How Freight Equalization Policy Led to Deindustrialization of West Bengal
West Bengal has experienced significant de-industrialization since India's independence, with the freight equalization policy playing a major role in the state's industrial decline.
The freight equalization policy, introduced by the Nehru government in 1952 and in effect until 1993, aimed to promote balanced industrial development across the country by subsidizing the transportation costs of key raw materials like coal, steel, and cement.
The goal was to ensure uniform prices for essential raw materials like coal, iron, and steel across the country, regardless of the distance from the source.
However, this policy ended up having detrimental effects on resource-rich states like West Bengal.
West Bengal's Industrial Prominence Pre-Independence
Prior to independence, West Bengal was one of the most industrialized regions of India under British rule. In 1946, the state had 1218 factories, accounting for 25% of all factories in the country.
Even in the early post-independence period from 1948-1958, the manufacturing industry in West Bengal grew at a faster rate compared to the rest of the country.
The state's compound annual growth rate (CAGR) for the manufacturing sector stood at 3.3%, surpassing the national average of 2.8% during the same period. The state benefited from its proximity to mineral resources like coal and iron ore.
Impact of Freight Equalization Policy
The freight equalization policy neutralized West Bengal's geographical advantage. By fixing uniform freight rates, the policy essentially subsidized the transportation of minerals from eastern states like West Bengal to other parts of the country.
This allowed industries to be set up anywhere in India while still being able to procure raw materials at subsidized rates from states like West Bengal, Bihar, Madhya Pradesh, and Orissa.
As a result, these mineral-rich states lost their competitive edge and could no longer leverage their natural resource wealth to attract industrial investment.
Businesses found it more profitable to set up factories near coastal trade hubs in western and southern India rather than in the traditional industrial belt of West Bengal. States like Maharashtra, Gujarat, and Tamil Nadu emerged as major beneficiaries of the freight equalization scheme.
Decline of West Bengal's Industrial Base
The impact on West Bengal's industrial base was severe and long-lasting. The state's share in India's total industrial output fell from 24% in 1955-56 to under 10% by the 1980s.
Between 1980-2005, factory sector employment in West Bengal declined at an annual rate of 2.1%. Labor-intensive industries like jute and engineering, once the mainstay of the state's economy, went into terminal decline.
The freight equalization policy made it unviable for West Bengal to leverage its mineral resources for industrial development.
Even after the freight equalization policy was discontinued in the early 1990s as part of economic reforms, West Bengal struggled to regain its industrial prowess.
The manufacturing sector's share in West Bengal's GSDP (Gross State Domestic Product) has fallen from 21.73 percent in 1980-81 to 9.67 percent in 2014-15.
Other Factors Contributing to the Deindustrialization of West Bengal
Besides freight equalization, a few other factors also played a role in West Bengal's deindustrialization:
The partition of India in 1947 disrupted the jute industry as the mills were located in West Bengal but most of the jute growing areas went to East Pakistan (Bangladesh).
Militant trade unionism, labor unrest, and poor work culture in the 1960s-80s drove away investment from the state.
An incongruous credit policy of commercial banks led to huge amounts of Bengal's savings not being disbursed within the state but diverted to other regions, depriving it of capital for industrial development
By eroding the state's natural resource advantage and enabling the shift of industries to other regions, the policy triggered a vicious cycle of industrial decline that West Bengal is yet to fully recover from.
Sources:
[1] https://www.theigc.org/sites/default/files/2015/01/Chaudhuri-et-al-2014.pdf
[2] http://barrett.dyson.cornell.edu/NEUDC/paper_316.pdf
[3] https://journals.sagepub.com/doi/abs/10.1177/09767479211050983
[4] https://library.fes.de/libalt/journals/swetsfulltext/14218801.PDF
[5] https://indianresearcher.in/west-bengals-industrial-decline-a-crisis-of-capital-creation/
[6] https://media.economics.uconn.edu/working/2011-10.pdf
[7] https://assets.publishing.service.gov.uk/media/57a08b8a40f0b64974000bf6/dp32.pdf
[8] https://link.springer.com/chapter/10.1007/978-981-16-0869-8_4
[9] Pattern of Industrial Growth in West Bengal during 1980-1991: Structural Demand and Agriculture-Industry Relations
[10] https://www.niti.gov.in/sites/default/files/2019-06/Final%20Report%20of%20the%20Research%20Study%20on%20State%20Finance%20of%20West%20Bengal%20conducted%20by%20Indian%20Institute%20of%20Management%20%28IIM%29%20Calcutta,%20Kolkata.pdf
[11] https://www.millenniumpost.in/opinion/unrestrained-loot-of-bengal-555608
[12] https://organiser.org/2021/04/08/24900/bharat/bengals-industrialisation-basu-faulted-mamata-did-not-have-the-will-and-key-to-reverse-the-trend/