Bihar: India’s Greatest Economic Failure or Its Next Big Opportunity?

Bihar, home to nearly 130 million people, would rank as the 12th most populous country in the world if it were an independent nation. In terms of population, it exceeds countries like Japan, South Korea, and the United Kingdom. Yet, when it comes to per capita income, Bihar stands even below Somalia. Within India, it is the third most populated state after Uttar Pradesh and Maharashtra, hosting about 8.6% of the nation’s population, but contributing merely 2.64% to the national GDP.

India’s average per capita income stands at ₹1,84,425, while Bihar’s per capita income is only ₹66,828. In terms of per-capita GDP, Bihar today is at the economic level where the rest of India stood in 2012, meaning the state is almost 13 years behind the national trajectory. According to the NITI Aayog’s Multidimensional Poverty Index, Bihar remains the poorest state in India. When this index was measured from 2019–2020, it revealed that one in every three residents is multidimensionally poor—lacking access to fundamental services such as education, healthcare, electricity, clean water, and sanitation.

This raises two major questions:
Why did Bihar fall so far behind, and what must be done to move it forward?
To understand this, the narrative can be divided into two parts—its history and its future.

A Legacy of Power and Scholarship

Around 400 BCE, modern Bihar was known as Magadha and Pataliputra. It was the cradle of the great Nanda, Maurya, and Gupta dynasties, giving rise to rulers like Bimbisara, Chandragupta Maurya, and Ashoka. The world-renowned Nalanda University was established in this region. Records suggest that Nalanda once hosted more than 2,000 teachers and 10,000 students, attracting scholars from China, Korea, and Japan.

In simple terms, Bihar functioned as the intellectual hub of the ancient world—a kind of Silicon Valley of its time, leading in trade, agriculture, education, and philosophy. Legendary thinkers such as Aryabhata and Chanakya emerged from this region, contributing groundbreaking knowledge to mathematics, astronomy, economics, and political science.

The contrast today is stark. Modern Bihar has the lowest literacy rate in India and minimal industrial presence. Nearly 75% of the population is involved in agriculture, yet agriculture contributes only about 25% to the state’s Gross State Domestic Product (GSDP).

Why Bihar Declined: Three Major Causes

1. The British Raj and the Permanent Settlement

Although all of India suffered under British colonial rule, its impact on Bihar was especially severe. British rule in India began through the Bengal Presidency, which included Bengal, Bihar, Jharkhand, Odisha, and Assam—among the most fertile regions. After the British East India Company won several wars, it received tax collection rights in 1765, and soon implemented the Permanent Settlement, a system whose consequences are still felt today.

Before British intervention, cultivators paid land taxes to the ruling states, collected by mansabdars, who were appointed and could not inherit their positions. The British, however, transformed tax collectors into zamindars, effectively hereditary landowners. Zamindars could sell, mortgage, or transfer land rights and decide how much rent to charge cultivators. In return, they owed a fixed annual land revenue to the British, often extremely high.

This arrangement encouraged fear and greed, not productivity. Flood-prone Bengal regions further destabilised yields. Neither zamindars nor farmers had any incentive to improve irrigation or crop output. The result was widening socioeconomic inequality.

Realising its flaws, the British later adopted Ryotwari and Mahalwari systems in other parts of India, where taxes were collected directly from cultivators or village heads and adjusted based on productivity. As a result, these regions had incentives to invest in infrastructure, irrigation, and agriculture. Most British-built canals were constructed in non-zamindari regions, creating the earliest model of unequal development across India.

Even though zamindari was abolished after independence, its damage lasted generations. While other states moved toward development, Bihar was still struggling to escape its past. Research by Lakshmi Iyer and Nobel laureate Abhijit Banerjee highlights this disparity: from 1960–1965, zamindari states spent only ₹13 per person on development, while non-zamindari states spent ₹19 per person. During the Green Revolution, the gap widened further—zamindari regions spent ₹29 per capita, while non-zamindari regions spent ₹49 per capita.

2. Industrial Disruption: Freight Equalisation

Before independence, Bihar included modern-day Jharkhand, a region rich in minerals and coal. In the early 1900s, these deposits gave Bihar a powerful industrial head start. The Jharia coal belt produced nearly 50% of India’s coal, and the region had the highest iron ore reserves. Tata Steel established India’s first integrated steel plant in Jamshedpur. Railways were built to transport coal and steel, fueling major industrial centres like Dalmianagar, which produced cement, paper, chemicals, and jute. Northern Bihar’s Champaran belt thrived with sugar mills.

By the 1950s, Bihar and West Bengal jointly produced 92% of India’s iron and steel, and accounted for 48% of the country’s engineering-related manufacturing.

