The Nehru-Gandhi family has ruled India for so long that the implications of their policies continue to affect the nation to this date. India has encountered everything from territorial conflicts to internal discord, threats to democracy and the Constitution as well as significant economic challenges, all under the leadership of Congress-led governments steered by the most “distinguished” political family in the country.
The decisions, whether misguided, flawed, driven by personal or political interests, or for any other reason, can be debated. Yet, it is clear that they functioned as barriers to the development and progress of the country, causing the nation to endure the most adverse ways of misery, the consequences of which are borne even by the current population.
One such move was the Freight Equalisation Policy, which, rather than advancing equitable industrial progress as its name suggests, ultimately created a stark economic disparity for generations to come. Have you ever pondered why the most resource-rich eastern Indian states like Bihar, Jharkhand and Odisha have such a poor industrial growth?
Ofcourse, there are other underlying factors, but the catastrophic freight equalization policy played a major role in devastating the states. Introduced in 1952, it subsidized long-distance freight transportation with the goal of facilitating equitable economic development. Instead, it exacerbated poverty and income inequality in the eastern region.
Its outcome was calamitous and the repercussions continue to be apparent in these states till today. Interestingly, the mineral-abundant eastern states have primarily functioned as consumer markets for merchant capital that evolved into industrial capital since independence, a legacy also attributed to the British imperialists.
The policy did not apply to raw materials like cotton, rather, it only applied to specific commodities that were considered necessary for the economy, such as iron, steel and cement. Therefore, states that benefited from it, remained dominant in the market for raw resources including cotton.
Likewise, eastern India was not provided with the opportunity to set up cotton and textile mills since cotton was not subsidized under this program as the manufacturing industries began to shift west and south.
FEP: A glaring failure
The union government under Nehru implemented the the Freight Equalisation Policy in 1952 and it lasted until 1993. The primary rationale behind it was to encourage balanced regional development by stimulating industrial development in places which were far from major raw material suppliers and manufacturing centers.
However, Hansraj Bhardwaj, who was a minister in the government of India, accepted that the policy had fallen short of its objectives and had to be revoked.
“This policy did fulfil this objective in the initial years. However, various committees appointed by the union government from time to time reviewed the policy and observed that the beneficial effect of the policy in terms of regional dispersal was more than offset by the increased in real transport costs,” he acknowledged, while responding to a query.
He added that other tools including suitable credit and fiscal policies, the supply of necessary infrastructure and transportation subsidies, among others were available to achieve balanced regional growth. “Government accepted these recommendation and freight equalisation was gradually phased out in most items,” the minister highlighted.
The policy suggested that industrialists paid the same amount for raw resources as they did in mineral-rich states, including coal, iron ore, aluminum, bauxite, limestone, mica, etc. Hence, the states that produced these important minerals lost their competitive edge as a result of this strategy, which also discouraged private investment in eastern states with abundant mineral resources, including West Bengal, Assam, Bihar, Jharkhand, Odisha, Madhya Pradesh and Chhattisgarh.
The subsidised transportation of raw minerals to coastal states with adequate infrastructure and market cities in the nation’s preferred locations, Mumbai and Pune in Maharashtra, Ahmedabad in Gujarat, Chennai in Tamil Nadu, Bengaluru in Karnataka, Hyderabad in Andhra Pradesh and Delhi was the reason for the disincentive.
Industrialization in the mineral-rich eastern states was hampered as majority of industries were started outside of these regions. Private capital’s incentives to install production facilities in these states were diminished. Hence, the companies found industrial sites in other regions of the nation that were nearer to coastal markets and trade centers. Odisha, despite being a coastal state that is also mineral rich, was also left out of this incentivisation.
Moreover, the new paradigm of development during the economic reforms policy regime comprising of liberalization, privatization, and globalization, assumed an open market system with less governance, moving away from the inspector raj or license rule. It resisted the open market system’s fair playing field since less privileged governments had worse infrastructure and fewer competitive advantages.
Why was FEP introduced
The Freight Equalisation Policy’s premise was that all Indian states should have ‘equal access’ to resources for producing iron and steel without having to shell out more for transportation. Eastern India’s natural gift of minerals was perceived as ‘unjust’ for some reason. After the Planning Commission was established in 1950, redistribution of income and resources sounded like a reasonable decision, during the height of Nehruvian socialism.
92% of the nation’s steel production and 48% of all manufacturing in 1950 originated from the states of West Bengal and Bihar which also had Jharkhand at the time. Coal and other natural resources were abundant in the states as well. There were just two integrated steel plants (ISPs) in India at the time, one in Burnpur, West Bengal, and one in Jamshedpur, then Bihar.
