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The Raghuram Rajan panel report is an improvement over methodologies which were employed in the past to measure backwardness, writes NK Singh.

india Updated: Oct 03, 2013 07:20 IST
NK Singh
NK Singh
Hindustan Times

Growing regional aspirations have multiple consequences. The dispersal of political power has remained asymmetric with a continued concentration of economic power with the central government.

A quasi-federal system with a centrist bias inherent in our Constitution is being put to increasing test.

The increasing displacement of identity politics with what is described as development-centric politics makes it obligatory for credible regional leaders to effect a demonstrable improvement in life quality in seeking a renewed mandate.

Issues of the income divide and growing regional inequality, therefore, assume a high focus. Undeniably, there are moral and economic compulsions that gains of growth must be more evenly shared.

It will be unacceptable that some regions or segments of the population do not become part of growing national prosperity.

While the Gini coefficient, in a rough sense, measures income disparities between the rural and the urban, or between different segments of the population, there is still a need for measuring the differences between states and regions.

Over the past century, countries such as the UK, United States, Australia, Canada, South Africa, Germany and Italy have addressed the challenge of regional backwardness through policies of fiscal equalisation.

The broad principle is to ensure comparable levels of public services conditional on the levels of taxation. In our strategy, the First Five Year Plan placed an emphasis on the upliftment of backward areas, especially those with a tribal population.

Gradually, by the Third Plan, the approach shifted from the exclusive ‘target group’ to ‘target areas’.

However, the major shift came in 1969 with the Fifth Finance Commission acting in line with what is known as the Gadgil Formula conferring Special Category Status on three states.

This was subsequently widened to include 11 states. It is worthwhile to remember that the three principle benefits of the Special Category Status relate to the proportionality between the central and states shares for Centrally Sponsored Schemes, the tax regime for attracting private investment and special assistance over and above what flows through the Gadgil formulation.

Notwithstanding these efforts, divergence has continued. Montek Singh Ahluwalia in his paper in the volume entitled ‘The New Bihar – Rekindling Governance and Development’ has argued that “convergence comes into play only once some critical preconditions have been achieved, for example the building of essential infrastructure and human resources, which can support faster growth”.

Broadly speaking, the poorer General Category States have continued to diverge from the national mean, and while the outcome in some backward states may have improved, the disparities have only widened.

The approach of the Planning Commission, like most of the commission’s work, was caught in a time warp. Nitish Kumar’s initiative to seek Special Category Status for Bihar acted as a driver and a catalytic agent for a new approach.

The first one to recognise this was P Chidambaram when, both in his statement in Parliament and in his Budget speech, he accepted the need for fresh thinking and a methodology for determining backwardness.

The Raghuram Rajan Committee appointed thereafter to develop a Composite Development Index seeks to achieve this objective. In a sense, it is the equivalent to the Gini-coefficient for regional and state disparities. It has examined the extent to which different States have diverged from the national average on multiple development parameters.

These variables include monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of SC-ST population, urbanisation rate, financial inclusion and connectivity.

Depending on how they score on the Multi Dimensional Index, the states have been categorised as Least Developed, Less Developed, and Relatively Developed.

The composite index ranges from zero to one, with one being the most backward and zero the least backward or relatively developed.

Ten states that score above 0.6 (out of 1) on the composite index have been classified as Least Developed; the 11 states that scored from 0.4 to 0.6 are Less Developed, and the seven states that scored less than 0.4 are Relatively Developed.

In addition, the Committee has recommended that “least developed” states, as identified by the index, be eligible for other forms of central support that the Centre may deem necessary to enhance the process of development.

The Raghuram Rajan Committee Report must be considered in the following context. First, it brings greater transparency and clarity in the proposed devolution model.

It is also dynamic in the sense that states can fall in or out of a category depending on their performance since there is a built-in mechanism for review in the report.

This methodology should stand the test of time, and is broadly harmonious with contemporary development literature, which classifies countries as developed, developing and least developed.

What it leaves out is the fourth category, also accepted in development literature, namely Specially Disadvantaged, which refers to countries that are landlocked, prone to natural disasters, or vulnerable to insurgency or geo-political uncertainties.

Second, it remains debatable whether both the variables and the weights assigned to them are appropriate. Clearly, some other variables like per capita GDP, per capita energy consumption or manufacturing output would have added to the compositeness of the index.

Third, the report assigns 75% weight to backwardness and 25% to performance. One must safeguard against states becoming complacent, and continuing to perform badly thereby burdening other states.

The benefits to Least Developed and Less Developed States have an element of cross-subsidy since funds are finite and inelastic but their utilisation is fungible. Improving performance must be incentivised over a period of time by altering the proportionality between performance and backwardness.

Fourth, translating these recommendations into practice needs careful monitoring. Special Category States are subsumed now as the Least Developed States.

Ensuring benefits to them will need coordinated action by multiple ministries and organisations. The department of economic affairs, as mandated by the prime minister, now has the challenge of making different ministries conform to State-wise targets for access to funds proposed in the report.

Finally, will this report end regional disparities? Does it address the clamour for equity in our fiscal devolution framework? Can the Composite Development Index become coterminous with the Composite Happiness Index? Notwithstanding these concerns, the report is a clear improvement over the methodologies employed in the past to measure backwardness.

Adam Smith argued some three centuries ago that “All nations have endeavoured, to the best of their judgment, to render their taxes as equal as they could contrive”.

Only time will tell if the present endeavour can usher in a more equitable system of devolution and addresses regional aspirations.

(NK Singh is a Rajya Sabha member and a former revenue secretaryThe views expressed by the author are personal)

First Published: Oct 02, 2013 19:19 IST