Rajan Committee on Underdevelopment Index
Raghuraman Rajan Committee has submitted its report on a new under development index, which it calls Composite Development Index , on 1st September 2013. It has completed its report within three months. It had five other members namely, Shaibal Gupta, Bharat Ramaswami, Najeeb Jung, Niraja G. Jayal and Tuhin Pandey. But none of them is an expert on Centre-State fiscal relations. It has a lengthy dissenting note which has attracted as much attention as the main report. Analysts have also criticized it for bring deliberately giving its finding to favour Bihar in order to lure the present ruling party to its fold. Jayalalitha has reportedly remarked about the report that "it is a thinly disguised attempt to provide an intellectual justification to deliver resources to a potential political ally". It has also been reported that one of the motives of the committee was to show Gujarat's economic performance in poor light. I shall not discuss this Report from any one of these angles but only on the merit of what has been written in this report.
Previous Formula
There was already an index called Gadgil – Mukherjee Index for determining under development of States for the purpose of giving grants. Dr Gadgil, Deputy Chairman of the Planning Commission gave a formula but due to reservations of some State Governments on revision, a Committee under Shri Pranab Mukherjee, then Deputy Chairman, Planning Commission was constituted to evolve a suitable formula. The suggestions made by the Committee were considered by NDC in December 1991, where following a consensus, the Gadgil-Mukherjee Formula was adopted. It was made the basis for allocation during 8th FYP (1992-97) and it has since been in use. After setting apart funds required for (a) Externally Aided Projects and (b) Special Area Programme, 30% of the balance of Central Assistance for State Plans is provided to the Special Category States. The remaining amount is distributed among the non-Special Category States, as per Gadgil-Mukherjee Formula.
So current pattern of formula is:
Purpose of the Present Formula
The Committee was constituted in the light of the Finance Minister's Budget (2013) speech, in which the Finance Minister said, "it may be more relevant to use a measure like the distance of the State from the national average under criteria such as per capita income, literacy and other human development indicators........ to suggest methods for identifying backward States on the basis of measures such as the distance of the State from the national average on a variety of criteria such as per capita income and other indicators of human development". The purpose is obviously is to have, as Rajan Committee has put it, " a more egalitarian society, coupled with balance development of different regions". The Terms of Reference were, mainly, "to suggest methods for identifying backward States on the basis of measures such as the distance of the State from the national average on a variety of criteria such as per capita income and other indicators of human development".
Who is supposed to adopt the formula
There are three existing channels for devolution of Central funds to States:-
Finance Commission for devolution and grants
Planning commission for grants and loans for planning
Various Central Ministries which effect transfers for various central sectors and centrally sponsored schemes devolved by various central Ministries
It is not clear at all as to who amongst the three above is supposed to follow the Rajan formula. Rajan report itself is not clear about it. In the recommendation (v), the Rajan Committee says that its approach is "not intended to replace all existing methodology but should be thought of as one that will channel some fund allocations based on need and performance. Other methodologies may serve different purposes and should be used in parallel to allocate other funds". This means that Gadgill Mukherjee formula will also continue. At the same time at page 45 of the report the dissenting note of Mr. Shaibal Gupta has indicated that "the suggested index will considerably deprive the poorer States of precious resources that are mediated through the Planning Commission and Finance Commissions". The dissenting note seems to clearly suggest that the criterion given by the Rajan Committee will replace the formula now being followed by Planning Commission and Finance Commission. We may also note that the report has been sent by the Finance Minister to the Planning Commission. It has been reported in the media that the Prime Minister had directed that the recommendations of the Rajan Committee should be examined by the Planning Commission and necessary action taken. The Planning Commission has since clarified that the Rajan Committee Report made a case for ending the special category status for poorer states and replacing Gadgil- Mukherjee formula with its Multi Dimensional Index (MDI) for allocation of funds to states. This will be placed before the NDC, the National Development Council , which will take a final call. While this is the correct position, the assertion of the Rajan Report that it is a parallel report is not correct at all.
Under development index
The index proposed is based on the average of the following ten sub components, namely, (i) monthly per capita consumption expenditure-not the income per head (ii) education –computed as a weighted of attendance ratio and number of institutions for primary and secondary education (iii) health measured by a single indicator—infant mortality rate (iv) household amenities which is a weighted average of the number of households having electricity, drinking water, sanitation, phone etc (v) poverty rate taken from the Planning Commission (vi) female literacy-taken from Census, (vii) percent of SC-ST population taken from Census, (viii) urbanization rate taken from Census , (ix) financial inclusion, and (x) connectivity which is a weighted average if indicators such as length of highways, rail route. The index is based on publically available data.