Prime Minister Jawaharlal Nehru was a strong supporter of industrial growth under central government and was influenced by Fabian Socialism. He authorized the establishment of additional steel factories in Durgapur, West Bengal, Bokaro Steel City, Bihar, Bhilai, Madhya Pradesh and Rourkela, Odisha.
However, the Planning Commission also made the decision to offer freight transportation subsidies to businesses located wherever in India. It neutralized the benefit that a manufacturing sector would receive from being situated near a steel factory. “Only by securing a balanced and coordinated development of the industrial and the agricultural economy in each region can the entire country attain higher standards of living,” read the Second Five Year Plan which outlined its intention clearly in 1956.
The goal of manufacturing firms is to keep transportation expenses as low as possible. As a result, those who produce items using iron and steel are usually found near steel plants which has led to an industrial boom since the Industrial Revolution. The cost of transportation was no longer a consideration when the FEP was put into effect, therefore the price of the land, the availability of inexpensive labor and other state government incentives were the main factors in the decision to open a plant.
The data indicated that even though the subsidies were relatively minimal, the companies were able to relocate from eastern India to other regions of the country. At the expense of eastern India, areas such as western and southern India prospered as centers of manufacturing. The government equalized shipping prices for cement and fertilizer in addition to steel, citing their value for agriculture. However, the same approach was not extended to all resources and goods.
How FEP ruined the steel industry
Multiple industries were covered under the Freight Equalisation Policy but India’s manufacturing sector employed very few of these commodities in comparison to the iron and steel sector. As a result, it had little to no impact in these other industries. The foundation of Indian manufacturing was the iron and steel sector.
It was determined in 1954 that the union government, acting through Hindustan Steel Limited (HSL), would be in charge of future steel production. HSL was given the task of developing new steel mills in Durgapur, Bhilai, Bokaro and Rourkela. Both Tata and IISCO (Indian Iron and Steel Company, previously Steel Corporation of Bengal) were privately held until 1972, when the latter was taken over by the government.
Iron ore is the main raw material used to make steel, and it can only be obtained in a few places. The iron ore would thereafter be transformed by the Integrated Steel Plants s into coils, plates, structural steels and pig iron. Therefore, the conversion of iron ore into steel and wrought iron products which is the initial step in the supply chain would not be affected once the site of ISPs was selected.
The users of these products can be categorized into two main types: (a) those who produce customized refined steel and alloy products based on specifications, for instance, in car axles and (b) their users, like the auto industry. The industries included in the aforementioned categories would have preferred to be as close to the ISPs as feasible to minimize their expenses in absence of this policy. The place itself, as provided by nature, would actually be the biggest subsidy.
The alleged “factory retention price” was determined by the union government and was contingent on the steel type and the distance of transit. The difference in transportation costs was covered as credits for manufacturing facilities situated farther away and an equalization fund was founded to compute the difference between the factory retention price and the price of steel paid for short distances.
The formation of a joint plant committee was initiated precisely to control these rates. Therefore, any inherent regional advantage was effectively eliminated through artificial means regulated by the government. Older factories would relocate to areas with higher labor and land prices if they were given incentives and since the policy offered a consistent shipping rate, geography was no longer a factor in the decision to build a new plant.
FEP withdrawn after damage was inflicted
It should be noteworthy that the state governments of Bengal and Bihar did not receive sufficient compensation from the center during this time of major losses. An interministerial assessment in 1977 demonstrated that the subsidies received were just a minor portion of the ultimate price. Meanwhile, the union government persisted to stand by its policy.
Nevertheless, the manufacturing sector’s downward trend persisted, despite the centre’s claims. Furthermore, the Freight Equalisation Policy’s emphasis on heavy industries prevented the economic diversification. It put an end to Bihar’s early industrial boom. The state’s industrial output increased by 75% between 1951 and 1961 which was a substantial increase over the 41% national average.
As a result, it saw the creation of more than 100,000 new jobs. However, Bihar’s industrialization began to slow down as the policy’s long-term effects became apparent. A distance-based subsidy cap was finally introduced by the National Development Council in 1991. Due to the relatively high ceiling, the national exchequer was drained until the policy was ended in 2001, confessing its failure.
“The removal of the freight equalisation and licensing policies cannot compensate for the ill that has already been done,” cried former Lok Sabha speaker Somnath Chatterjee in 1996. He headed the West Bengal Industrial Development Corporation at the time.
Which states gained from FEP
The Freight Equalisation Policy’s goal was to level the playing field, but its ignored eastern India’s natural advantage of having easily accessible mineral fortune, and allowed other states to prosper while the mineral producing regions remained backward.
