RaghuramRajan Panel Report
Introduction
RaghuramRajan Committee was formed to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds.It proposes a general method for allocating funds from the Centre to the states based both on a state’s development needs as well as its development performance. RaghuramRajan headed panel has been set up by the government to identify criteria to determine a state’s relative backwardness came out with its report.
Central allocations are governed by the Gadgil-Mukherjee formula that places the greatest weight on the State’s population, followed by other factors like per capita income and literacy.Rajan Committee has come up with a Multi-Dimensional Index that will help measure backwardness and aid the Centre in allocating funds to states.
Committee Formation
Committee was formed amid the demands for “Special Category” status by Bihar, which lags behind the national average on all important indices to fund its development needs. Bihar’s demand was echoed by other states like Odisha.
Committee to be constituted, to consider backwardness of the States in terms of measures like distance of the State from the national average under criteria such as per capita income and other human development indicators and for evolving a Composite Development Index of States.
In his budget speech, Finance Minister had proposed to evolve new criteria and reflect them in future planning and devolution of funds.
Present Condition
The present criteria for determining backwardness are based on terrain, density of population and length of international borders.
RaghuramRajan Committee
• Report of the Dr. RaghuramRajan Committee for Evolving a Composite Development Index of States has been submitted to the Union Finance Minister.
Proposals in the Report
Any scheme of allocation should take into account both development needs as well as past performance. This committee proposes a general method for allocating funds from Centre to states based both on a state’s development needs as well as its development performance.
Need is based on simple index of under development. The indexMulti-Dimensional Index is an average of following ten sub-components: (i) monthly per capita consumption expenditure as measured by the NSSO, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, and (vii) % of SC – ST population, (viii) urbanization rate, (ix) financial inclusion and (x) connectivity.
It has proposed that 10 States that had score 0.6 and above on the Index may be classified as “Least Developed”; States that had score below 0.6 and above 0.4 may be classified as “Less Developed”; and States that had score below 0.4 may be classified as “Relatively Developed” in the scale of 0 to 1.
o Least developed: Odisha is the least developed state in the country followed by Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan.
o Less Developed: This list consists of Manipur, West Bengal, Nagaland, Andhra Pradesh, Jammu and Kashmir, Mizoram, Gujarat, Tripura, Karnataka, Sikkim and Himachal Pradesh. Gujarat is a surprise on this list for most observers as its ‘model of development’ is much talked about in political and economic circles.
o Relatively Developed: Goa is the most developed state in the country followed by Kerala, Tamil Nadu, Punjab, Maharashtra, Uttarakhand and Haryana.
The value of underdevelopment index or Multi Development Index (MDI) for a state represents the need of an average individual in a state. To allocate more to underdeveloped states with large areas but small population, the Committee decided to assign 80 % weight to a state’s share in population and 20% to state’s share in area. This follows the approach of a number of committees as well as the Finance Commission.
The report which was proposed a general method for allocating funds from the Centre to the States based on both a State’s development needs as well as its development performance.
Committee has mentioned that improvements to the state’s development index over time (i.e. a fall in underdevelopment) as the measure of performance.
It hasrecommended that each State may get a fixed basic allocation of 0.3 % of overall funds, to which will be added its share stemming from need and performance to get its overall share.
In total, 28 states included for construction of index, 8.4% of funds will be allocated as a fixed basic allocation. Of the remaining 91.6%, 3/4ths is allocated based on need and 1/4th based on State’s improvements on its performance, which will be reviewed after every 5 years.
It has observed that the demand for funds and special attention of different States will 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 score 0.6 and above as “Least Developed” States. According to the Committee, these two recommendations, along with the allocation methodology, effectively subsume what is now “Special Category”.
Since States now classified as ‘special category’ will “find their needs met” through the new allocations, the term ‘special category’ will be retired.
Recommendations
Committee recommends that the framework outlined in this report be used to allocate some of the development funds that are allocated by the Centre to the states.
It recommends that the proposed MDI be updated on a quinquennial basis and performance be measured relative to the last update.
It recommends that the index and the allocation formula be re-examined after 10 years and revisions proposed based on experience.
It recommends that “least developed” states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.
