Freight Equalization Policy

"A forgotten policy that sowed the seeds of regional economic disparity and laid the foundation for future social and political identities."

“So, despite having mineral resources and fertile land, Bihar, and now Jharkhand, too, could not make the desired progress”

The late former President Pranab Mukherjee made this statement during a program held in Bihar in 2017.

Western and southern India flourished on the strength of the resources of eastern and central India. A Member of Parliament from eastern India presented this fact from independent India’s economic history in somewhat needlessly aggressive language, which sparked controversy.

But this naturally raises the question: How and why did this happen? In ancient and medieval times, the most prosperous kingdoms and empires were located in this very region. While it is not relevant here to delve deep into that distant past, one must note that the economic decline of eastern India began under British rule, and the Freight Equalization Policy put the final nail in the coffin.

The Indian National Congress adopted the vision of a socialistic pattern of society. Accordingly, it established the Planning Commission, and devised a framework of Five-Year Plans to achieve developmental goals.

The First Five-Year Plan focused on agriculture, while the Second Plan emphasized industrial development. Its preamble clearly stated the objective: "To advance national economic development and improve living standards through balanced and coordinated growth of agriculture and industry across all regions."

In 1950, India had only two steel plants — one in Jamshedpur (owned by the Tatas) and another in Bengal. According to the research paper titled "Manufacturing Underdevelopment: India's Freight Equalization Scheme and its Long-Run Effects of Distortion on Geography of Production" by John Firth and Ernst Liu, Bihar (then undivided) accounted for 92% of national steel production and 48% of total industrial output.

Pandit Jawaharlal Nehru was deeply influenced by Fabian socialism and the Soviet economic model. Against this ideological backdrop, Nehru’s government considered eastern India’s natural advantage in industrial development unjust in a broader national context.

It was from this thinking that the Freight Equalization Policy was born, a policy that sowed the seeds of regional economic disparity, and laid the foundation for future social and political identities.

The Freight Equalization Policy was introduced in 1952 by Pandit Nehru’s government. The core provision of this policy was based on the fact that mineral resources, especially coal, iron ore, bauxite, and aluminum, were heavily concentrated in eastern and central India.

To ensure uniform industrial development across the country, the policy stipulated that raw materials (i.e., mineral resources) should be made available at the same price regardless of the location of the factory.

To achieve this, the government subsidized the freight costs, ensuring that industries set up in any region of India could access these minerals at rates comparable to those in the mineral-rich areas.

Against this backdrop, it becomes essential to examine the economic decline of eastern India, which began during the British colonial period. The British launched their imperial ambitions through Bengal, and once they gained control, they introduced the Permanent Settlement system of land revenue in the region.

At the same time, to ensure a steady and reliable supply of raw materials needed for Britain’s industrial revolution, they deliberately altered the agricultural pattern. They enforced the cultivation of indigo and other cash crops, often at the cost of food security.

In parallel, they imposed exorbitant taxes on Indian-made textiles and other goods, effectively crushing the unorganized cottage industries.

During this period, two major global developments also transformed the landscape of international trade and industry.

The first major event was the opening of the Suez Canal. This drastically simplified and accelerated maritime transport between India and Europe.

Earlier, ships had to take the long sea route around the Cape of Good Hope, which meant that Mumbai and Kolkata ports were at roughly equal distance from Europe. With the Suez Canal in operation, Mumbai became significantly closer and more accessible from Europe in both distance and travel time.

The second major event was the American Civil War, which disrupted the steady supply of cotton to Britain’s textile industry. Vidarbha (then part of the Central Provinces) and Gujarat stepped in to fill this gap in cotton supply.

To facilitate this shift, the railway network began to expand towards Mumbai, connecting the cotton-producing hinterlands to the port.

In western and southern India, the Ryotwari system of land revenue remained in place. Under this system, individuals or families held direct ownership of agricultural land, making landholding a central element of rural life.

In contrast, the Permanent Settlement system in eastern India entrenched the zamindari (landlord) model, where absentee landlords held large estates. This led to increasing exploitation of the actual tillers of the soil — the peasants.

While zamindars owning thousands of acres lived lavishly in Kolkata, indulging in art and literature, the rural regions and farmers continued to suffer under economic distress.

With a few exceptions, zamindars and princely estate holders did not prioritize entrepreneurship or developmental initiatives.

In western and southern India, princely states like Baroda, Kolhapur, Mysore, and Aundh had visionary rulers who prioritized modernization and industrial

development. They launched several progressive projects focused on these goals.

In addition, the cooperative movement in Gujarat and Maharashtra brought new energy to rural areas. People in these regions already had relatively higher purchasing power, which only continued to grow.

Against this backdrop, post-independence states like Bihar, Bengal, Odisha, and Madhya Pradesh had abundant mineral wealth, an industrial base in Jamshedpur, and fertile agricultural land.

Then came the Freight Equalization Policy; the government subsidized freight costs for raw materials like minerals, ensuring they could be transported anywhere in India at the same price.

At the same time, Mumbai and Chennai (then Madras) were, and still remain, the most efficient ports for exports (with Kandla and several ports in Kerala later joining this network).

