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A University of Sussex DPhil thesis Available online via Sussex Research Online: http://sro.sussex.ac.uk/ This thesis is protected by copyright which belongs to the author. This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given Please visit Sussex Research Online for more information and further details State Incapacity by Design Unused Grants, Poverty and Electoral Success in Bihar Athakattu Santhosh Mathew A dissertation submitted in fulfilment of the requirements for the degree of Doctor of Philosophy from the University of Sussex Institute of Development Studies University of Sussex December 2011 ii I hereby declare that this thesis has not been and will not be, submitted in whole or in part to another University for the award of any other degree. Signature: iii UNIVERSITY OF SUSSEX ATHAKATTU SANTHOSH MATHEW DPHIL DEVELOPMENT STUDIES STATE INCAPACITY BY DESIGN Unused Grants, Poverty and Electoral Success in Bihar SUMMARY This thesis offers a perspective on why majority-poor democracies might fail to pursue pro- poor policies. In particular, it discusses why in Bihar, the Rashtriya Janata Dal (RJD) party led by Lalu Prasad Yadav, which claimed to represent the poor and under-privileged, did not claim and spend large amounts of centre–state fiscal transfers that could have reduced poverty, provided employment and benefitted core supporters. Despite this failure, the RJD and Yadav enjoyed repeated electoral success between 1990 and 2005, in a context of credible elections and a majority of poor voters. I have called this combination of events the ‘Bihar paradox’. I explore this paradox by: 1. Creating two panel data sets on fiscal transfers in the form of Centrally Sponsored Schemes and State Plan Allocations made from the Government of India to sixteen main states over an eight-year period from 1997-98 to 2004-05. 2. Using the panel data sets to show that, during this period: a) Poor states in India claimed and spent less of the centre–state fiscal transfers available to them than wealthier states b) Relative to other states, the Government of Bihar claimed and spent less fiscal transfers than expected of a state at its level of poverty. 3. Explaining how Yadav’s electoral strategy contributed to this under-claiming and under-spending. For Yadav, the political imperative was to marginalize the upper castes and provide selective benefits to key supporters. This led to large numbers of public sector vacancies which eroded state administrative capacity in all but a few ‘pockets of productivity’, which in turn led to poor results for general development outcomes. iv The Bihar story is relevant to areas of research variously labelled as ‘state-building’, ‘capacity development’ and ‘public sector reform’. It is another warning about how easy it is to foster pessimism by attributing governance problems in poor countries to deeply embedded historical or cultural factors, when they may have more immediate, political and tractable causes. v ACKNOWLEDGMENTS This has been an epic journey ... with all its trials and tribulations, achievements and milestones ... I dedicate this to my parents: Ammachey –who has been my inspiration and now, can put her mind at rest, and Appachen who has reminded me almost every day of my task ahead I would like to express my appreciation to the cast and crew who sailed with me during this ambitious journey... I am indebted to them for the roles they played ... main, supporting, rock of strength, lighthouse to guide ... I have crossed many paths; made new friends along the way ... they have all helped me get here. I owe my deepest gratitude to... Mick Moore who challenged and encouraged me, never accepting less than the best ... his supervision has been priceless – ‘something that money can’t buy!’ Anne Marie for taking the leap of faith and agreeing to take me on for the doctoral programme, and Rob who helped me shape my initial thoughts during long walks Mark Robinson and Rachel for sharing their joys and sorrows The governance team – Peter Houtzager, Anu Joshi, Andres Mejia Acosta, Diana Conyers, David Leonard, Marc Berenson, Aaron Schneider and Jim Manor – they have guided me through this process and helped me develop an understanding of the subject My DPhil colleagues - Louise Tillin, Javier Arellano, Will Prichard, Sohela Nazneen, Asha George, Sunita Abraham –Talks, Kattie Lussier, Anthony Nrogonano, Narayanan Gatti, Larissa Jones, Julian Salazar and Karla , Cathy Shut, Alex Shankland, Ronaldo Ademty, Rehab Osman , Tobias Denkus – they added meaning to an otherwise lonely voyage Lawrence Haddad, Robert Chambers, John Gaventa, Andrea Cornwall, Martin Greely, Anirudh Krishna, Norman Uphoff, Ali Cheema, Salil Shetty, Sue Unsworth, John Harriss, Sanjay Kumar, Bernhard Kittel, Ashutosh Varshney, Jeffry Witsoe, Arnab Acharya, Stuti Khemani and Amit Prakash – for the many intellectually stimulating conversations Angela Dowman, Linda Waldmen, Peter Taylor, Adam Randon, Caroline Martin, Camilla Walsh and Julia Clark for all their help The larger IDS family... Gabby, Mike, Sheila, Jackie, Wendy, Tina, John P, Martin and John G in facilities, Jeff and David in CATS...this was our home during this period. Maya Unnithan, Sanjeev, Vinita Damodaran, Shanti and Sunder Mahendra, Mohit, Pamela and Louis Shurmer-Smith for their timely support vi My in-laws ... Appacha, Amma and the rest of the Boatveedu family for being there for us I would also like to thank.... N.C. Saxena and Naomi, Aruna Roy, Nikhil Dey, Shekhar Singh and Jean Dreze – who by example continue to show the way T.K.A. Nair, Mukund Prasad, R.J.M. Pillai, Anup Mukerjee, Bhanu Prathap Sharma, R.C.P. Singh, Chanchal Kumar, S. Siddarth and Atish Chandra – colleagues in the IAS who have been patient with me while I pursued this research Thomas Issac, Oommen Chandy, Sudhir Kumar, Ravi Mittal, Arunish Chawla, S.M. Vijayanand, Sheila and Kuttappen, Rajeev Sadanandan, K.M.Abraham, R Sridharan and others in the governments of Kerala and Bihar and Planning Commission ... for the interviews, advice, key insights and constructive comments and many acts of support Shri. Nitish Kumar and Shri. Lalu Prasad Yadav for supporting my many requests for leave The DRC for the Future State for supporting the working paper and the Essex Summer School in Social Science Data Analysis and Collection The people of Saharsa, Supaul, Khagaria, and Palamau – who are the reason I did this. And finally... to the amazing ‘team Mathew’, for their unconditional love and support in every way possible throughout this process and beyond, for their academic performance and achievements ... all I can say to them is ‘we have done it’! ... this thesis would have remained a dream if not for all of you! vii CONTENTS LIST OF TABLES xii LIST OF FIGURES xiii LIST OF ACRONYMS xiv LIST OF TERMS xvii CHAPTER 1 – INTRODUCTION 1 1.1 The Indian Administrative Service (IAS) 1 1.2 Bihar: A Brief Introduction 3 1.3 Motivation for This Research 6 1.3.1 Example One 8 1.3.2 Example Two 10 1.3.3 Example Three 14 1.4 The Puzzle 16 1.5 Methodology 17 1.5.1 Literature Review 17 1.5.1.1 Plurality of Concerns 18 1.5.1.2 Politics of Patronage 19 1.5.1.3 Information Problems 19 1.5.1.4 Limited Democracy 20 1.5.1.5 The Politician’s Dilemma 20 1.5.2 Data Collection and Analysis 22 1.6 Preliminary Findings and Additional Research Questions 24 1.7 Explaining the Bihar Paradox 25 1.8 Summary and Organisation of Thesis 30 CHAPTER 2 – LITERATURE REVIEW 32 2.1 Plurality of Concerns 34 2.2 Politics of Patronage (Clientelism) 39 2.3 Information Problem 47 2.4 Limited Democracy 50 2.5 Politician’s Dilemma 54 viii 2.6 Summary 58 CHAPTER 3 – A BRIEF HISTORY OF POLITICS AND DEVELOPMENT IN BIHAR 60 3.1 Bihar’s History of Troubled Governance and Poor State Capacity 60 3.1.1 Permanent Settlement and its Consequences 61 3.1.2 Bihar Post-Independence 65 3.2 Salience of Caste in Everyday Life and Politics 68 3.2.1 A Brief Introduction to Caste 69 3.2.2 Caste and Politics in India 71 3.2.2.1 Caste as Class: 73 3.2.2.2 Caste as a Vehicle for Articulation of Common Interests: 75 3.3 Backward Caste ascendancy in politics 75 3.4 Bihar: Poor and Backward 78 3.4.1 Who Are the Poor? 79 3.4.2 Bihar’s Situation when Yadav Took Power 80 3.4.2.1 Poverty 80 3.4.2.2 Economic Stagnation 81 3.4.2.3 Illiteracy 83 3.4.2.4 Government Capacity 84 3.4.3 Bihar’s Pro-Poor Performance during Yadav’s Stewardship 85 3.4.3.1 Poverty 85 3.4.3.2 Per Capita Income 86 3.4.3.3 Literacy 86 3.4.3.4 Government Capacity 86 3.5 Under-Claimed and Under-Spent Fiscal Transfers in Bihar 87 3.5.1 Brief Overview of Fiscal Transfers in India 88 3.5.2 Examples of Bihar’s Under-Claiming and Under-Spending 89 3.6 Summary 93 CHAPTER 4 – CENTRE-STATE FISCAL TRANSFERS IN INDIA 95 4.1 India and CSS: A Natural Experiment 96 4.2 Centre-State Fiscal Transfers: An Outline 97 4.2.1 Finance Commission 99 4.2.2 Plan Assistance (PA) 100 4.2.3 Centrally Sponsored Schemes (CSS) 101 ix 4.3 Existing Research on Centre-State Fiscal Transfers in India 104 4.3.1 Political Economy of Fiscal Transfers 105 4.3.2 Fiscal Transfers as Regressive vs.