The approach recommended in this report is not intended to replace all existing methodologies, but should be thought of as one that will channel some fund allocations based on need and performance. Other methodologies may serve different purposes and should be used in parallel to allocate other funds.
Significance of Report prepared by Committee
• Prime Minister has approved the proposal to place the report of the Committee in the public domain.PM has also directed that the recommendations of the Committee may be examined and necessary action in this behalf may be taken.
• Ministry of Finance, Department of Economic Affairs has been asked to examine the report and take necessary action, the Finance Minister added.
Disagreement among the Choice of Indicators
One of the panel’s five members, Patna-based Shaibal Gupta of the Asian Development Research Institute, has disagreed substantially with the panel’s choice of indicators, in a long dissent note appended to the report. His most significant disagreement is with the panel’s decision to use monthly per capital expenditure derived from National Sample Survey Organisation reports as a measure of income, rather than per capita State domestic product, which he said substantially altered State rankings.
In its report, the panel, however, defended its choice of indicator: “Since we are interested in measuring the State population’s well-being, a majority of the committee agreed that consumption from the household survey seems more appropriate than income from the national accounts. This is a judgment call, and we also present the index calculated using per capita net State domestic product. The correlation between indices is 0.997.”
Consequences of Implementing the Report
If the recommendations of this Committee are accepted then
The transfer of funds from the Centre to the States will have to follow a new pattern. So far, the Central assistance to State plans has been disbursed according to the Gadgil-Mukherjee formula that gives highest weightage to population and poverty ratio.The transfer of taxes from the Central pool is decided every five years by the Finance Commission based on another set of criteria. Then there is the Backward Region Grant Fund under which special assistance is given to backward areas that are in need of funds. Any new method of disbursing funds would be politically fraught because some States might lose while others gain. So implementing the new formula will require a lot of political will.
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 and Maharashtra will lose substantially.
By S. Gopal
References
http://www.finmin.nic.in/reports/Report_CompDevState.pdf
http://pib.nic.in/newsite/erelease.aspx?relid=99675
http://in.finance.yahoo.com/news/simplified--raghuram-rajan-panel-report-on-state-backwardness-064423690.html
Introduction
RaghuramRajan Committee was formed to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds.It proposes a general method for allocating funds from the Centre to the states based both on a state’s development needs as well as its development performance. RaghuramRajan headed panel has been set up by the government to identify criteria to determine a state’s relative backwardness came out with its report.
Central allocations are governed by the Gadgil-Mukherjee formula that places the greatest weight on the State’s population, followed by other factors like per capita income and literacy.Rajan Committee has come up with a Multi-Dimensional Index that will help measure backwardness and aid the Centre in allocating funds to states.
Committee Formation
Committee was formed amid the demands for “Special Category” status by Bihar, which lags behind the national average on all important indices to fund its development needs. Bihar’s demand was echoed by other states like Odisha.
Committee to be constituted, to consider backwardness of the States in terms of measures like distance of the State from the national average under criteria such as per capita income and other human development indicators and for evolving a Composite Development Index of States.
In his budget speech, Finance Minister had proposed to evolve new criteria and reflect them in future planning and devolution of funds.
Present Condition
The present criteria for determining backwardness are based on terrain, density of population and length of international borders.
RaghuramRajan Committee
• Report of the Dr. RaghuramRajan Committee for Evolving a Composite Development Index of States has been submitted to the Union Finance Minister.
Proposals in the Report
Any scheme of allocation should take into account both development needs as well as past performance. This committee proposes a general method for allocating funds from Centre to states based both on a state’s development needs as well as its development performance.
Need is based on simple index of under development. The indexMulti-Dimensional Index is an average of following ten sub-components: (i) monthly per capita consumption expenditure as measured by the NSSO, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, and (vii) % of SC – ST population, (viii) urbanization rate, (ix) financial inclusion and (x) connectivity.
