The Planning Commission is not in a hurry to adopt the recommendations of the Raghuram Rajan committee on addressing backwardness to revise its formula for allocating central funds to states, commission member BK Chaturvedi said, even as the demand for special category status and special financial packages from weaker states is getting louder ahead of polls. Chaturvedi lauded the Rajan report for its research value and said it is of “academic interest.” But the former Cabinet secretary said the Commission would rather go by the Gadgil-Mukherjee formula for allocating Plan funds to states.
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 Commission’s 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