In a move that can substantially reduce political discretion in the allocation of development funds by the Centre to the states, a six-member panel headed by RBI governor Raghuram Rajan has suggested a new methodology for transferring money based on a "multi-dimensional index (MDI)".
Addressing the media in New Delhi on Thursday, finance minister P Chidambaram, who had promised in his Budget speech in February that the criteria for funds transfer would be revised, said 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 parameters.
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.
The panel was set up in the wake of the demand for special category status for Bihar by its chief minister Nitish Kumar, who welcomed the new criteria.
"Each state should get a basic fixed allocation and additional funding should depend on its development needs and performance (on given parameters)," the report said.
"The demand for funds and special allocations by different states would be more than adequately met by the twin recommendations that each state be given a basic allocation of 0.3% of overall funds and the categorisation of states that score 0.6 and above as least developed," said Chidambaram.
The report is likely to be implemented from the next financial year, Chidambaram said, adding: "Prime Minister Manmohan Singh has directed that the recommendations of the committee be examined and necessary action in this behalf may be taken."
The department of economic affairs will examine the report and take necessary action, he added.