How the Freight Equalization Policy Crushed Bihar’s Growth

The Freight Equalization Policy (FEP) was introduced in 1952 with the goal of equalizing the cost of minerals across India. While it aimed to promote industrial development across all regions, it ended up harming states rich in natural resources like Undivided Bihar (including present-day Jharkhand), Odisha, Chhattisgarh, Madhya Pradesh, and West Bengal.

This policy removed the natural advantage these states had and instead benefited coastal states like Maharashtra, Gujarat, and Tamil Nadu. Even after its removal in 1993, the damage was beyond repair.

Let’s explore how this policy worked, its impact, and why Bihar suffered the most.

What Was the Freight Equalization Policy?

In 1952, Jawaharlal Nehru’s government introduced the Freight Equalization Policy to promote balanced industrial growth.

Freight refers to goods or cargo transported from one place to another, typically by ship, truck, train, or airplane. It can also refer to the cost of transporting those goods.

The policy made minerals like coal, iron, and bauxite available at the same price across India by covering transportation costs.

Since minerals became equally available everywhere, companies preferred to set up factories near ports and big cities rather than in remote mining areas.

Impact of the Freight Equalization Policy

Positive Impact :
- States like Maharashtra, Gujarat, Tamil Nadu, Karnataka, Punjab, and West Bengal (coastal and industrially developed states benefitted).
- These states already had ports, infrastructure, and capital, making them attractive for industries.
Negative Impact :
- Undivided Bihar (including present-day Jharkhand), Odisha, Chhattisgarh, Madhya Pradesh, and West Bengal’s interior regions suffered badly.
- These states had minerals but no industries to process them.
- Lack of industries meant fewer jobs, poor infrastructure, and economic stagnation.
- Example:
  Jamshedpur (Tata Steel) is one of the few industrial cities in Bihar/Jharkhand because it was established before the policy. But after 1952, almost no big industries came to Bihar, while Gujarat and Maharashtra kept growing.

Why Did Bihar Suffer the Most?

Bihar was hit hardest because:

No reason for industries to set up in Bihar: If minerals were available everywhere at the same price, why would companies come to Bihar?
Migration of industries to other states: Industries went to coastal and already-developed states, leaving Bihar behind.
Lack of job creation: Without industries, unemployment increased, forcing people to migrate.
Loss of potential growth: Bihar could have become an industrial powerhouse, but the policy took away its natural advantage.

This is why Bihar, despite having huge mineral reserves, remained underdeveloped.

When and How Was the Freight Equalization Policy Removed?

The Freight Equalization Policy (FEP) was not removed overnight—it was gradually phased out in the 1990s. However, there is no single official date for its complete removal, as it happened in different stages :

Early Criticism & Pressure (1980s-1990s):
- By the 1980s, Bihar, Odisha, Jharkhand (then part of Bihar), and West Bengal had already raised strong objections to the policy.
- Several economists, policymakers, and political leaders argued for its removal, stating that it had hindered industrialization in mineral-rich states.
- The rise of regional political movements in states like Bihar and Bengal also fueled protests against FEP.
Economic Reforms & Policy Shift (1991-1992):
- The liberalization of India’s economy in 1991 under Prime Minister P. V. Narasimha Rao and Finance Minister Manmohan Singh led to a major shift in industrial policies.
- Free-market principles, and subsidies like those under FEP were seen as obstacles to economic growth.
- As a result, the first major step to remove the policy was taken in 1992, when the government started withdrawing transport subsidies.
Gradual Withdrawal & Complete End (Mid-1990s) : Throughout the mid-1990s, the central government gradually reduced freight subsidies. By the late 1990s, FEP was no longer in effect.

Removal of the Policy: Too Late to Fix the Damage

The policy ended in 1993, but by then, industries were already well-established elsewhere.

To make the situation worse, Jharkhand split from Bihar in 2000, taking most of the mineral-rich areas with it.

Bihar was left with fewer resources and no industries.

The Long-Term Impact of This Policy

Western and southern states became industrial hubs, while Bihar struggled. The wealth gap between states widened. Even today, Bihar is trying to recover from this policy’s effects.

Nearly 50% of Bihar’s households have at least one migrant worker. The main reason is the lack of industries and jobs in the state.

As a result, many move to Punjab, Delhi, and Haryana for work in construction, factories, and farms. But wages are low, and job security is minimal. This highlights the urgent need for industrial growth in Bihar to reduce migration.

If you made it this far, thank you for taking the time to read! I hope this article helped you understand the impact of Freight Equalization on Bihar’s economy.

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