. efficiency of banking system. Asymmetric

information, externalities in financial markets and imperfect

competition can lead to sub-optimal levels of financing and

investment.

Two important aspects in the composition of financial

intermediation related to the nature of finance and source of

finance. Banks are important source of finance in such states

where accessibility to the capital market is negligible and nature

of required finance is to meet short term working capital

requirements.

The pioneering study38 by Levine, Loayza and Beck

has provided new evidence in an attempt to resolve this debate

over financial intermediation. They identify three indicators of

financial sector development that are best at explaining difference

in economic growth;

1. Bank credit to the private sector,

2. stock market activity, and

3. Features of the legal system such as the extent of

the lender and borrower protection.

Levine further shows that the impact of financial

intermediation on growth acts mainly through credit allocation

38. World Bank Policy Research Working Paper No. 2059 (P, 56) on Financial Intermediation and Growth: Causality and Causes.

rather than savings rates. He concludes, therefore, that ‘maybe

Schumpeter was right’. Other studies on the bank credit and

growth, Gavin and Haussmann have found that high ratios of

bank credit to GDP in Latin America are associated with high

detrimental effects on long-run growth.

A study39 by Aghion, Howitt and Mayer-Foulkes has

confirmed this relationship for a cross-section of 70 OECD and

non-OECD countries. Financial depth supported by banking

sector credit significantly contribute to lower inequality and raise

the average income of the lower 80 percent of the population.

Honohan presents initial evidence suggesting that banking sector

credit reduced absolute poverty rates in a sample of 70 countries.

These reforms are expected to raise savings and

investment levels, increase the rate of growth and reduce

macroeconomic instability. However, it is far from reality because

of restricted banking benefits to all.

Unequal funding by banks to potential states like Bihar

which depicted in the form of Low C D Ratio in the state, is also a

major problem and is probably even more significant for

39. Financial Development and Economic Growth: A Critical View Background paper for World Economic and Social Survey 2006. Valpy Fitz Gerald, Oxford University (P29-30)

sustainable growth and poverty reduction in the long run. Today,

those states are witnessing better opportunities and environment

to grow where C D Ratio is traditionally high so, there is a urgent

need to overcome the problem of low C D Ratio of the state of

Bihar.

Considering the case of such developed states where C

D Ratio is enough to grow, the involved agencies in maintaining

high C D Ratio for the state must come forward and take

initiatives to improve the present condition lower C D Ratio of the

state. Improved lower C D Ratio of the state will help the state of

Bihar to realize its hidden and underutilized potential and

therefore maximization of welfare of the mass.

Thus, the basic determinants economic development

may be outside the financial system, the latter influences the pace

of development by the manner and extent to which it performs the

role of intermediation between net saver and net borrower.

Financial institution act as a vehicle for transferring the benefits

of economy’s surplus to the ultimate recipients of growth and

development.

Financial institution of underdeveloped regions should

remain more prompt towards their social responsibility. Adequate

supply of credit depends upon the perception of the bankers about

the overall situation of their business certainty and factors

affecting it. However, the business certainty in turn depends upon

institutional endeavor which remained absent from Bihar,

resulted into abysmal condition of the credit deployment and state

of the economy.

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