Opinion Bihar’s economy has turned around. Now, invest in people, institutions

The transformation in the last two decades is striking. During the 1990s, Bihar’s per capita NSDP growth was almost negative. Since 2000, it has improved to roughly 5.3 per cent annually. GSDP growth averaged 8.22 per cent CAGR during 2004-2017. The services sector now contributes 58.6 per cent of the output. Agricultural employment has fallen sharply from 72.6 per cent in 2004 to 43.8 per cent in 2017. The most rapid expansion has come in construction, telecommunications, and financial services. Bihar  is developing new comparative advantages and demanding integration into the national growth story.

The state must now stay the course in order to become a participant in India’s aspiration to reach advanced-economy status. Five priorities deserve focus.

First, Bihar has a unique opportunity to leapfrog traditional development typologies. Its vast migrant population is an asset. Nearly 73,000 workers moved abroad in 2023, and roughly 7.2 per cent of its population resides in other Indian states. Remittances fill gaps left by insufficient domestic job creation. More than half of all households rely on income earned elsewhere. This is a demographic paradox. Bihar supplies labour to the world, yet struggles to convert that human capital into domestic productivity.

Many economies have transformed remittance flows into investment capital. Bihar can cultivate much stronger linkages with its global diaspora. An institutional mechanism, which incentivises remittances, will help direct that capital to supporting education, entrepreneurship, and capital-creating assets. The right policy matrix could attract capital flows to support this development engine.

Second, Bihar has seen an extraordinary surge in infrastructure investment. The Centre has approved over Rs 33,000 crore for 875 km of highway upgrade. This is in addition to Rs 675 crore for district-level road expansion and Rs 3,822 crore for the four-lane Sahebganj-Areraj-Bettiah corridor. Six more connectivity projects will target logistics efficiency and improved border access. Rail infrastructure is receiving unprecedented capital injection. Projects worth Rs 2,192 crore for doubling the Bakhtiyarpur-Rajgir-Tilaiya line, seven new train services including Amrit Bharat Express routes, and nearly Rs 1 lakh crore in ongoing rail capacity projects, including the planned high-speed Buxar-Bhagalpur corridor, have been undertaken. Bihar’s aviation map is being redrawn through a state-AAI agreement for six regional airports. There are also plans for 15 operational facilities and a greenfield international airport near Patna.

These physical linkages augur well for a tourism expansion. However, there is no coherent strategy that can draw on Bihar’s rich cultural endowments to attract domestic and foreign interest. The cost of doing business and setting up a viable tourism sector remains uncertain. Many economies thrive on tourism. But there would be few examples of such latent, under-explored, and under-exploited tourism hubs as Bihar.

Regulatory complexity and delays in clearances or contract enforcement discourage credible investors and undermine large projects. Digital transparency, rule-based systems, industrial land bank and efficient dispute resolution mechanisms will matter more than subsidies. Research has affirmed the role of institutions in shaping long-run development. Odisha and Uttarakhand have shown how even incremental governance reforms can unlock capital influx with greater credibility.

Third, private investment has been elusive. It has to become a driver of growth. The once-fabled Bihar bureaucracy is mired in a status-quoist approach. It views private capital with suspicion. Can bureaucrats in Bihar’s development departments be assigned a target to attract private capital — single private capital or optimised international lending by multilateral and partner approaches? Can their performance in attracting private capital be judged on a transparent matrix?

Fourth, Bihar needs investment in people. The state’s demographic dividend is its biggest potential and largest risk. The 2024 Periodic Labour Force Survey showed that the primary/middle school-educated population was the same as the all-India level. However, the secondary, higher secondary and graduate educated population was below the national average. Aversion to vocational education will not help the state shift to higher-productivity employment. Industry partnerships and aligning college curricula with the labour market are imperative. Upgrading human capital is not a social welfare aspiration but a foundational prerequisite for productivity.

Fifth, Bihar’s fiscal management has been a success.  A fiscal space creates unusual opportunities. Sustained investment in human capital will cement inclusive, durable growth rather than short-term populism.

These priorities outline a path to something far more ambitious than catching up. A state once trapped in stagnation can chart a new course by embracing technology, strengthening institutions, and turning its diaspora and youth into engines of innovation. Bihar has altered its economic destiny. What remains is to institutionalise the gains.

Bihar’s progress  reflects a rare symmetry of purpose between the Centre and the state. Bihar is no longer a basket case. The state needs sustained political support to convert identity politics into developmental compulsions.

The writer is former chairman, 15th Finance Commission