The state governments in western and southern India also offered land at concessional rates, along with other industry-friendly incentives.

A strong educational foundation ensured the availability of skilled human resources.

As a result, entrepreneurs no longer had any compelling reason or incentive to set up industries in mineral-rich regions. Instead, they naturally gravitated toward areas that combined accessibility, infrastructure, and policy support, mostly in the west and south.

Western and southern India witnessed the emergence of industries such as automobile manufacturing, engineering, and cement production.

There is a biological truth that shrubs wither under the shade of a large tree, but in the industrial world, this metaphor applies in exactly the opposite way. Under the canopy of a large industrial hub, hundreds of smaller industries take root and thrive.

That is precisely what happened in Pune, Coimbatore, Chennai, Sambhajinagar (Aurangabad), Mumbai, Gujarat, Bengaluru, and Hyderabad. With industrial development, these cities and states rapidly became increasingly prosperous.

In stark contrast, the eastern and central Indian states, which supplied the raw materials, continued to lag behind in development, becoming progressively more backward.

By the 1970s and 1980s, prominent individuals from eastern states began to recognize the negative consequences of the Freight Equalization Policy.

They started raising their voices demanding a fair share of mineral royalties for their states. (Although not directly related to this policy, the issue of crude oil, the Narengi pumping station, and Assam’s lack of benefit from it was also one of the major triggers behind the Assam Movement in the 1980s.)

Taking note of growing concerns, the government constituted a ministerial committee in 1977. In its report, the committee observed that the subsidies provided under the policy were minimal in monetary value.

While the subsidy amount was small in absolute terms, the sheer volume of goods transported under the scheme resulted in substantial relief for industries.

In 1991, the government introduced an upper cap on the subsidy, but this measure had little impact in addressing the core problem.

Against this backdrop, just consider how deadly the combination of the License-Permit Raj and the Freight Equalization Policy truly was.

The noble objective was equitable distribution of wealth. There was also a strong insistence that this wealth should be generated primarily through the public sector. At the same time, the state intended to prevent the creation of monopolies or private dominance.

In essence, the system discouraged the generation of wealth, but still focused on its distribution. As a result, by 1991, what we achieved was an equitable distribution of poverty.

Western and southern India surged ahead in terms of economic progress. With growing economic prosperity, the social structure gradually evolved as well. The spread and acceptance of education expanded rapidly alongside this prosperity, leading naturally to greater awareness and population control.

The population growth rates in these states fell below the replacement rate. At the same time, more and more young people began to migrate abroad and settle there permanently.

Meanwhile, in contrast, eastern and central India saw increasing waves of migration, as large numbers of people moved in search of employment opportunities.

Article 280 of the Constitution provides for the Finance Commission. The primary function of the Finance Commission is to determine how the total revenue of India should be distributed among the various states. This distribution is based on criteria such as the population of the states, their economic and social development, and the equitable distribution of economic growth within the states.

Due to the Freight Equalization Policy and certain earlier policies, the states in North, East, and North-Eastern India lagged behind in the path of development. Because of their lower purchasing power, the collection of consumption-based indirect taxes in these states is also lower. As a result, based on the recommendations of the Finance Commission, these states receive a larger share of the total collected taxes.

For example, suppose ₹100 is contributed by Maharashtra to the national tax collection. Out of that, only ₹7 comes back to Maharashtra. In contrast, Jharkhand receives ₹303, Odisha ₹187, and Chhattisgarh ₹282 for every ₹100 they contribute.

So, what about the revenue and income of states like Maharashtra, Tamil Nadu, Gujarat, and Karnataka? The answer lies in the monthly GST collection data published by the government. GST is a consumption-based indirect tax, of which half is directly credited to the state’s treasury.

These states have strong internal revenue sources due to factors such as: robust industrial and business activity, a wealthy population, a large and financially capable middle class, and significant commercial transactions.

In the case of Maharashtra, 67% of its total revenue comes from internal sources within the state.

However, even after the onset of economic reforms and the withdrawal of the Freight Equalization Policy in 1993, former Lok Sabha Speaker Somnath Chatterjee made a noteworthy statement regarding the states of East and Central India:

"The losses caused by the Freight Equalization Policy and the dismantling of the license-permit regime through economic reforms can never truly be compensated..."

In a way, the revenue distribution recommended by the Finance Commission acts as compensation for the damage caused to those states due to the Freight Equalization Policy.

Against this entire backdrop, we must take into account the regional identities of Marathi, Kannada, and Tamil cultures. There is a growing sentiment that “Have we committed a crime by exercising population control and achieving economic development?”

Every Indian citizen has a constitutional right to reside, engage in trade, conduct business, and seek employment in any part of India. However, it is essential that this right is not misused or turned into a form of dominance.

Our future path must be shaped with this sensitivity in mind. Otherwise, we risk creating divisions in Indian society where none exist, or widening those that already do, thereby unintentionally empowering oppositional forces both within and outside India.

It is our duty to preserve India’s unity and integrity, and we shall continue to uphold that responsibility. But in doing so, we must also study the cracks that exist, and take timely action to bridge them. This article is a humble attempt in that direction.