From Boom to Bust: How the Freight Equalization Policy Impacted Bihar’s Industrial Dreams

The Freight Equalization Policy (FEP), implemented by the Indian government in 1952, aimed to bridge the gap between resource-rich and resource-poor states by subsidizing the transportation costs of essential raw materials like coal and steel. While intended to foster balanced industrial development across the country, it had a negative impact on resource-rich states like Bihar and Odisha.

It undermined Bihar’s natural advantage, stifled economic diversification, and fostered inefficiencies. Industries could now set up anywhere with subsidized transportation, negating Bihar’s geographical advantage. Similar to Bihar, Odisha’s abundant mineral resources became less of a locational advantage due to FEP. The policy’s focus on heavy industries also limited diversification in the state’s economy.

It destroyed the initial industrial boom in Bihar. Between 1951 and 1961, Bihar’s industrial output grew by 75%, significantly outpacing the national average of 41%. This led to the creation of over 100,000 new jobs in the state. But once the long term impact of FEP started to show up, the industrialization in Bihar started dampening.

While FEP aimed to level the playing field, it unintentionally negated Bihar’s inherent advantage of having readily available mineral resources. Industries could now set up anywhere in the country with subsidized transportation, reducing the incentive to locate in Bihar.

Meanwhile, following States benefitted most from Freight Equalization Policy:

  1. Tamil Nadu: Tamil Nadu, with its established textile industry, leveraged FEP to further expand and modernize. The policy made raw materials like cotton cheaper and more accessible, boosting the state’s textile production and exports.
  2. Maharashtra: Similar to Gujarat, Maharashtra’s strategic location near ports and existing industrial infrastructure attracted heavy industries due to FEP-subsidized transportation. The policy played a significant role in the establishment of major industrial belts like the Mumbai-Pune corridor.
  3. Punjab: Punjab, known for its agricultural prowess, also benefited from FEP. The policy facilitated the setting up of food processing and agricultural machinery industries, diversifying the state’s economy and creating new employment opportunities.
  4. Gujarat: Gujarat, lacking in natural resources, saw a boom in heavy industries like steel and chemicals thanks to FEP. The proximity to ports and a developing industrial ecosystem further amplified the policy’s impact.
  5. Andhra Pradesh: Andhra Pradesh, rich in mineral resources like limestone and coal, saw increased industrial activity due to FEP. The policy attracted cement and steel industries, utilizing the state’s natural resources and contributing to its economic growth.