It would indeed be quite difficult to argue with a rock star economist, especially if he is governor designate of Reserve Bank of India, as is Dr Raghuram Rajan.  Yet Dr. Gupta has been very effective in arguing a rational position on evolving the underdevelopment Index, as borne out by his note of dissent. I must say that the dissent note has been argued very cogently an d showcases a sublime touch on part of Dr. Gupta. However, since I have already appreciated the work of Dr. Gupta adequately in my earlier articles, I would now like to touch upon the absurdity of his statement to media calling the report as positive.

First and foremost would be the self goal inflicted by the committee in further restricting its ‘Terms of Reference’ even more than it was stated in the ‘Terms of Reference’ under which this committee has been set up. For example TOR point (d) states that “(d)To recommend how the suggested criteria may be reflected in future planning and devolution of funds from the Central Government to the States;” The position of the panel on this is “The present committee proposes a general method for allocating funds from the Centre to states based both on a state’s development needs as well as its development performance. The committee does not; however propose a quantum of funds to be allocated based on these criteria, for that is not within its terms of reference”. Such a wishy-washy abdication of mandate has been uncalled for. Even if committee did not wish to suggest quantum of funds it could have still been much more creative. Committee could have at least recommended that ministries in government of India do adopt appropriate indices as guidelines for allocating their expenditure across states, within stipulated specified variances allowed for operational flexibility.  This could have been done under TOR point (b) “(b) To suggest any other method or criteria to determine the backwardness of States;” coupled with point (d) as mentioned above.  Data on planning commission site shows that it is expenditure by ministries which is heavily skewed against underdeveloped states and not direct devolutions.  Finance Commission allocation works out 10.06% (including general share and specific grants) as per this very report. Even plan assistance is 7.95% as per the report.  But there is no comment on allocation of funds routed through ministries, which as per planning commission data works out even less than 3% for Bihar. Incidentally, most of the central funds (more than 50%) are spent through federal ministries, federal organizations and quasi federal organizations.

Next the committee jumped its mandate in implicitly suggesting that its index would obviate the need for ‘Special Category’ status to any state. Report reads as follows “Finally, this committee has responded to the concerns of states. The demand by some states to be retained or included in the “special category” is in reality more an economic argument than political argument. The case of small states now included in the “special category” is addressed by our recommendation of a fixed basic allocation of 0.3 per cent of overall funds. The case of some states for inclusion in the “special category” is addressed by our recommendation that states that score 0.6 and above on the (under)development index be deemed as “least developed” states.”  Does not this position of committee foreclose option of ‘Special Category’ altogether? Kindly tell us under which TOR point the committee ventured into commenting on this aspect.  Moreover, it says that demand for inclusion is economic which the proposed index will address adequately, rather than a political one. Dr Gupta is now saying that this is an economic issue to be settled politically. Then why say that this index will obviate such demands on one hand while on the other take a public position that this report is one battle won in war for special state status. These two mutually exclusive scenarios cannot occur simultaneously.

Most damning indictment of the report is in overlooking ‘Per Capita Income’ as a key criterion. As per Dr Gupta’s own dissent note, argued very cogently, this should have been considered.  Particularly as this has been one criterion which was explicitly suggested in TOR point (a) “(a) 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;” Yet committee laboured hard to irrationally negate the same as can be seen in the following excerpt:

 “One issue on which the committee deliberated extensively is whether to use state level per capita income from national accounts or average per capita consumption expenditure from the household survey as an indicator of development. Per capita Net State Domestic Product (NSDP is a common measure of development, and has also been used previously by the Planning Commission and Finance Commission. However, there was broad, though not universal, support in the committee that consumption expenditure should be used instead, as it appropriately measures the well being of an average individual in a state, which the underdevelopment index should capture.

One concern with per capita income at the state level is that it may not adequately measure what reaches the people. Resource rich states may have high levels of average income, which is likely to be appropriated by resource extracting corporations that may or may not be owned in the state. As a result, average consumption at the household level may still be low. Conversely, states with many emigrants may see inflows from remittances that tend to raise average consumption, even if average state incomes are low. Of course, that a state has a lot of emigrants may reflect the poor quality of job opportunities in that state. Moreover, emigrants do pay a cost by leaving family behind.

Another reason for using income is that it could represent greater capacity of the state to raise and utilize resources from its own people, for example through state taxes and household savings. However, household savings may be invested outside the state rather than internally, limiting the resources the state has for development.”

 As rightly point out by Dr Gupta, just by negating this criterion, Bihar was pushed up the ladder. This means that Bihar’s claim gets weakened as Odisha gets rated the worst, diffusing the buildup of political pressure on central government from politically more relevant Bihar. Additionally, Bihar loses on share of funds, if any, devolved using this criteria. Since Finance Commission is also working on a similar index, and if they get selectively influenced by the idea of negating per capita income, recommendations of this report will be quite detrimental to interest of BIHAR and may prove counterproductive.  I concede that if Finance Commission gets positively influenced by the overall sharing mechanism of 12.04% and ups its allocation from 10.06% to this level, this report can prove to be a blessing in disguise.

Finally this committee can be termed as a wasted opportunity if it were only to suggest a human development index after so much deliberation, without even suggesting some specific mechanism or instruments for devolving funds. Committee chould have simply selected the standard ‘Human Development Index. Result would not have been any different. Thereafter it could have proceeded with working out the other details to arrive at an allocation formula. If we read TOR (a) and (b) together, mandate was to develop a ‘backwardness index’ rightly rechristened as ‘Underdevelopment Index’ and not to develop a ‘Human Development Index’ as it turns out to be. Idea behind the whole exercise was to spur economic development.  Specific schemes catering to funding for human development are already in place as flagship federal schemes. Underdeveloped states have already been getting substantial fund and if the new Index were to be applied to such schemes, Bihar would be a big loser. I hope that the same is not applied selectively to backward region grant fund either; otherwise Bihar will lose out heavily on this count as well. Too many lose ends have been left in this report for any comfort.

As such, Dr Gupta should explain as to which of the index criteria capture the substandard quality of Infrastructure, Higher Education and Tertiary Healthcare. Similarly, which criteria will capture capital formation /availability of resources for investment? Can length of roads/ sq KM suffice or width should also matter to cater to larger population size?  Similarly, can length of railway line suffice or the throughput should also be considered?  Why not include availability of Port, Civil Aviation Research Institutions etc in this Index? Committee could have done better by adopting readily available Infrastructure Index, Human Development Index, Industry & Economic Services Index, Rural Development Index, and Urban Development Index & Higher Education cum Research Institution Index individually before arriving at a composite Index. Such sub indices could have helped concerned ministries direct their spendings accordingly. This could have also helped address point (d) of TOR.  I believe the committee would have received many useful inputs had it solicited suggestions from the public.  Anyway, my unsolicited advice to Dr Gupta would be to keep away from political discourse “like report is positive for Bihar and one battle is won in the war for special status” having done his duty to the state by rightly dissenting with the report.  It actually appears that Bihar has lost the battle after scoring a few brownie points