HISTORY

•GADGIL FORMULA :• NAMED AFTER THEN PLANNING COMMISSION CHAIRMAN DR. D R GADGIL.

• WAS INTRODUCED DURING FOURTH AND FIFTH FIVE YEAR PLAN.

• IT HAD THE FOLLOWING FORMULA :- SPECIAL CATEGORY STATES LIKE ASSAM, JAMMU AND KASHMIR AND NAGALAND WERE GIVEN

PREFERENCE. THE REMAINING BALANCE OF CENTRAL ASSISTANCE WAS SHOULD DONE ON FOLLOWING BASIS –

Weight(%) Criteria60 Population10 Tax Effort10 Per capita state income10 Irrigation and Power projects10 Problems of individual states

GADGIL-MUKHERJEE FORMULA :

• NAMED AFTER THEN CHAIRMAN OF PLANNING COMMISSION DR. PRANAB MUKHERJEE.

• THE NEW REVISED FORMULA IS GIVEN IN FOLLOWING TABLE –

Weight(%) Criteria55 Population25 Per capita income5 Fiscal Management

15 Special problems100 Total

WHY• The level of development of a state is likely to be the consequence of a complex set of historical,

cultural, and sociological factors. An explicit government objective was to have a more egalitariansociety, coupled with balanced development of different regions. Despite taking a number of steps toreduce the regional disparities, substantial differences in development still exist between states.

• In order to address this issue, the government in may 2013, decided to constitute an expertcommittee to consider backwardness of the states for evolving a composite development index ofstates.

• The committee came up with a new concept called as composite development index of states.

THE COMMITTEE MEMBERS

•DR. RAGHURAM G. RAJAN……..CHAIRMAN•SHRI SHAIBAL GUPTA ………….MEMBER•DR. BHARAT RAMASWAMI…….MEMBER•SHRI NAJEEB JUNG ……………..MEMBER•DR. NIRAJA G. JAYAL …………...MEMBER•SHRI TUHIN PANDEY …………..MEMBER

THE TERMS OF REFERENCE OF THE COMMITTEE WERE AS UNDER • to suggest methods for identifying backward states on the basis of measures such as the distance of the state from the

national average on a variety of criteria such as per capita income and other indicators of human development; • (b) to suggest any other method or criteria to determine the backwardness of states; • (c) to suggest the weightage to be given to each criterion; • (d) to recommend how the suggested criteria may be reflected in future planning and devolution of funds from the

central government to the states. • (e) to suggest ways in which the absorptive capacity of states for funds and their ability to use the funds to improve

well-being can be assessed and used to influence devolution to incentivise performance.

ALLOCATION OF FUNDS

The Committee proposes a general method for allocating funds from the Centre to the states based both on a state’sdevelopment needs as well as its development performance.

The methodology developed by the Committee first allocates funds across states based on need

Need is based on a simple index of (under) development. The index proposed here is an average of the followingten sub-components: (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv) householdamenities, (v) poverty rate, (vi) female literacy, (vii) percent of SC-ST population, (viii) urbanization rate, (viii)financial inclusion, and (x) connectivity.

Less developed states rank higher on the index, and would get larger allocations based on the need criteria.

DISTRIBUTION PATTERN OF CENTRAL GOVT. FUNDS

FIXED , 8.4

NEED BASED, 68.7

PERFORMANCE BASED, 22.9

FIXED NEED BASED PERFORMANCE BASED

THE REAL SCENE

• According To Law Of Average Every State Must Have Got 3.6% Allocation

• But This Range Varies Between 0.3% To 16.41%

• There Are 3 Categories Of States According To This Committee:

1. Least Developed: (Under) Development Index Of 0.6 Or More

2. Less Developed: (Under) Development Index Between 0.4-0.6

3. Relatively Developed: (Under) Development Index Of Less Than 0.4

The Committee proposes allocations based on the index, but with allocations increasing more than linearly to themost underdeveloped states. The proposed allocation scheme accommodates differences in needs, even whilerecognizing that the truly needy should be given disproportionately more. Importantly, since the index is based onpublicly available data, there is no element of discretion in the allocations.

The value of the underdevelopment index for a state represents the need of an average individual in a state. Toallocate more to underdeveloped states with large areas but small population, the Committee decided to assign 80percent weight to a state’s share in population and 20 percent to the state’s share in area in determining the factorby which to multiply need. This follows the approach of a number of committees as well as the FinanceCommission.

This report however, also takes a step forward in trying to draw a balance between “needs” and “performance”.Given that poor administration or weak institutions in a recipient state can fritter away allocated resources to thedetriment of the population, there should be some recognition for effective governance and the efficiency ofresource use. This becomes all the more necessary since the proposal to give substantially more to underdevelopedstates might create a mild disincentive to develop. The Committee therefore settled on improvements to a state’sdevelopment index over time (that is, a fall in underdevelopment) as the measure of performance.

REPLACEMENT OF SPECIAL CATEGORIZATION CONT...

MERITS OF PREVIOUS SYSTEM•States under this category have a lowresource base and are not in a position to mobilize resources for their developmental.• Centre to target specific benefits. The Centre may want to offer additional forms of support to states that are particularly underdeveloped

ACCORDING TO NEW SYSTEMThe 10 “least developed” states that currently score above 0.6 could, for instance, be targeted for specific additional support. Current “least developed” states would be Arunachal Pradesh, Assam, Bihar, Chattisgarh, Jharkhand, Madhya Pradesh, Meghalaya, Odisha, Rajasthan, and Uttar Pradesh

o The Committee recommends that the framework outlined in this report be used to allocate some of the development funds that are allocated by the center to the states.

o The Committee recommends that the proposed underdevelopment index be updated on a quintenntial basis and performance be measured relative to the last update.

o The Committee recommends that the index and the allocation formula be re-examined after 10 years and revisions proposed based on experience.

o The Committee recommends that “least developed” states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.

o The approach recommended in this report is not intended to replace all existing methodologies, but should be thought of as one that will channel some fund allocations based on need and performance. Other methodologies may serve different purposes and should be used in parallel to allocate other funds.

RECOMMENDATIONS

CRITICISMS• Bibek Debroy Says The RBI Governor's Report On Growth Of Indian States Is Flawed.

• Tamil Nadu Chief Minister Jayalalithaa Wrote To Prime Minister Manmohan Singh Urging Him To Reject The Report.

• Committee Member Shaibal Gupta Sums Up All That Is Wrong With The Methodology Used To Arrive At The Conclusion.

• The Report Severely Penalises States That Have Consistently Worked Towards The National Goals Of Development And Welfare, While It Sets Aside Huge Allocations To States That Have Historically Been Under-performers.

PRAISE

• The Report Paves Way For More Funding From The Centre For Odisha, Bihar, And M.P. And U.P. While Goa, Kerala, Tamil Nadu, Maharashtra And Haryana Stand To Lose.

• Nitish Kumar Welcomes Raghuram Rajan Report Ranking Bihar 'Least Advanced‘ .

CONCLUSION

• Changes In The Weightage Of The Parameters Determining The State Development Index.

• Divide States Into Three Categories – Least Developed, Less Developed And Relatively Developed.

• Extra Funding To States According To Above Categories

• The Report Is Being Appreciated By States Under Least Developed Category And Criticized By States Under Relatively Developed Category.

• Currently The Report Has Been Sent To The Planning Commission For Necessary Actions.