It has proposed that 10 States that had score 0.6 and above on the Index may be classified as “Least Developed”; States that had score below 0.6 and above 0.4 may be classified as “Less Developed”; and States that had score below 0.4 may be classified as “Relatively Developed” in the scale of 0 to 1.
o Least developed: Odisha is the least developed state in the country followed by Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan.
o Less Developed: This list consists of Manipur, West Bengal, Nagaland, Andhra Pradesh, Jammu and Kashmir, Mizoram, Gujarat, Tripura, Karnataka, Sikkim and Himachal Pradesh. Gujarat is a surprise on this list for most observers as its ‘model of development’ is much talked about in political and economic circles.
o Relatively Developed: Goa is the most developed state in the country followed by Kerala, Tamil Nadu, Punjab, Maharashtra, Uttarakhand and Haryana.
The value of underdevelopment index or Multi Development Index (MDI) for a state represents the need of an average individual in a state. To allocate more to underdeveloped states with large areas but small population, the Committee decided to assign 80 % weight to a state’s share in population and 20% to state’s share in area. This follows the approach of a number of committees as well as the Finance Commission.
The report which was proposed a general method for allocating funds from the Centre to the States based on both a State’s development needs as well as its development performance.
Committee has mentioned that improvements to the state’s development index over time (i.e. a fall in underdevelopment) as the measure of performance.
It hasrecommended that each State may get a fixed basic allocation of 0.3 % of overall funds, to which will be added its share stemming from need and performance to get its overall share.
In total, 28 states included for construction of index, 8.4% of funds will be allocated as a fixed basic allocation. Of the remaining 91.6%, 3/4ths is allocated based on need and 1/4th based on State’s improvements on its performance, which will be reviewed after every 5 years.
It has observed that the demand for funds and special attention of different States will 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 score 0.6 and above as “Least Developed” States. According to the Committee, these two recommendations, along with the allocation methodology, effectively subsume what is now “Special Category”.
Since States now classified as ‘special category’ will “find their needs met” through the new allocations, the term ‘special category’ will be retired.
Recommendations
Committee recommends that the framework outlined in this report be used to allocate some of the development funds that are allocated by the Centre to the states.
It recommends that the proposed MDI be updated on a quinquennial basis and performance be measured relative to the last update.
It recommends that the index and the allocation formula be re-examined after 10 years and revisions proposed based on experience.
It recommends that “least developed” states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.
The approach recommended in this report is not intended to replace all existing methodologies, but should be thought of as one that will channel some fund allocations based on need and performance. Other methodologies may serve different purposes and should be used in parallel to allocate other funds.
Significance of Report prepared by Committee
• Prime Minister has approved the proposal to place the report of the Committee in the public domain.PM has also directed that the recommendations of the Committee may be examined and necessary action in this behalf may be taken.
• Ministry of Finance, Department of Economic Affairs has been asked to examine the report and take necessary action, the Finance Minister added.
Disagreement among the Choice of Indicators
One of the panel’s five members, Patna-based Shaibal Gupta of the Asian Development Research Institute, has disagreed substantially with the panel’s choice of indicators, in a long dissent note appended to the report. His most significant disagreement is with the panel’s decision to use monthly per capital expenditure derived from National Sample Survey Organisation reports as a measure of income, rather than per capita State domestic product, which he said substantially altered State rankings.
In its report, the panel, however, defended its choice of indicator: “Since we are interested in measuring the State population’s well-being, a majority of the committee agreed that consumption from the household survey seems more appropriate than income from the national accounts. This is a judgment call, and we also present the index calculated using per capita net State domestic product. The correlation between indices is 0.997.”
Consequences of Implementing the Report
If the recommendations of this Committee are accepted then
The transfer of funds from the Centre to the States will have to follow a new pattern. So far, the Central assistance to State plans has been disbursed according to the Gadgil-Mukherjee formula that gives highest weightage to population and poverty ratio.The transfer of taxes from the Central pool is decided every five years by the Finance Commission based on another set of criteria. Then there is the Backward Region Grant Fund under which special assistance is given to backward areas that are in need of funds. Any new method of disbursing funds would be politically fraught because some States might lose while others gain. So implementing the new formula will require a lot of political will.
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 and Maharashtra will lose substantially.
By S. Gopal
References
http://www.finmin.nic.in/reports/Report_CompDevState.pdf
http://pib.nic.in/newsite/erelease.aspx?relid=99675
http://in.finance.yahoo.com/news/simplified--raghuram-rajan-panel-report-on-state-backwardness-064423690.html
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