Where do developmental funds go?

15 years ago the Indian economy kick started but the bad news is that the north eastern states (and some others) didn’t ride along. The most recent news is that the north eastern states are “on a downward spiral.” While this may not be quite correct, what is true is that certain states in India did not keep up. At one time the income of the seven north-eastern states was above the national average and today it isn’t. Mizoram and Tripura are doing better and I wondered why. Well, these two states are the most dependent on agriculture, with 75% of Tripura’s economy dependent on it, and  70% of Mizoram’s economy.

The states which are only half dependent on agriculture and depend on exports, tourism, cottage industries, food and timber products, chemicals and other industrial products have stagnated. Considering that the north eastern states are poor on infrastructure, whether it’s power, roads, airports or hotels, this stagnation is inevitable.

No returns
The central government is pumping money into the north east. In fact for over a decade now, all central government ministries have been setting aside 10% of their annual budgets for the north-eastern states. When it comes to actual figures, from 1998-2006, upwards of Rs 42,600 crore was given to the northeast. So, what’s happened to the money? Here are some ways it must have been “used”:

1. Some of it has been underutilized, simply not spent due to inefficiency and tardiness.
2. Some has been eaten up, a sorry tale of the whole of India. Whether it’s government babus, officials, politicians or contractors, in India it is some sort of a rule that a slice of developmental funds is set aside for thieves and anti-nationals.
3. Some funds are diverted. Funds meant for rural development find their way into urban development, to build luxury hotels and malls. This creates a lopsided development model.
4. Some developmental funds land up with terrorist outfits who do not allow any developmental works unless they are fed. And from businessmen to government employees, they all seek “protection” from terrorist groups. It’s becomes a vicious cycle of expenditure for the government, which is then forced to spend on increased security.
5. Illegal Bangladeshi migrants not only add to the infrastructure woes of the state, these foreigners are often used by Pakistan based terror outfits. This creates a communal divide and more security problems. Politicians do not get rid of these foreigners due to vote bank politics.

It’s not as if these problems are restricted to the north east alone. All states in India are infected with the corruption virus and many are afflicted with the insurgency bacteria as well.

How much does money help?
Clearly the solution is not to stop giving away funds, but I could not help comparing this to the controversy over foreign aid to poor countries. In fact criticism about foreign aid to poor countries has increased. Foreign aid has not worked well in sub-Saharan Africa.  Studies have shown that just as countries with abundant natural resources tend to be laid back, countries dependent on foreign aid (which can be viewed as a resource, although an unnatural one) also tend to be laid back .

What’s worse, political and business factions vie with each other to control the flow of resources and this leads to more corruption and infighting. In Africa for instance it is believed that Somalia’s civil war was caused by the desire of different factions to control the large food aid that the country was receiving.

Ofcourse one can argue that foreign aid to developing countries and central government funding for poorer states are two different things, but I do think that there are lessons to learnt here.

Demarking funds and handing over money to government departments is not enough. Unless good political and “policy” environments are developed, an unlimited flow of funds into the state coffers will not be used effectively.

Why not do other things, like the central government increasing their efforts to find good domestic and export markets for the goods from the north-east and ensure good prices? More efforts can be made to lure reliable private parties into the states. Microfinancing can be expanded as well.

The quality of educational institutions needs to be improved to ensure that people from the northeast get all the opportunities at their doorstep. Literacy is high, but the region does need good quality higher educational institutions.

I am not an economist, and these are just my thoughts which readers are welcome to expand on.

(Map from The Economist)

Related Reading: Read all the other posts on the North-East of India
Read all posts on Development in India and the Indian Economy.
More posts: All of India’s 8 north-eastern states are not disturbed areas!
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