Rajans index will help UPA gain more allies in UP, Bihar

Written by fe Bureau | New Delhi | Updated: Sep 27 2013, 09:14am hrs
An expert panel set up by finance minister P Chidambaram has recommended a new way of disbursing funds to states and said this would make the special category status enjoyed by 11 of the countrys 28 states superfluous, while the truly needy states would get allocations higher than at present and be incentivised to perform.

The UPA government, fielding a battery of demands from states like Bihar, West Bengal, Orissa and Chhattisgarh for special category status and the concomitant higher central assistance, is likely to flag the panels multidimensional index as a solution.

The panel headed by former chief economic advisor in the finance ministry and current RBI governor Raghuram Rajan recommended that three-fourths of a pool of discretionary central assistance be disbursed based on need (backwardness) and the remaining quarter on performance and efficient spending.

Central assistance has already become a politically-sensitive issue ahead of national elections early next year. Bihar chief minister Nitish Kumar has been maintaining that his party JD(U), which recently parted ways with the BJP-led NDA, will support any party at the Centre at the next elections that will grant special status to his state.

The Rajan report suggested that each state should get a basic fixed allocation of 0.3% of the overall funds for such discretionary allocation to ensure that administrative costs are met and an additional allocation depending on its development needs and development performance.

States that score 0.6 and above on the (under) development index are classified as least developed states, while those getting a score between 0.6 and 0.4 are classified as less developed. Those that score below 0.4 are deemed to be relatively developed states.

The panel said the 10 least developed states Orissa, Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan could also be targeted for additional assistance. The seven most developed status are Goa, Kerala, Tamil Nadu, Punjab, Maharashtra, Uttarakhand and Haryana, in that order. Under the new formula, states shares would range from 0.30% (Goa) to 16.41% (UP).

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 scores 0.6 and above as least developed states, Chidambaram told reporters here.

These two recommendations, along with the allocation methodology, effectively subsume what is now special category, the panel said, adding the framework could be used to allocate some of the development funds that are allocated by the Centre to the states.

Chidambaram said that before taking a decision on the new criteria, views would be taken from all stakeholders, especially ministries that devolve a large amount of funds. By and large, the report captures in a better way the degree of backwardness and shows a way forward on how to devolve funds.

He said the new criteria would most likely be implemented in the next financial year.

The new formula will not be applied on the statutory transfer funds to states from the divisible pool of tax revenue mandated by Finance Commissions, which accounts for about 54-58% of total resources given to states. The remaining transfer is in the form of central Plan assistance to 'special' and 'general' category states, which is pegged at Rs 1.36 lakh crore for 2013-14, and as assistance under centrally-sponsored schemes.

Though the Rajan committee did not specify where its formula will be applied, it seems it could guide transfers under the second category at least in part. While announcing the committee in his 2013-14 Budget speech, Chidambaram had said he proposed to get the new criteria reflected in future planning and devolution of funds.

Now, 11 out of 28 states are in the special category, getting priority in the devolution of net Union tax proceeds as well as a higher share of grants under normal central assistance. The seven Northeastern states, Himachal Pradesh, Uttarakhand, Sikkim and J&K enjoy special category status. They get 90% of Centres assistance as grants and the rest as loans, while general category states get only 70% as grants and the rest as loans.

Any improvement in classifying the development of states, from what we have now, is a welcome change. There may, however, be concerns that a some injustice can occur to certain states under this new methodology, said NR Bhanumurthy of National Institute of Public Finance and Policy.

The panel said 8.4% of funds to be disbursed as per his formula will be allocated as a fixed basic allocation to all the 28 states. Of the remaining 91.6%, parameters are chosen such that three fourth of it is allocated based on need and the remaining based on performance.

The panel set up to evolve a new criteria for determining backwardness used ten parameters for it monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percent of SC-ST population, urbanisation rate, financial inclusion, and connectivity. (To placate states like Bihar, West Bengal, and Odisha, the government had in this year's budget allocated Rs 11,500 crore under a Backward Regions Grant Fund.)

The Rajan panel did not propose a quantum of funds to be allocated based on its criteria,as it was beyond its terms of reference. The proposed underdevelopment index would be updated every five years. It also said its approach was not not intended to replace all existing methodologies of classifying, but should be thought of as one that will channel some fund allocations based on need and performance.