However, this momentum collapsed after the introduction of Freight Equalisation in 1956, which was launched under India’s second Five-Year Plan. The goal was to ensure balanced industrial development across all regions. Transportation costs for raw materials like coal, iron, cement, and fertilisers were standardised nationwide. This removed Bihar’s natural advantage. It suddenly became just as cheap to set up factories in distant port cities like Mumbai or Chennai, which had better export mechanisms. As a result, India’s industrial centre shifted from East India to the coastal Western regions. The policy remained until 1991, and by the time it ended, Bihar had already lost its industrial edge.

3. 2000 Division: Bihar—Jharkhand Split

A final blow came in 2000, when Bihar was divided, creating Jharkhand.
Mineral-rich districts such as Dhanbad, Bokaro, Jamshedpur, Ranchi, and Hazaribagh were separated. Nearly 75% of Bihar’s industrial units went to Jharkhand, and the state’s revenue sources dropped by almost 60% overnight. Today, less than 2% of India’s operational factories are in Bihar. Being landlocked, it also struggles with exports, contributing only 0.47% to India’s total export volume.

Agriculture and services remain its only major economic pillars. However, 60% of Bihar’s land is held by marginal farmers, each owning less than one hectare. With limited industrial jobs at home, residents migrate in search of work. Bihar has India’s highest out-migration rate—one in every three Biharis is a migrant worker.

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The Present Economic Structure

Around 50% of Bihar’s labor force works in agriculture, 18% in construction, 29% in services, and only 6% in manufacturing. Female labor participation is also low. While India’s average is 37%, Bihar stands at 22.4%, and most women are either self-employed or in casual work, with only about 6–7% in salaried jobs.

The gap between Bihar’s per-capita GDP and the national average continues to widen. Not a single company in the NIFTY-100 index has headquarters in Patna. If Bihar wishes to catch up, its GDP growth must outperform India’s overall growth by a significant margin.

Where Bihar Can Move Forward

With challenges in agriculture and manufacturing, Bihar’s most realistic economic lever is the services sector. This pattern is already clear: the tertiary sector contributes about 57% of its GSDP. Bihar’s strongest advantage is its demographics—it is India’s youngest state. By 2031, the median age will be just 26. If this young population is educated and kept healthy, Bihar’s service income can expand dramatically.

Government spending reflects this strategy. As a share of total expenditure, Bihar ranks second in education spending, at around 18%, just behind Delhi. Education is the state’s largest budget component. However, in absolute per-capita terms, Bihar spends far less—₹2,917 per person versus the national state average of ₹4,995.

Health expenditure follows a similar pattern: roughly 6% in percentage terms, but only ₹927 per capita, compared to the national average of ₹2,139. To escape this cycle, Bihar must either borrow more (raising fiscal deficit) or expand revenue. Increasing revenue is the sustainable option.

Agriculture: Hidden Strengths

Despite its long struggles with farming, Bihar remains vital to India’s agricultural economy. It is the third-largest producer of vegetables, the fourth-largest producer of fruits, and contributes 85% of India’s makhana. It is the largest producer of litchi. Yet agriculture contributes only 25% to GSDP, largely because of high post-harvest losses.

Food processing is therefore a priority. Two mega food parks have been approved, along with various incentives. Sugarcane is another latent opportunity. Historically, Bihar produced 30–40% of India’s sugar, but its mills collapsed due to oversupply and losses. Today, sugarcane is rising again due to ethanol-blending policies, and the state has proposed nine ethanol plants by 2026.

Financial Barriers

Two financial issues stand out.

First, nearly 75% of Bihar’s revenue receipts come from the central government—one of the highest ratios in India. This means any central policy change directly impacts the state’s finances. Bihar must diversify its income sources.

Second, Bihar’s credit-to-deposit ratio is just 40%, versus the national average of 70%. For every ₹100 deposited in Bihar’s banks, only ₹40 is lent locally; the rest flows out. This prevents capital formation and suppresses local business growth. Even a modest reduction in this capital outflow would stimulate local development, benefitting infrastructure, real estate and manufacturing sectors. As incomes rise, consumer durables and FMCG companies would also benefit.

What's The Conclusion

Bihar, once a center of knowledge and industrial progress, fell behind due to colonial land systems, flawed industrial policy, and territorial division. Understanding these challenges also reveals its opportunities: youth-driven services, agricultural value chains, ethanol, and investment-friendly financial reforms. 

The path forward requires strategic policy, patient capital, and sustained revenue growth—and if these conditions are met, Bihar has the potential to accelerate far faster than its past suggests.

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Disclaimer

This article is based on publicly available data and research. It is meant for informational and educational purposes only and does not intend to target or defame any individual, group, or institution. Figures and policies may change over time; readers should verify information from official sources.