Not all States will be thrilled with RBI Governor Raghuram Rajan’s Underdevelopment Index. The index will result in gains for some States, but losses for others in terms of their existing allocations of development funds.

For example, Odisha will see its share of total Central assistance provided to State Plans and Centrally sponsored schemes rise, as well as an increase in Normal Central Assistance and Finance Commission grants.

On the other hand, Tamil Nadu is likely to be unhappy with its share from these development funds being revised downward due to a better index score.

Andhra Pradesh will also get a smaller chunk for the total Central assistance given to State Plans, as well as Centrally sponsored schemes. But it will garner a greater share of Normal Central Assistance (NCA), as determined by the Gadgil-Mukherjee formula, as well as Finance Commission grants and central taxes deployed.

The Rajan-led committee that put together the index took into account 10 socio-economic parameters in 28 Indian States to determine how best to distribute development funds from the Centre. These include monthly per capita consumption, education, health, household amenities, the poverty rate and female literacy.

In addition, the proportion of SC-ST residents to the State’s total population, the urbanisation rate, financial inclusion and connectivity were used to put together the barometer of backwardness in Indian States.

The development funds are not cornered solely on the basis of index ranking, however. Rather, the committee has asserted that the truly needy States should be given disproportionately more; while more developed States should accrue a smaller chunk of the funds.

What is more, the committee has indicated that over time, funds allocated between States can be increased or decreased to ensure development takes place across the country.

This is achieved through a formula wherein each State is allocated 0.3 per cent of the total development funds, while the remainder will be distributed on the basis of “need” and “performance” parameters.

States’ changing need for development funds will be evaluated through a formula that takes stock of their share of the country’s total population, their share of the total area in the country and their underdevelopment index score.

Excluding each States’ fixed share of development funds (adding up to 8.4 per cent), need will account for 69 per cent of variable development funds.

Performance in achieving development goals will account for the remaining funds.

The Rajan committee says this performance-based component is necessary since granting substantially more funds to under-developed States will create a mild disincentive to develop.

As such, the performance-based component can be thought of as a bonus that removes the disincentive for a State to improve its development index, which would result in a reduced share in allocations over time.

(This article was published on September 26, 2013)
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