Rajan submitted the report to the finance minister last year, immediately before he took over as RBI governor (during his stint at the finance ministry as chief economic advisor).
The Rajan committee proposed a new methodology for allocating central funds to states by splitting 28 states into three categories least developed, less developed and relatively developed based on a multi-dimensional index (MDI). The report was referred to the Planning Commission for necessary action.
But Chaturvedi told FE that the Planning Commission would continue to follow the Gadgil-Mukherjee formula for allocating central funds to state plans. The Constitutionally-mandated Finance Commission will anyway determine the formula for devolution of central taxes based on its discussion with states. So, the Rajan panel's recommendations are at best inputs and practically of academic value to the two commissions, rather than norms to be necessarily followed.
As far as the Planning Commission is concerned, it is governed by Gadgil-Mukherjee formula for normal central assistance. Unless it is changed by the National Development Council, we will continue with that. We can't really change it without NDC mandate, Chaturvedi said.
The Gadgil-Mukherjee formula envisages that special category states get 30% of all central assistance. Of that, 90% is provided in grants and 10% in loans. For general category states, the ratio of grants to loans is 70:30.
The Finance Commissions revenue-sharing formula is based broadly on four parameters population, area, fiscal capacity distance (potential per capita revenue) and fiscal discipline. The 13th Finance Commission attached 25% weightage to population and 10% to area, 47.5% to fiscal capacity distance and 17.5% to fiscal discipline to arrive at the devolution formula of sharing 32% of centre's gross tax receipts with states.
The Planning Commission has developed similar indices for backwardness in the past. The last report submitted in 2013 by a committee, headed by Chaturvedi, showed the existing 11 special category states eight north-eastern states, Jammu & Kashmir, Himachal and Uttarakhand ranked highest in terms of a development disability index that factored in geographical disadvantage, infrastructure deficit and lack of connectivity.
After the demand for special category status from states such as Bihar, the finance ministry had commissioned the Rajan panel to look into the merits of demands. Endorsing the Rajan report, finance minister P Chidambaram opined that the demand for funds and special attention of different states would be more than adequately met by the twin recommendations of the basic allocation of 0.3% of overall funds to each state and the categorisation of states that has a MDI score of 0.6 and above as least developed states.
Asked why states like Bihar would demand special category status while their dependence on own revenue is already much lower and comparable to special category states, Chaturvedi said economically weaker states want a greater share of funds to come to them as grants. Citing the funding pattern for centrally sponsored schemes (CSS), he said: Special category states get 90% of the funding from Centre and have to spend the remaining 10% from their own resources. In contrast, a general category state has to spend 25%. Further, states like Bihar may be asking for the special category status because they could then lower their spending to 10% in CSS and use the remaining 15% for other developmental work.
Also, special category states could get excise concessions for new industrial units, which could help in attracting investment in the state, create jobs and boost the state GDP, he added.
The Planning Commission has been treating special category states more liberally. A special central assistance (budgeted at about R16,000 crore for FY14) is used at the discretion of the commission to help weaker states, he added.
Though the Rajan report made a case for greater central assistance to least developed states such as Bihar, Odisha, Chhattisgarh, Jharkhand, Uttar Pradesh and Rajasthan, opposition political parties criticised the report saying it was being used by the UPA to forge ties with new allies such as JD(U), led by Bihar chief minister Nitish Kumar. Eyebrows were also raised as Rajan categorised some economically strong states such as Gujarat, Karnataka and Andhra Pradesh as less developed.