The proposed allocation scheme, claims the Committee, accommodates difference in needs, even while recognising that the truly needy should be given disproportionately more. To allocate more to underdeveloped States with large areas but small population, the Committee decided to assign 80% weight to a state's share in population and 20% to the state's share in area in determining the factor by which to multiply need. This is the same approach followed by a number of Committees as also the Finance Commission. The Committee has recommended that each State gets a fixed basic allocation of 0.3% of overall funds, to which will be added its share stemming from need and performance to get it overall share. Thus, given that there are 28 states included in the construction of index, 8.4% (0.3 x 28) of funds will be allocated as a fixed basic allocation. Of the remaining 91.6%, 3/4th of it is allocated on need and 1/4th is based on performance.
The criterion works out in this way that the states who score less points are treated as more developed. The Committee has decided that the states that score 0.6 and above are "lease developed" etc as per table below.
Underdevelopment Index for States
(0.6 and above) – Least developed
Rank | State | Underdevelopment Index |
1 | Odisha | 0.80 |
2 | Bihar | 0.76 |
3 | Madhya Pradesh | 0.76 |
4 | Chhattisgarh | 0.75 |
5 | Jharkhand | 0.75 |
6 | Arunachal Pradesh | 0.73 |
7 | Assam | 0.71 |
8 | Meghalaya | 0.69 |
9 | Uttar Pradesh | 0.64 |
10 | Rajasthan | 0.63 |
Less Developed (0.6 to 0.4)
Rank | State | Underdevelopment Index |
11 | Manipur | 0.57 |
12 | West Bengal | 0.55 |
13 | Nagaland | 0.55 |
14 | Andhra Pradesh | 0.52 |
15 | Jammu & Kashmir | 0.50 |
16 | Mizoram | 0.49 |
17 | Gujarat | 0.49 |
18 | Tripura | 0.47 |
19 | Karnataka | 0.45 |
20 | Sikkim | 0.43 |
Relatively developed (0.4 to below)
Rank | State | |
21 | Himachal Pradesh | 0.40 |
22 | Haryana | 0.40 |
23 | Uttarakhand | 0.38 |
24 | Maharashtra | 0.35 |
25 | Punjab | 0.35 |
26 | Tamil Nadu | 0.34 |
27 | Kerala | 0.09 |
28 | Goa | 0.05 |
The Committee report has mistakenly omitted to say where 0.4 will be placed.
This report abolishes the concept of "special category" on the ground that their demand will be adequately met by the present formula.
Controversy about accepting the first criterion of monthly per capita consumption expenditure
There has been considerable controversy about consumption expenditure rather than income, that is, Per capita Net State Domestic Product (NSDP). The Committee admits that NSDP is a common measure of development which has also been used previously by Planning Commission and Finance Commission. But the Committee has accepted the consumption expenditure rather than income on the ground that "it appropriately measures the well being of an average individual in a state, which the underdevelopment index should capture". The next ground which has been taken by the Committee is that per capita income does not adequately measure what reaches the people. What it means is that the State may be rich in income but the people may be poor because the income is cornered by people not belonging to the State. The exact language used is the following:
"Resource rich states may have high levels of average income, which is likely to be appropriated byresource-extracting corporations that may or may not be owned in the state. As a result, average consumption at the household level may still be low."
The two concepts in the above quotation are totally wrong. The concept of "resource extracting corporation" is economically unacceptable because there is no distinction between resource extracting corporation and, let us say, manufacturing corporation. Both produce economic goods and there is no distinction from the economic point of view between mineral goods and manufactured goods. Such a distinction is artificial and it is most shocking that such highly rated economists (excepting Dr. Shaibal Gupta who has given a dissenting note) have made such a distinction. Secondly the concept of "owned in the state" in the above quotation is a dangerous concept. Ownership brings a lot of issues which are best avoided. If we take aluminium factory in Odisha, it is owned by K M Birla. Should we say that because it is not owned by a person from Odisha, it is not increasing the per capita income of the State? Take Maharashtra for example. Most of the industries are owned by Marwaries, Gujaratis and Punjabis. Should we say that since they are not owned by the Maharashtrians, the income of the people of the State is not increasing? And to which State does Birla belong ? They are all born and brought up in Bengal or Maharashtra. The whole question of "owned in the State" is both wrong and dangerous. The correct concept is income and not expenditure, as Shaibal Gupta pointed out in the dissenting note which is 20% of the whole report. His main objection is about the criterion of choosing monthly per capita expenditure rather than per capita income (Per capita GSDP or PCI). He points out that this Rajan Committee was established on the basis of the Finance Minister's speech in the Budget 2013-14 where the FM mentioned "per capita income" and not expenditure. In the Committee's terms of reference also the expression "per capita income" was there. Shaibal Gupta has argued that the criterion of income is better than the criterion of expenditure. Income minus expenditure is equal to savings. More developed State has a lower expenditure per capita and higher savings. Savings is as much a criterion to judge the economic standard of the State (as expenditure) because it is savings which gets converted into investment. Shaibal Gupta has also challenged the argument of the Committee that the data regarding income is less dependable. He points out that the data for income are prepared by the States but on the basis of the guidelines issues by the Central Statistical Organisation (CSO). The CSO thereafter checks the data before releasing them. So there is no reason to call them undependable. He says that even the expenditure data are also equally undependable.
