Gujarat net gainer from the new backwardness index worked out by committee headed by RBI governor

Dr Rajan

While much is being made out from the latest “Report of the Committee for Evolving a Composite Development Index of States”, prepared under the chairmanship of Dr Raghuram R Rajan, new Reserve Bank of India governor, making some states happy while others unhappy, it has something which has gone totally unnoticed. Even as clubbing Gujarat as a “less developed state”, if the recommendations of the report are accepted, Gujarat is likely to get a higher Central allocation than is the case today. Submitted to the Ministry of Finance, Government of India, the report recommends that Gujarat should be allocated 3.69 per cent of the Central share as against what was allocated by the Finance Commission – 3.12 per cent, which includes grants and share in Central taxes.
In fact, the report states, if the new backwardness index worked out by the Dr Raghuram Rajan committee is accepted, “some gain and others lose based on our formula. Nine states gain in shares relative to the Plan transfers, and twelve gain relative to the Finance Commission ones. Notably, for most of the states, the loss in shares is small. For example, relative to the Finance Commission formula, only five states lose one percentage point or more of their share.” Gujarat is a net gainer also in Central assistance. Thus, the committee has recommended the share of 3.69 per cent be also applicable for total Central assistance to state plans and Centrally-sponsored schemes, which as today stands at 3.14 per cent for Gujarat.
The states that gain vis-à-vis Finance Commission (grants plus share in Central taxes) allocation as their backwardness index has gone up, apart from Gujarat, are Andhra Pradesh, Bihar, Goa, Haryana, Jharkhand, Madhya Pradesh, Odisha and Rajasthan. The states which gain in their total share in Central assistance to state plans and Centrally-sponsored schemes (apart from Gujarat) include Bihar, Chhattisgarh, Goa, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh. Gujarat’s gain has come at a time when it had all along been crying for a higher Central assistance. In fact, a major plank of the Gujarat government has been that it gets “less” in terms of Central assistance, though it contributes a much higher amount as taxes and other duties to the Central kitty.
A major reason why Gujarat has “gained” vis-à-vis a large number of states, if the Dr Raghuram Rajan report is any guide, is that several states show much lower backwardness index than Gujarat. While Gujarat’s backwardness index is calculated at 0.49 on a scale of 1, the states which have a better backwardness index than Gujarat include Haryana (0.40), Himachal Pradesh (O.40), Goa (0.05), Karnataka (0.45), Kerala (0.09), Maharashtra (0.35), Punjab (0.35), Sikkim (0.43), Tamil Nadu (0.43), Tripura (0.43) and Uttarakhand (0.38). Gujarat has a slightly higher backwardness index – under which a higher backwardness index means the state is relatively more backward – than the all-India average of 0.50. Obviously, the committee recommends that the share of Central allocations to many of these states should go down.
The underdevelopment index the committee includes the following ten sub-components to decide on backwardness index: (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, (vii) percent of SC-ST population, (viii) urbanization rate, (viii) financial inclusion, and (x) connectivity. The report states, “Income is proxied for by per capita consumption expenditure from the Consumption Expenditure Surveys of the National Sample Survey Organisation (NSSO), and is averaged across individuals at the state-level.”
A separate table worked out by the Dr Raghuram Rajan committee, significantly, is based on per capita net state domestic product (NSDP), which suggests average income earned in each state. Here, Gujarat scores 0.50 on a scale of 1. Here also several states perform better than Gujarat on this score – Haryana (0.43), Himachal Pradesh (0.42), Goa (0.05), Karnataka (0.48), Kerala (0.15), Maharashtra (0.37), Punjab (0.39), Sikkim (0.41), Tripura (0.47), and Uttarakhand (0.56).
The committee report states, “In order to calculate the change in the index to measure performance, we make the following modifications to the procedure described above. First, both the base and current year indices are normalized using the minimum and maximum values for the base year. We do this in order to avoid the possibility that a change in the index might merely reflect a change in the minimum and maximum values across states over the two years, rather than an improvement in the index.
“Second, three of the variables, which we use in the construction of the needs-based indices are dropped – share of SC/ST in total population, length of surfaced national highways, and railways. The share of SC/ST in total population does not seem to be a variable that would affect performance, so it was excluded from the performance calculation. Similarly, the length of surfaced national highways and railways are determined by the central government, and states should not be rewarded or penalized for any change in these.
“Third, the change in the index is normalized using the minimum and maximum values, so that the least performing state does not receive any bonus, whereas the better performers get bonus shares in proportion to the magnitude of their improvement.”

Underdevelopment index on a scale of 1 based on per capita net state domestic product (NSDP)