Rajan’s index will help UPA gain more allies in UP, Bihar

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SummaryAn 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

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 country’s 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 panel’s 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

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