Sukumar Mukhopadyay : Rajan Committee on Under development Index

Rajan Committeeon Underdevelopment Index
Raghuraman Rajan Committee has submitted its report on a new under development index, which it calls Composite Development Index , on 1st September 2013.  It has completed its report within three months.  It had five other members namely, Shaibal Gupta, Bharat Ramaswami, Najeeb Jung, Niraja G. Jayal and Tuhin Pandey.  But none of them is an expert on Centre-State fiscal relations.  It has a lengthy dissenting note which has attracted as much attention as the main report.  Analysts have also criticized it for bring deliberately giving its finding to favour Bihar in order to lure the present ruling party to its fold.  Jayalalitha has reportedly remarked about the report that “it is a thinly disguised attempt to provide an intellectual justification to deliver resources to a potential political ally”.   It has also been reported that one of the motives of the committee was to show Gujarat’s economic performance in poor light.  I shall not discuss this Report from any one of these angles but only on the merit of what has been written in this report.

Previous Formula
There was already an index called Gadgil – Mukherjee Index for determining under development of States for the purpose of giving grants.   Dr Gadgil, Deputy Chairman of the Planning Commission gave a formula but due to reservations of some State Governments on revision, a Committee under Shri Pranab Mukherjee, then Deputy Chairman, Planning Commission was constituted to evolve a suitable 
formula. The suggestions made by the Committee were considered by NDC in December 1991, where following a consensus, the Gadgil-Mukherjee Formula was adopted. It was made the basis for allocation during 8th FYP (1992-97) and it has since been in use. After setting apart funds required for (a) Externally Aided Projects and (b) Special Area Programme, 30% of the balance of Central Assistance for State Plans is provided to the Special Category States. The remaining amount is distributed among the non-Special Category States, as per Gadgil-Mukherjee Formula.
The dissenting note by Shaibal Gupta pointed out that Rajan Committee has recommended Odisha as the most backward State though its per capita income is Rs.51.130 which is more than double of Bihar which is Rs 25,023.  There are several contradictory situations arising because of  taking expenditure and not income.  He also points out that per capita income is the basis of Human Development Index (HDI) which is internationally accepted since it is relied upon by UNDP.  He also points out that if income is taken as the criterion, it will have a better acceptability by all the States in the country which is very important because without their acceptance in the Forum of National Development Council (NDC) the Report cannot be acted upon.  It has also been pointed out by another economist (Arvind Panagariya, Times of India October 19, 2013) that the allocation has got anomaly since Bihar which is the poorest State gets Rs.11.56 per capita whereas Goa which is the most developed State gets Rs.20.63 per capita out of 1000 crores as given in the Table-3 of the Report.  Even in Uttar Pradesh, which is one of the least developed States,  the per capita allocation is Rs.8.21 as against Goa which gets Rs.20.63 per capita.

Reaction of the Planning Commission
It is known that Planning Commission’s criterion is quite at variance with Rajan Committee Report.  It has been reported that a Committee of the Planning Commission consisting of Mihir Shah and Abhijit Sen had ranked 365 districts on backwardness using a completely different parameter.  This Committee opted for seven variables derived from 2011 Census including scheduled caste and scheduled tribes population, literacy rate, house-hold access to electricity, drinking water and banking facility.  The Planning Commission Committee has also pointed out that the ranking of Odisha as the poorest State though its GDP is much more than that of Bihar shows anomaly in the Rajan Committee Report. Further Gujarat which is a much more developed State has been shown as less developed.  This is also anomalous.  It is reported that several States including Kerala, Tamil Nadu, West Bengal, etc have objected to the Rajan Committee recommendation and therefore its acceptance in the NDC will be difficult. Though the Vice-Chairman of the Planning Commission has gone on record to say that the Shah-Sen Committee`s Report was in relation to 365 districts only, it will be difficult for Planning Commission to dissociate itself from the report of the criterion adopted by the Committee. 

Conceptually the use of expenditure rather than income as a criterion in this Report is totally wrong.  Particularly bringing the issues of the (i) ownership in the State and (ii) differentiating between mineral extractions and manufacturing activity have queered the pitch by bringing in undesirable issues to the fore.  The criterion of the Committee has led to absurd results such as an average person from Goa which is the most developed State gets much more than an average person from Bihar which is the poorest State.  Odisha having double the per capita income of Bihar has turned out to be the poorest State according to the criterion. The time tested methodology of poverty, population and special category States was a much better proposition which should have been continued.  There is no justification for abolishing special category States, which are mainly in the hilly areas where delivery is a serious problem.  One cannot compare Mizoram or Nagaland or Jammu and Kashmir just on the basis of population or area.  Just because few States (like Bihar) ask for being included in the special category States, there is no justification for abolishing the category itself. The approach is like throwing the baby with the bathwater.  A much better idea would have been to revisit the criteria for entitlement to the class of special category States.  The Rajan Committee Report does not stand a chance of being accepted either by Planning Commission or by Finance Commission or by the NDC.  The constitution of the Committee itself has been questioned by some on the ground that it does not have any economist having expertise of Centre State fiscal relations.  The Committee has given its report in a hurry since the head of the Committee namely Raghuraman Rajan has to leave the post of Chief Economic Advisor on a particular date .  So it is a report written in a hurry.  The Committee Report has created more problems than it has solved.