New formula for development ranking of States
Dr Ashwani Mahajan
Recently a panel under the stewardship of present RBI governor presented a report about the development ranking of different Indian states, which has been subject to major debate in the country and the same being criticised too, for its significant variance from the present thinking. Rajan’s report has endeavoured to rank different states, according to the level of their respective development. If this report is implemented, states would be allocated funds, on the basis of the same. Therefore this report not only has academic importance, but also has financial implications for the states.
Normally states are ranked according to their per capita income. Accordingly, in 2011-12, Haryana was the richest state in India, with Rs 62,927 as per capita income, whereas Bihar was considered to be the poorest state with only Rs 13,178 as per capita income, with ratio between income of richest and the poorest income to be as big as 4.78. According to per capita income rich income states are Punjab, Maharashtra, Kerala, Gujarat, Tamil Nadu, Andhra Pradesh and Karnataka respectively. Poor states include after Bihar, Uttar Pradesh, Madhya Pradesh, Odisha, Rajasthan and Assam.
There is another method of looking at level of development and that is, the state of infrastructure development of a state in comparison to other states. The same is measured by length of roads, per 100 kilometres, teledensity, proportion of irrigated area as per cent of gross cropped area, per capita energy consumption, social services indicators such as literacy rate indicating development in education; and life expectancy, mortality rates of various types and birth rate etc., indicating progress in health services and so on.
Formula and Assistance to States
In India we have a federal system of government, where we have Union Government at central level and state governments at state level. Constitution clearly earmarks sources of funds for the functioning of the governments at two levels. However, there is a tilt in the constitution, in favour of Union government, in terms of the fiscal capacity. If we see total collection of taxes (before devolution with states) of Union government, it was Rs 10,44,275 crores in 2012-13, whereas states could fetch only Rs 6,45,070 crores. However if we see the responsibilities of states, they are much more than that of the Union.
Therefore, resources are transferred from the Union to the states, for smooth functioning of the administration and for fulfilling the development aspiration of the states. There is a provision of Finance Commission in the Constitution. Finance Commission is constituted, after every five years and the same makes recommendations for transfer of a proportion of taxes collected by the Union. Respective share of each state is decided on the basis of the formula recommended by the commission. At present 32 per cent of Union taxes are transferred to states on the basis of the formula, which gives 25 per cent weight to population, 47.5 percent to fiscal capacity distance, 10 per cent to area and 17.5 per cent to fiscal discipline. Apart from devolution of taxes Finance Commission also makes recommendations about grants in aid of various types to states. In addition to Finance Commission, almost equal amount of allocation is also made by the Planning Commission.
The Rajan Formula
Departing from earlier methods for determining the index of development, Rajan formula makes use of 10 variables, including monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, per cent of SC/ST in population, urbanisation, financial inclusion and connectivity. As a result of this, states even with lower per capita incomes go up on the ladder of development, say Bihar, Jharkhand etc., while richer states like Gujarat go down in terms of the development index as ‘invented’ by Rajan.
Formula & the Poor States
Rajan has made drastic changes in the formula to determine the level of development of a particular state. As a result of the same the state which was considered to be the poorest one does not remain as poor as before, while other states, which were not so poor earlier, are considered to be the poorer than before. As a result of this the poor states which were expecting more funds from the Centre, will be getting lesser amount than expected. In this context though some of the poorer states will be adversely affect, whoever major impact would be on special category states namely J&K, Tripura, Manipur, Assam, Nagaland etc., as according to Rajan’s report they will be getting less share through Planning Commission route. For example – J&K will be getting only 0.52 per cent in the new formula as compared to 2.59 per cent earlier. Similarly Manipur will be getting 0.5 per cent as compared to 2.19 per cent and so on. The formula is being criticised on various accounts, as it takes entirely different components and also for duplicity of ingredients. For example – some indicators such as household banking facilities etc. which is outcome of the other variables already included in the formula. Therefore, there exists duplicity in the variables. The other criticism of the formula is that it gives equal weight to each component of the formula, which is the deprived of any logic. For example – per cent of SC/ST population has been given the same weight as financial inclusion or connectivity. The other criticism of the formula is that it uses per capita expenditure instead of using income indicator, such as per capita state domestic product.
Since expenditure has been taken as an indicator, Odisha has been considered to be underdeveloped, though it has got nearly double per capita income than Bihar. Gujarat which comes at 5th position according to per capita income is down to 12th position according to Rajan report.
It seems that Rajan panel has tailor made the formula to suit the political ends for the benefit of present regime. Though Bihar’s status has been improved in terms of development index, it has been compensated in other way by greater allocation in central funds. On the other hand Gujarat has been deliberately downgraded by making illogical formula, to somehow discount the claims of Narendra Modi for his wonderful model of development. It would be better if people sitting in high positions such as RBI Governor, should not indulge in such political gimmicks.