Tamil Nadu used it to further modernize and grow its well-established textile sector. The initiative strengthened the state’s textile output and exports by lowering the cost and increasing access to raw resources like cotton.
Gujarat also experienced a rise in heavy industries like chemicals and steel. The impact of the policy was further amplified by its proximity to ports and a growing industrial ecosystem.
Similarly, heavy industries were drawn to Maharashtra by its convenient location close to ports and pre-existing industrial infrastructure which was made possible by the policy’s subsidized transportation. The creation of important industrial belts like the Mumbai-Pune corridor was greatly aided by the same.
The agriculturally proficient state of Punjab also profited from the policy. It promoted the establishment of industries for agricultural machinery and food processing as well as diversified the state’s economy and generating new job alternatives.
It also boosted industrial development in Andhra Pradesh which is abundant in coal and limestone. The policy brought in the steel and cement companies, which employed the state’s natural resources and boosted its economy.
Fallout from FEP resonates decades later
The late President Pranab Mukherjee supported the long-standing allegation of Bihar and other states that the Freight Equalization Policy had significantly impeded the growth of eastern India. In 2017, He referred to a remark of Bihar chief minister Nitish Kumar in the 1990s while he was a member of the Lok Sabha.
He stated that the latter appeared to have a point when he charged that the policy destroyed the competitive advantage of Bihar and other eastern states of the country. “So, despite having mineral resources and fertile land, Bihar, and now Jharkhand, too, could not make the desired progress,” Mukherjee pointed out.
Last year, finance minister Nirmala Sitharaman also stated that the region that suffered as a result of the Freight Equalization Policy is now at the center of the National Democratic Alliance (NDA) government’s development agenda.
The cabinet minister noted how eastern Indian states lost greatly as a result of this policy since it reduced incentives for the establishment of enterprises near mining areas which pushed companies farther away and hurt the economic prospects of the region. People left in pursuit of work as a result of that as well.
Last year, former union minister Rajeev Chandrasekhar similarly attributed North India’s development deficit on the Freight Equalisation Scheme of the successive Congress governments at the centre. “It is also necessary for the people of India today, especially in North India, to know why it is that North India has lagged behind South India in development,” he stated.
He was responding to former Congress MP DK Suresh’s startling statement that if the center “continues the trend” of withholding funds from the southern states, they will want their own nation.
“The answer to that is, from 1952 under the Congress till 1995, almost 40 years, the Congress government pursued a freight equalisation policy that made it absolutely no incentive for companies to invest in Jharkhand, to invest in Bihar, to invest in the north of India,” outlined Chandrasekar.
“South India garnered all the investments because of the policy. So if anything, today the people of states like Jharkhand and people of states like Bihar should be asking Congress, Why did you do this to us for 50-55 years? Now MPs from the Congress in the south are saying we should not help north India. So this is the hypocrisy of the Congress. This is the double speak of the Congress that one leader talks about jodo, another leader talks about todo,” he charged.
K. Annamalai shows the mirror
K. Annamalai, the Vice President of the Tamil Nadu Bharatiya Janata Party (BJP), also addressed the issue of how the policy represented a significant injustice to the northern states of India, while launching a stinging attack on North and South division politics perpetuated by parties such as Dravida Munnetra Kazhagam (DMK), Congress leaders and their ecosystem.
“We live in age, a reality where some of the political parties and leaders have started to emphasise North and South. Our Chief Minister claimed that we contribute more tax from the south region but receive less while the share of some other state is higher than their contribution. He called it unfair. Sometimes, we don’t read our history properly. The second year plan, when India wanted to have a balanced development, Freight Equalisation Policy was enforced,” he stated.
Annamalai then underlined the aforementioned figures to outline how the policy hindered the growth of the eastern states of India. “38% of engineering output originated from Bengal and Bihar. Nevertheless, the government believed that the southern region was not progressing as it should have been,” he expressed.
He added that the south’s failure to manage the expenses associated with the transportation of coal, steel and other raw materials led to the government’s implementation of the policy.
“The engineering output, which was at 92%, decreased to 30% over a span of 30 years. Additionally, 17 steel plants were established in both western and southern India. The imbalanced policy resulted in advancement in one area while another experienced setbacks,” the BJP leader voiced and highlighted that hence the claims of superiority by some southern politicians are baseless.
Conclusion
The distribution of wealth via artificial means, which is a central agenda for Congress, the left and their ecosystem, seldom proves effective in the long term and the failure of the Freight Equalisation Policy illustrated the same. However, the party persists in misleading voters for electoral benefits, despite its many detrimental policies.
The severe industrial lag of the eastern states remains a striking example of the same, while their unwarranted reliance on larger financial assistance from the central government, a problem created by the grand old party, is often employed as a means to deride and belittle them.
