A quote from Article 280 of the Constitution is useful. A Finance Commission will make recommendations about “(a) the distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them…; (b) the principles which should govern the grants-in-aid of the revenues of the States”. Splice that with Article 275, on grants-in-aid, and the idea is clear. After catering to Union government’s responsibilities set out in Seventh Schedule, there is a kitty of net proceeds of taxes. A Finance Commission will determine how this is to be shared between Union and states. Once aggregate share of states is determined, a Finance Commission will also determine shares of different states in that aggregate. This is the so-called vertical and horizontal calculation, all pertaining to clause (a). It has nothing to do with grants-in-aid. This may not be the best of nomenclature, but (a) is a bit like equality. Once a formula is set (and different Finance Commissions have used different formulae), shares of states in the aggregate state kitty are mechanically derived. To use that nomenclature, (b) is more about equity or fairness, the idea behind grants-in-aid. Irrespective of where a citizen resides, he/she must have access to the same minimum threshold level of goods and services.
Let’s call these public goods and services, assuming they have to be delivered by government. I don’t think any Finance Commission, including the 14th, has been able to address the conceptual difference between (a) and (b) cleanly. Therefore, though there are separate provisions for grants-in-aid, formulae used, especially from 8th Finance Commission onwards, built in equity indicators. I am not specially picking on Union Finance Commissions. The issue is also valid for State Finance Commissions and for expenditure through centrally-sponsored schemes or schemes with central assistance. At all three tiers of government, goods and services have to be provided through public expenditure. But even after we have agreed on the minimum threshold level of goods and services, costs aren’t uniform throughout the country. Think of special category states. What’s “special” about them and why has this concept been around since 1969? Strategic location along borders is a slightly different argument and I am not talking about the Gadgil-Mukherjee formula. As the terminology suggests, this is formula-driven. Nor do I have in mind low resource base. I have in mind central assistance. A major argument behind this has been hilly and difficult terrain.
Hilly and difficult terrain isn’t specific to 11 special category states alone. Other states also possess hilly and difficult terrain. Indeed, at one level, particularly for large and heterogeneous states, it isn’t even a state-level problem. It’s a district-level problem, perhaps even lower down. To address that clause (b) of equity, one needs to know how much it costs to deliver (per capita per unit say) goods and services in different parts of the country. This may be difficult to estimate, but that’s no argument against not even attempting it. Sure, surrogate indicators have been used to measure cost disability, such as physical or social infrastructure deviation from the average, area, or population, and weights attached to these in formulae used. But these surrogate indicators measure the baseline gap, they don’t quantify cost. Take Chhattisgarh, with a geographical area of 1,35,190 sq km. Does that area give me a sense of how much it costs to deliver goods and services in the state? Probably not, because hilly areas of north and south will be different from central plains. With all the data that is now available, including through satellite imagery, can one not build in elevation and work out Chhattisgarh’s topographical area? That will be a far better indicator of cost than geographical area.
As a tangential thought, the Central Ground Water Board has a watershed atlas, with a basin map divided into 34 basins. If one wishes to zero in on intra-state differences, this probably gives a decent idea of region-wise costs, and it’s possible to disaggregate this to a sub-basin level too. For understandable administrative reasons, development discussion has tended to focus on state-level considerations. Switching the discourse to cost of delivery permits better appreciation of intra-state differences. For instance, the 127 agro-climatic zones identified under the Natural Agricultural Research Project (NARP) give us a better sense of agricultural issues. I am not plugging for topographical area alone. Plausibly, per capita and per unit, it costs less to deliver in a village with a population of 10,000 than in a village with a population less than 200. (In Census 2001, there were around 90,000 villages with a population less than 200, with large absolute numbers in Himachal, Uttarakhand, Rajasthan, Uttar Pradesh, Jharkhand and Odisha. We don’t yet have numbers for Census 2011.) With development, for various reasons, some smaller villages disappear. When Mahatma Gandhi wrote about India dying in her villages, he mentioned the number of villages too. There were 7 lakh. The number is 6,40,000 now, not all inhabited. Let’s avoid that digression. The limited point is that building a road in Arunachal Pradesh is not the same as building a road in West Bengal, because of cost considerations alone.
The author is Member, NITI Aayog. Views are personal