SPECIAL STATUS TO STATES SANTOSH KUMAR MOHAPATRA (published in OrissaPOST on Nov 1,2013, available in orissapost ) (Using monthly expenditure as yardstick overestimates the well-being of the poorest states and underestimates the well-being of the richest states) The Rajan panel report submitted to the Central government on evolving a composite development index of states (otherwise known as underdevelopment index) has spawned debate and discussion. The six-member committee headed by Raghuram Rajan, former chief economic adviser to the finance ministry and incumbent Governor of Reserve Bank of India (RBI) was set up in May 2013 for the development of criteria that may be reflected in future planning and devolution of funds from the central government to the states. The states are highly dependent on the Union government for financing their development plans because the extra resources on which states could bank on are largely concentrated with the Union government. This necessitates the transfer of resources from the central government to states in the form of devolution, grants and loans based on certain criteria. Centre-state transfers take place mainly through three channels: (1) statutory transfers through the Finance Commission mechanism. These include devolution of central tax revenues (divisible pool) to different states and grants-in-aid. (2) Planning Commission allocates funds to states through central assistance for state plans. Central assistance can be broadly split into three components: Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance. (3) Third, transfers for various central sector and centrally-sponsored schemes devolved by various central ministries and monitored by the Planning Commission. Normal Central Assistance (NCA), the main assistance for state plans, is governed by Gadgil-Mukherjee Formula based on categorization of “Special Category” and “General Category” states. NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30:70 for other state. Beyond additional plan resources, special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government. In many cases the state will not be required to give the matching grants. Thirdly, the unspent money at the end of a financial year will not lapse. It will be carried forward. The Raghuram Rajan committee has suggested a new methodology for devolving funds on states based on a Composite Development Index of States, otherwise known as Multi Dimensional Index (MDI) that captures backwardness of states and do away with the earlier provision of special category state status. The committee has suggested that the 28 states be split into three categories -- least developed, less developed and relatively developed -- depending upon their Multi Dimensional Index (MDI) scores. The new index, is based on averages of ten sub-components — monthly per-capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, share of scheduled castes and scheduled tribes in the total population, urbanisation rate, financial inclusion, and connectivity. The new methodology ranks Odisha as India’s most backward State, Bihar as the second most backward, with Goa as India’s most developed State. The 10 States such as Odisha, Bihar, Madhya Pradesh ,Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh, Rajasthan that score above 0.6 (out of 1) on the composite index have been classified as “least developed,”. The 11 States such as Manipur, West Bengal, Nagaland, Andhra Pradesh Jammu & Kashmir, Mizoram, Gujarat, Tripura ,Karnataka, Sikkim, Himachal Pradesh, that scored from 0.4 to 0.6 are “less developed” ` and the seven States such as Haryana Uttarakhand Maharashtra Punjab Tamil Nadu Kerala, Goa that scored less than 0.4 are ``relatively developed’. The present committee proposes a general method for allocating funds from the Centre to states based both on a state’s development needs as well as its development performance. The committee does not, however, propose a quantum of funds to be allocated based on these criteria, for that is not within its terms of reference. Need is based on a simple index of (under) development orMulti Dimensional Index (MDI). According to the Raghuram Rajan Committee recommendations; each of the 28 states get 0.3 per cent of overall Central funds allocated amounting 8.4% and of the remaining 91.6%,three-fourths be allocated based on need and one-fourth based on the State’s improvements on its performance. The Committee recommends that the proposed underdevelopment index be updated on a quinquennial basis and performance be measured relative to the last update. Yet underdevelopment, as discussed above, is more than about simply the allocation of funds. The Central Government may want to offer additional forms of support to states that are particularly underdeveloped. The 10 “least developed” states that currently score above 0.6 could, for instance, be targeted for additional assistance. As states develop fast, they will move out of the “least developed” segment because the index is a relative measure, there will always be some states in that segment However, the report has attracted criticism for having been politically motivated even from committee members such as Patna-based Shaibal Gupta of the Asian Development Research Institute. It is apprehended that, Rajan committee formula, if implemented, for central funding may trigger Union states face-off. Not surprisingly, some states gain and others lose when compared with allocation of shares based on formulas used for transfers through the Planning Commission or the Finance Commission routes. Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh will get a larger share of Central funds than their current share of total Central assistance to State plans and centrally sponsored schemes, while Kerala, Tamil Nadu, Tripura, Nagaland and Maharashtra will lose substantially. The use of monthly per capita expenditure (MPCE) instead of per capita income in spite of clear directive from Finance Minister seems baffling and beyond reason. This has skewed and altered state rankings. Critiques say Per capita Net State Domestic Product (NSDP) is a common measure of development which is used by the Planning Commission, Finance Commission and also in the Gadgil Formula. Per capita income is considered the standard, time-tested universal yardstick for development, as used by various multilateral agencies. Typically, an income indicator would also account for savings, which expenditure does not. The more developed an area, the higher is the per capita savings as percentage of the total income. Therefore, a more developed area would have a proportionately lower MPCE compared to its income, in relation to a less developed area. Using monthly expenditure overestimates the well-being of the poorest states and underestimates the well-being of the richest states. Gupta asks pertinently why each of the ten variables has equal weightage in the construction of the index. Equal weightage of disparate variables makes no sense at all. This report also fails to note the disadvantage to States like strategic location, absence of natural resources, desert regions, drought-prone areas and environmentally fragile areas viz. Hilly areas, coastal areas as well as areas prone to National Disasters like earthquake, flood, cyclone etc. which are necessary to gauge the real reasons for underdevelopment. This does not augur well for odisha, which is always prone to natural apocalypse. In brief, Rajan’s committee has been too slapdash with its statistical methods to provide a perfect answer. Its extensive recommendations on how funds should be allocated based on flawed index , and hence may be relegated to the same fate as of the reports of many other government committee . The author is an Odisha based financial columnist.Email:skmohapatra67@gmail
Posted on: Fri, 01 Nov 2013 13:27:16 +0000
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