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Working backwards

New index ranks India’s states on the basis of several components to measure development and aid fund transfer. Gaurav Choudhury reports.

business Updated: Oct 09, 2013 02:34 IST
Gaurav Choudhury
indian economy

New index ranks India’s states on the basis of several components to measure development and aid fund transfer.

What are the Rajan committee’s latest findings on measuring backwardness in Indian states?

A six-member panel headed by Reserve Bank of India (RBI) governor Raghuram Rajan has suggested a new methodology for transferring money based on a "multi-dimensional index (MDI)". The panel has recommended that the "special category" criteria, currently used for providing additional assistance to backward states, be scrapped. Instead, it has proposed that all states be classified as "least developed", "less developed" and "relatively developed" on the basis of their MDI scores, which are based on per capita consumption, the poverty ratio, and several other factors. What was the need for developing a backwardness index?

The proposed methodology first allocates funds across states based on need, which is in line with recommendations of previous committees. Need is based on a simple index of (under) development developed by the committee. Less developed states rank higher on the index, and would get larger allocations based on the need criteria.

How is the index measured?
The committee has identified three key concerns in measuring underdevelopment and linking to fund allocation. These are: what components constitute the index, what weights are assigned to these components and how the index is linked to allocate central funds across states. The panel has proposed a mix of 10-components with different weights for the index. These include: monthly per capita consumption expenditure (MPCE), education, health, household amenities, poverty rate, female literacy, proportion of SC-ST population, urbanisation rate, financial inclusion, and connectivity. There was broad agreement in the committee that consumption expenditure should be used as it appropriately measures the well-being of an average individual in a state for the underdevelopment index.

Why has the committee proposed including proportion of SC/ST population as a component for measuring backwardness?
The issue about the fraction of people belonging to scheduled castes or scheduled tribes (SC/ST) in state population was widely debated. Some on the committee believed that unlike the other variables, this was not an ‘outcome’ variable. The majority of the committee, however, felt that it reflected groups that had been historically deprived, and even today, may indicate social deprivation if not economic deprivation.

How are states classified according to the new index?
The panel has classified states with MDI scores of 0.6 and above as “least developed”; those with scores of between 0.4 and 0.6 as “less developed”, and states with scores of less than 0.4 as “relatively developed”. Thus, Goa and Kerala are India’s most advanced states; Odisha, Bihar and MP the least so; and Gujarat, at 12th place, is a “less developed” state.

According to this formula, how should central funds be allocated to states?
According to the committee’s calculations, Bihar should get 12.04% of the total funds allocated for states by the Centre, as against its current share of 7.42% under the total central assistance to state plans and centrally sponsored schemes. Rajasthan should get 8.42% against 4.79% at present, Odisha 6.53% against 4.62%, Madhya Pradesh 9.56% against 6.91% and Gujarat 3.69% against 3.05%. Uttar Pradesh will continue to corner the largest share of central assistance at 16.4% of total funds against 10.1% earlier.

Why has there been criticism about the Rajan committee’s recommendations?
Committee member Shaibal Gupta has written a long dissent note appended in the report. Gupta, among other things, questions the committee’s decision to assign equal weights to each of the sub-components (such as monthly per capita expenditure and percentage of SC/ST population) for calculating the overall index for the state. The committee not only considers this methodology simple, but also equivalent to other sophisticated methods.

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