New backwardness index to determine funds allocation to states

Raghuram Rajan panel suggests composite development index for judging backwardness. Bihar and Uttar Pradesh recommended highest allocations; will it help UPA win new alliance partners?

 
By Jitendra
Last Updated: Monday 17 August 2015

A six-member expert committee appointed by the Union finance ministry to determine backwardness of states has recommended that 60 per cent of the Central funds assistance should go to the seven poorest states of the country. Bihar and Uttar Pradesh, the two poorest and most populous states, should alone get more than one-fourth of the Central allocation, the report has said while suggesting the new mechanism for allocation called the composite development index for states.

The expert panel—Committee for Evolving a Composite Development Index of States—is headed by Raghuram G Rajan, former chief economic adviser to the finance ministry who was recently appointed governor of the Reserve Bank of India. The committee submitted its report  to the government in the first week of September. The government released the report on Thursday. 

The committee has suggested a new index to judge (under) development of states. The index has 10 criteria carrying equal weightage: (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv)household amenities, (v) poverty rate, (vi) female literacy, (vii) per cent of SC-ST population, (viii) urbanization rate, (viii) financial inclusion, and (x) connectivity. States that score above 0.6 in the index will be categorised as “least developed”, below 0.6 and above 0.4 score means a state is “less developed” and a score below 0.4 means a state is “relatively developed”. The new criteria include human development indices which was not there earlier

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To bring in more balance in allocation and to reward fast development, the committee has suggested a new mechanism to allocate Central funds that take into consideration various socio-economic conditions like more population and difficult terrain. It specifically recommends that states categorised as “least developed” should be targeted for more allocation.

The Committee recommends that each state get a fixed basic allocation of 0.3 per cent of overall funds. To this will be added the allocation based on the new  backwardness index. A state's overall rank will take into consideration its population and area. While allocating funds, share of the state's population to country's will get 80 per cent weightage and its area share will get 20 per cent weightage. Twenty-five per cent of the total Central allocation will be set aside to reward good performance of states and their needs for additional allocation. This provision would help states like Bihar and Uttar Pradesh that need additional allocation and have been growing comparably faster. 

Gainer states

The expert committee was set up following persistent demands for special status from states, particularly from Bihar. The Central government ruled by  UPA has been courting the Nitish Kumar-led JD (U) government in Bihar for political support in the next elections. It is widely perceived that the committee was the first step to grant special status to the state. The report is very clear in its recommendation that the government has all the powers and rationale to grant states additional allocation based on its judgement. Another politically sensitive state, Uttar Pradesh, has also been demanding special packages from the Central government. Under the new mechanism, both Bihar and Uttar Pradesh will be getting 28 per cent of total Central allocation, which is a significant jump over what they get now (see table).  “Uttar Pradesh gets the highest share based on both need and performance, followed by Bihar in terms of need but not in terms of performance,” says the report.

Going by the committee's own estimate, states are not going to forfeit much in terms of money. “Nine states gain in shares relative to the Plan transfers, and 12 gain relative to the Finance Commission ones. Notably, for most of the states, the loss in shares is small,” says the report. Poor states have definitely gained. Seven poorest state of the country—Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh—will corner 60.56 per cent of the Central allocation under the new formula. Interestingly, the incentive of allocation based on growth also goes to these states.
 

How the new formula works
 
  1. Each state gets 0.3 per cent of Central allocation
  2. Ranking uncer the composite development index—least developed, less developed and relatively developed—will decide level of allocation
  3. Share in total population gets 80 per cent weightage for allocations
  4. 25 per cent of total Central allocation to be allocated on good performance and need of special assistance
  5. Government can further allocate more to “least developed” states

 

Comparison between present funds allocation share and under new formula (in %)
States Present committee share Total central assistance to State plan&
Centrally sponsored
Normal Central Assistance
(NCA) as per Gadgil-Mukherjee formula
Finance commission
(grants+
share in Central Taxes)
Andhra Pradesh 6.85 7.34 2.72 6.61
Arunachal Pradesh 0.97 1.56 4.38 0.50
Assam 3.05 4.93 10.31 3.31
Bihar 12.04 7.42 4.95 10.06
Chhattisgarh 3.70 3.14 1.21 2.43
Goa 0.30 0.15 0.22 0.23
Gujarat 3.69 3.05 1.72 3.12
Haryana 1.33 1.36 0.88 1.11
Himachal Pradesh 0.67 2.04 5.81 1.54
Jammu&Kashmir 1.83 4.92 9.03 2.51
Jharkhand 3.88 2.96 1.47 2.77
Karnataka 3.73 4.13 2.03 4.39
Kerala 0.38 1.95 1.44 2.45
Madhya Pradesh 9.56 6.91 3.15 6.72
Maharastra 3.94 6.64 3.01 5.28
Manipur 0.50 1.39 3.34 0.80
Meghalaya 0.65 1.11 2.74 0.51
Mizoram 0.40 1.09 3.26 0.50
Nagaland 0.45 1.39 3.45 0.84
Odisha 6.53 4.62 2.48 4.83
Punjab 1.07 1.26 1.05 1.45
Rajasthan 8.42 4.79 2.76 5.84
Sikkim 0.35 0.67 2.18 0.35
Tamil Nadu 2.51 4.46 2.66 5.01
Tripura 0.52 1.78 5.05 0.81
Uttar Pradesh 16.41 10.09 8.87 18.16
Uttarakhand 0.79 1.90 5.90 1.15
West Bengal 5.50 6.93 3.92 6.72

 

Under-development/need index and allocation share (in %)
States Under-development
/need index
Fixed Share Share based on need Share based on performance Total share
Andhra Pradesh 0.52 0.3 4.03 2.52 6.85
Arunachal Pradesh 0.73 0.3 0.65 0.02 0.97
Assam 0.71 0.3 2.60 0.14 3.05
Bihar 0.76 0.3 8.94 2.80 12.04
Chhattisgarh 0.75 0.3 2.91 0.49 3.70
Goa 0.05 0.3 0.00 0.00 0.30
Gujarat 0.49 0.3 2.56 0.83 3.69
Haryana 0.40 0.3 0.62 0.41 1.33
Himachal Pradesh 0.40 0.3 0.26 0.11 0.67
Jammu&Kashmir 0.50 0.3 1.13 0.40 1.83
Jharkhand 0.75 0.3 3.04 0.54 3.88
Karnataka 0.45 0.3 2.19 1.24 3.73
Kerala 0.09 0.3 0.04 0.03 0.38
Madhya Pradesh 0.76 0.3 7.86 1.40 9.56
Maharastra 0.35 0.3 2.35 1.28 3.94
Manipur 0.57 0.3 .20 0.00 0.50
Meghalaya 0.69 0.3 0.33 0.02 0.65
Mizoram 0.49 0.3 0.10 0.00 0.40
Nagaland 0.55 0.3 0.14 0.01 0.45
Odisha 0.80 0.3 4.85 1.38 6.53
Punjab 0.35 0.3 0.52 0.25 1.07
Rajasthan 0.63 0.3 5.29 2.83 8.42
Sikkim 0.43 0.3 0.03 0.02 0.35
Tamil Nadu 0.34 0.3 1.32 0.88 2.51
Tripura 0.47 0.3 0.14 0.08 0.52
Uttar Pradesh 0.64 0.3 12.24 3.87 16.41
Uttarakhand 0.38 0.3 0.30 0.19 0.79
West Bengal 0.55 0.3 4.09 1.10 5.50
    8.4 68.74 22.86 100.00

Report of the committee for evolving a composite development index of states (Raghuram Rajan Panel report), September 2013

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