Allocation Share
Table 3 of the Committee report shows the allocation share for 1000 crores as below
State | Allocation in Rs.1000 crores (in Rs. Crores) |
Andhra Pradesh | 68.51 |
Arunachal Pradesh | 9.65 |
Assam | 30.46 |
Bihar | 120.38 |
Chhattisgarh | 36.99 |
Goa | 3.01 |
Gujarat | 36.92 |
Haryana | 13.29 |
Himachal Pradesh | 6.71 |
Jammu & Kashmir | 18.33 |
Jharkhand | 38.75 |
Karnataka | 37.30 |
Kerala | 3.79 |
Madhya Pradesh | 95.60 |
Maharashtra | 39.38 |
Manipur | 5.04 |
Meghalaya | 6.45 |
Mizoram | 4.00 |
Nagaland | 4.53 |
Odisha | 65.32 |
Punjab | 10.73 |
Rajasthan | 84.21 |
Sikkim | 3.50 |
Tamil Nadu | 25.05 |
Tripura | 5.17 |
Uttar Pradesh | 164.11 |
Uttarakhand | 7.85 |
West Bengal | 54.95 |
The dissenting note by Shaibal Gupta pointed out that Rajan Committee has recommended Odisha as the most backward State though its per capita income is Rs.51.130 which is more than double of Bihar which is Rs 25,023. There are several contradictory situations arising because of taking expenditure and not income. He also points out that per capita income is the basis of Human Development Index (HDI) which is internationally accepted since it is relied upon by UNDP. He also points out that if income is taken as the criterion, it will have a better acceptability by all the States in the country which is very important because without their acceptance in the Forum of National Development Council (NDC) the Report cannot be acted upon. It has also been pointed out by another economist (Arvind Panagariya, Times of India October 19, 2013) that the allocation has got anomaly since Bihar which is the poorest State gets Rs.11.56 per capita whereas Goa which is the most developed State gets Rs.20.63 per capita out of 1000 crores as given in the Table-3 of the Report. Even in Uttar Pradesh, which is one of the least developed States, the per capita allocation is Rs.8.21 as against Goa which gets Rs.20.63 per capita.
Reaction of the Planning Commission
It is known that Planning Commission's criterion is quite at variance with Rajan Committee Report. It has been reported that a Committee of the Planning Commission consisting of Mihir Shah and Abhijit Sen had ranked 365 districts on backwardness using a completely different parameter. This Committee opted for seven variables derived from 2011 Census including scheduled caste and scheduled tribes population, literacy rate, house-hold access to electricity, drinking water and banking facility. The Planning Commission Committee has also pointed out that the ranking of Odisha as the poorest State though its GDP is much more than that of Bihar shows anomaly in the Rajan Committee Report. Further Gujarat which is a much more developed State has been shown as less developed. This is also anomalous. It is reported that several States including Kerala, Tamil Nadu, West Bengal, etc have objected to the Rajan Committee recommendation and therefore its acceptance in the NDC will be difficult. Though the Vice-Chairman of the Planning Commission has gone on record to say that the Shah-Sen Committee`s Report was in relation to 365 districts only, it will be difficult for Planning Commission to dissociate itself from the report of the criterion adopted by the Committee.
Conclusion
Conceptually the use of expenditure rather than income as a criterion in this Report is totally wrong. Particularly bringing the issues of the (i) ownership in the State and (ii) differentiating between mineral extractions and manufacturing activity have queered the pitch by bringing in undesirable issues to the fore. The criterion of the Committee has led to absurd results such as an average person from Goa which is the most developed State gets much more than an average person from Bihar which is the poorest State. Odisha having double the per capita income of Bihar has turned out to be the poorest State according to the criterion. The time tested methodology of poverty, population and special category States was a much better proposition which should have been continued. There is no justification for abolishing special category States, which are mainly in the hilly areas where delivery is a serious problem. One cannot compare Mizoram or Nagaland or Jammu and Kashmir just on the basis of population or area. Just because few States (like Bihar) ask for being included in the special category States, there is no justification for abolishing the category itself. The approach is like throwing the baby with the bathwater. A much better idea would have been to revisit the criteria for entitlement to the class of special category States. The Rajan Committee Report does not stand a chance of being accepted either by Planning Commission or by Finance Commission or by the NDC. The constitution of the Committee itself has been questioned by some on the ground that it does not have any economist having expertise of Centre State fiscal relations. The Committee has given its report in a hurry since the head of the Committee namely Raghuraman Rajan has to leave the post of Chief Economic Advisor on a particular date . So it is a report written in a hurry. The Committee Report has created more problems than it has solved.
Sukumar Mukhopadhyay, Member, Central Board of Excise & Customs (Rtd) November 4, 2013 ,Mayur Vihar Phase I, Delhi |
