Redefining backwardness of states

New criteria look at per capita income, literacy rate, human development indicators

Union Budget 2013-14 could well turn out to be a watershed for devolution of central funds with state governments. It proposed to reframe the criteria for assessing backwardness of states and hinted at a shift in the Centre's tendency towards mobilising revenue from channels which need not be shared with states.

Therefore, the Budget provisions relating to devolution are being seen as a wake-up call to states, urging them to focus on tax efforts to bridge their revenue deficits, rather than relying heavily on current transfers from the Centre. The broad message is in line with the path of fiscal prudence adopted by a Union government grappling with a mounting fiscal deficit.

The Centre has to mandatorily share proceeds of all Union taxes with the governments of all states and Union territories, according to Article 275 (1) of the Constitution. The 13th Finance Commission, set up in 2009 under former finance secretary Vijay Kelkar, had recommended increasing the states' share from 30.5 per cent to 32 per cent between 2010 and 2015. (SHARING THE PIE)

"I propose to evolve new criteria for determining backwardness of states and reflect them in future planning and devolution of funds," Finance Minister P Chidambaram said. While the present criteria are based on terrain, population density and length of international borders, Chidambaram advocated shifting towards "more relevant" per capita income, literacy rate and human development index (HDI). States have shown mixed performance on growth, compared to their HDI. Bihar is the best performer in terms of growth (16.7 per cent); it has the highest decadal (2001-11) growth rate of population (25 per cent) but also the highest poverty head count ratio (53.5 per cent), as well as the highest unemployment rate at 73 per cent. While Kerala's HDI indicators are better, its unemployment rate is high (73 per cent).

The move will bring about a change in the amount of resource transfer for individual states from the Centre's tax proceeds. According to Budget Estimate 2013-14, Uttar Pradesh will receive the largest chunk of tax proceeds from the Centre at Rs 68,491 crore annually, followed by Bihar at Rs 37,977 crore, West Bengal at Rs 25,270 crore and Madhya Pradesh at Rs 24,768 crore. Overall, the net resources transferred to states, including both devolution of taxes and non-plan grants, are seen increasing by 20 per cent to Rs 5,87,082 crore in the next financial year (2013-14) compared to 14 per cent growth the previous financial year.

The Budget also hinted at the government's growing tendency towards keeping devolution to the minimum possible of its revenue receipts. The Centre may not share with states the proceeds from the 10 per cent surcharge imposed on individuals with over Rs 1 crore of annual income.

Already, the introduction of Goods and Services Tax is set to abolish a few state-level taxes without the assurance of full compensation for any loss.