Plan panel officials disagree with Rajan panel report on state funding

Say Gadgil formula for central allocation a time-tested one, dispute new measurement criteria

There is opposition inside the Planning Commission to the recent report of the Raghuram Rajan panel report on a new index to determine the backwardness of the country’s various states.

The panel was set up in May, in the wake of demands from various states for a special category status, for deciding central fund allocations.

The government asked Rajan, then the finance ministry’s chief economic advisor and now the head of the Reserve Bank of India, to head a panel with the task of suggesting indicators of the relative backwardness of states, to enable a better allocation.

At present, central allocations are governed by what is know as the Gadgil-Mukherjee formula; it places substantial emphasis on a state’s population, followed by factors such as per capita and literacy, beside fiscal management and special problems. Special category get priority in allocation.

Rajan’s report, made public last month, proposed an index of backwardness composed of 10 equally weighted indicators for monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Castes and Scheduled Tribes population, urbanisation rate, financial inclusion and physical connectivity.

Of the 28 states, 10 scored above 0.6 (out of one) on the composite index and were to be classified as least developed,  11 states scoring from 0.4 to 0.6 were less developed and seven scoring less than 0.4 were relatively developed.

The report recommended each state get 0.3 per cent of overall central funds allocated and of the remaining 91.6 per cent, three-fourths be allocated based on need and a fourth on improvement in performance, to be reviewed every five years.

Planning Commission officials, who do not wish to be identified, spoke against replacing the Gadgil-Mukherjee formula; they say it is a time-tested one. Doing away with the existing classification of special category status to remote and hilly states, as recommended by the Rajan panel, needs approval from the National Development Council (NDC, comprising Centre and states), they contended.

“Any move to alter the time-tested Gadgil-Mukherjee formula could open a can of worms,” a key Planning Commission official told Business Standard.

The official said the Rajan method should, at best, be factored in by the Finance Commission for devolution of tax proceeds.

“Only the NDC has the power to grant or take away special category status to any state,” an official said.

Officials said the Commission is not satisfied with the manner in which states have been classified by the Rajan panel into categories on the basis of their monthly per capita consumption expenditure. This point was focused on in a dissent note to the majority recommendation by Rajan panel member Shaibal Gupta. These criteria would not give a correct picture, officials said.

Feedback has been invited by the government on the Rajan report. The Commission has not formally given its inputs but these would be based on the stated lines, the sources said.