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Raghuram rajan committee on backwardness of states

, October 21, 2013, 2 Comments

Raghuram rajan committee  MarketExpressPV Rajeev’s observations and views on Raghuram Rajan committee report on backwardness of states

According to the current practice special category states are identified based on features such as hilly and difficult terrain, low population density and/or sizable share of tribal population, strategic location along borders with neighboring countries, economic and infrastructural backwardness and non-viable nature of state finances. Under this formula the following eleven states have been classified as special category states namely, Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.

The Raghuram Rajan Committee which was set up to identify backwardness of states used indicators such as monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percent of SC-ST population, urbanization rate, financial inclusion, and connectivity to determine economic backwardness. The committee has classified the following 10 states as backward namely, Arunachal Pradesh, Assam, Bihar, Chattisgarh, Jharkhand, Madhya Pradesh, Meghalaya, Odisha, Rajasthan and Uttar Pradesh.

Many critics have argued that the Raghuram Rajan Committee recommendations are politically motivated and prepared so as to classify Bihar as a backward state so as to please Janata Dal (United) Party and win the party’s support for UPA. It can also be argued that Uttar Pradesh was also included as a backward state to win the support of Samajwadi Party for the UPA. If the committee was an instrument in the hands of the UPA, as alleged, why did the committee include Rajasthan and Madhya Pradhesh as backward states when opinion polls indicate that these two states are likely to come under BJP rule after the coming state elections. The truth is that the committee’s recommendations are not politically motivated but the criticism of the committee is, in fact, politically motivated.

Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh have been labeled as BIMARU states due to their extreme backwardness, poverty and low per capita incomes. It goes to the credit of the Raghuram Rajan Committee that under the committee’s classification these four states with large populations have been classified as being backward. These four states are likely to get larger allocation of Central Government funds if the Committee’s recommendation are accepted by the government. This will be a welcome move which will go far in achieving the declared objective of balanced regional development in India.

The Chief Minister of Tamil Nadu has been highly critical of the recommendations of the Committee. She is of the view that developed states should not be penalized for their achievements in the past. Kerala is another state which has been classified as being highly developed and is one with Tamil Nadu in opposing the Committee’s recommendations. One can only point out in this regard that states should not oppose a formula for identifying backwardness merely because the formula doesn’t benefit their particular state. In any case Kerala and Tamil Nadu were both not included in the earlier categorization of special category states nor are they included among backward states under the new formula. Thus the new report may not do much damage to both these states in the matter of allocation of central funds.

There is a mis-apprehension that hence forth all allocation of central funds is going to be on the basis of the recommendation of the new committee. Nothing can be further from the truth. The prime basis for Centre-State redistribution of financial resources are the recommendations of the Finance Commission. There is no move at present to depart from this pattern. Probably it is only the funds allocated under the Gadgil-Mukherjee formula by the Planning Commission that will come under the purview of the recommendations of the new committee. Fund transferred under this formula constitute only 3.8 per cent of the total centre-state fund transfers and 8.2 per cent of the transfers made by the Planning Commission. Thus the impact of the committee’s recommendation on the over-all centre-state financial relations in the country is expected to be very limited in scope.

The committee has itself recommended that the allocation formula be re-examined after ten years. The committee also recommends that the underdevelopment index should be revisited after five years. Thus there is no finality to the backwardness criterion that has been identified which is likely to change after every five or ten years.

It is the recommendation of the committee that 8.4% of the funds be allocated as a fixed basic allocation. Of the remaining 91.6%, 3/4th of the funds are to be allocated based on need (backwardness) and 1/4th based on performance. Thus backwardness as well as development performance of state will both get weight-age in determining resource allocation.

Political controversy has also raged over the fact that Gujarat was not included as being among the developed states of India. As several commentators had already pointed out earlier Gujarat has made significant development on the economic front while the state remains backward in social sector development. Now we have an index, with us, which measures development of states taking into consideration both economic as well as social indicators. It is no surprise that under such a classification Gujarat falls under the category of a moderately developed state.

In conclusion it can be stated that this is perhaps the first attempt in India to identify backwardness of states based on objective socio-economic indicators and in this respect the report makes a significant advancement. One can only expect that as indicated by the Finance Minister the recommendations of the Committee will be accepted and the report will be implemented from the next financial year itself.

  • Snehal Manjrekar

    Based on my understanding the norm has always been to allocate more funds to the least developed states. However, it would have been interesting if the govt would have introduced some penalties (cutback in funds) for those least developed states that witness withdrawal of projects. After Posco last year, Walmart and BHP Billiton this year chose to exit proposed projects for varied reasons.

    The funds could also be linked to the level of entreprenuerial spirit exhibited by the states. What I mean is rewarding the proactive planning toward upskilling of labor and the range of projects conceived by the state govt, for instance.

    Also the definition of ”Developed State” is bit narrow. Are they developed in comparison to the least developed states? If that’s the case then it is quite absurd! For developed states the indicators should be compared with a basket of emerging country cities with similar dispositions. Unsurprisingly, even the narrowly defined developed states of India need massive outlays to improve sewage, infrastructure, housing, education, and healthcare.

  • LivMdeka

    India’   slow development  is the result of  lack of smart government,lack of correct policies and  corruption.The  67 years  that India passed  has  been a waste. There were  hardly efficient governments at the centre and at the  states.A lazy  government  can not perform better.Or   the  government    must  stop  all  kinds of   misuse of public  money.Wastage of public money means less  development .A corrupt  minded  government  can perform.