Patna,(Bihartimes) Devil lies in the details or so to say. This has been the underlying theme behind petering out of euphoric initial response around the release of Raghuram Rajan Committee report on ‘underdevelopment index’ to public. Not sure that this was really an occasion to celebrate in such a tearing hurry as has been done by JDU. In fact it appeared more like an orchestrated hysteria to facilitate certain political moves. Reacting only on the basis of tutored press release of good old PC, without realizing what may lie in the actual report, is a folly which could have been best avoided. I am sure that no one from JDU has even perused the actual report before bursting in boisterous revelry. It seems JDU storm troopers had no patience for niceties like perusing the actual report before reacting. This behaviour of Nitish and his ilk exemplifies the typical syndrome of ‘post facto rationalization of a questionable outcome through a premeditated sequence of reactions’. Was this all he was bargaining for till now?
Shorn of all political overtones, it is now time to cut the crap and dissect the report for all its worth. Analyzing and validating Raghuram Rajan Index could be a way forward. As such, validating an index would involve first identifying the desired outcomes, and then check if model helps deliver the same. Going by the various objectives outlined in this regard by chief minister of Bihar, model should justify the following ultimate outcomes:
- Incremental Rate of Fund Flows to state
- Spur Industrialization & Economic Activity
- Improvement in Human Development Index(HDI)
A logical validation would suggest that outcome 1 is quite suspect, outcome 2 is unlikely and outcome 3 is the only likely outcome (regardless of new index) of them all. Committee itself has been conscious of these facts as explained subsequently in this article. ‘Underdevelopment Index’ proposed is highly skewed towards being another ‘Human Development Index’. It is far away from being an ‘Economic Development Index’ or even being a balanced index. Report admits the same in as many words (see Box) while disposing of Dr Saibal Gupta’s dissent note demanding for inclusion of GSDP, CD Ratio and Connectivity by Population Size as the key criteria. Inclusion of size of SC/ST population in this Index underlines the same thought process in spite of justifiable opposition by Dr Gupta on merit. From the explanations given in the report, it is obvious that committee was working contrary to the expectations of government of Bihar by completely negating most desired outcome as identified in point 2. Votaries of special status may please note before starting their celebratory fire. Committee did not deem it fit to even treat the symptom as exemplified by large scale migration and absence of economic infrastructure appropriately.
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.
Then question arises as to how point 3 could materialize without point 1 materializing? Answer is hidden in the prevailing fund transfer schemes. Even now this is happening as fund transfer for HDI is directly made to implementing agencies (See Pie Chart Component ‘Direct Release…’). Schemes like Bharat Nirman (PMGSY/ Indira Awash), JNNURM, Sarva Siksha Abhiyan, NRHM, Total Sanitation Scheme fall under this category. Bihar is enjoying a lion’s share anyway, much more than recommended 12.06% share and sometimes even touching over 20% (like Indira Awash, PMGSY allocations etc). So, is Bihar likely to gain beyond its current fund flow on this count? Answer is negative. Rather, in all probability, Bihar will lose a substantial amount if fund flow in this stream is subjected to the new Underdevelopment Index.
Coming to point1, why is it that Bihar is unlikely to get any incremental fund even when committee has worked out a share of 12.04%, which compares favourably to Finance Commission formula prescribing only 10.06% and Gadgil Mukerjee Formula driven NCA @4.95%? Reason being that Raghuram Rajan committee has not defined the fund transfer instruments which would be using the prescribed index (See Box below). Since this committee could not have done anything about fund transferred through finance commission formula, this formula driven stream remains unaffected. Committee on its own did not have mandate to comment on other formula driven allocations as such.
“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 proposea quantum of funds to be allocated based on these criteria, for that is not within its terms of reference”.
Recommendations:
“The Committee recommends that the framework outlined in this report be used to allocate some of the development funds that are allocated by the center to the states.”
“The Committee recommends that “least developed” states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.
“The approach recommended in this report is not intended to replace all existing methodologies, but should be thought of as one that will channel some fund allocations based on need and performance. Other Methodologies may serve different purposes and should be used in parallel to allocate other funds.”
As for non formula funding stream, what does this stance of committee exhibited in its recommendations mean? It goes only to suggest that finance minister Mr Chidambaram has not given them enough mandate. Further, mark that the operative part is ‘Some’ and not ‘Most’ or ‘All’ while recommending allocation of funds using the recommended underdevelopment index. This, inter alia, implies that committee itself was not convinced about the robustness of its ‘suggested model’ for determining flow of even the residual non formula funding streams.
Report mentions that total fund transfer happening to states is distributed as follows: 54% of funds are being devolved through non plan route of Finance Commission recommended formula and 3.8% as per Gadgil-Mukherjee formula as NCA to state plans. Thus, “Development Fund” which can at most be subject matter of allocation using the recommended index constitutes only 42.2% of the total devolutions. As also can be cross verified from Budget 2013-14 pie chart on fund transfer streams, total non formula development funding available for transfer amounts only to Rs 2,85,000 crores (subject to certain approximations). Here too, almost half the portion is devolved directly to implementing agencies towards HDI and not to states. If whole amount is subjected to transfer as per committee formula @12.06% for Bihar, the state is likely to get around Rs. 33,000 crores. Bihar is likely to lose out heavily given that it enjoyed heavy allocations under ‘direct funding to implementation agencies’ stream, touching even 20% at times in place of suggested new allocations @ 12.04%. Bihar may gain only if non formula funds, excluding funds for ‘direct funding to implementing agencies’, ‘central plan’ and ‘centrally sponsored plan assistance’, amounting to Rs 1,00,000 crores, is subjected to this formula. Bihar will get Rs 12,000 Crores up from Rs. 7,000 odd crores (currently, total plan support for Bihar state plan is Rs 8,500 crore including NCA of Rs 1,500 crores) if this happens. However, it has been left open by the committee whether this entire amount of Rs. 1,00,000 crore would be subjected to this allocation formula or only a portion there of. As a matter of fact, it seems to suggest latter. If amount being distributed using this formula is going to be less than Rs 60,000 crores out of the total Rs 1,00,000 crores maximum possible, then Bihar will be only at the mercy of central government for any additional flow arising from remaining Rs 40,000 crores. If it is applied on lesser ‘development fund’ and no share in remaining discretionary allocations then state stands to lose out.
So, it would be quite premature to say what this new index means for Bihar in terms of additional fund flow. However, it can be stated that this committee effectively negates the demand for ‘Special Category’. In fact, it has only opened up a new “Least Developed State Category’, without stipulating anything on what can be done for states in this category so as to stem slew of such demands. Since this category is unlike the constitutional scheme of ‘Special Category’, it is difficult to say what kind of benefit can be extended to such states. Any tax waiver/holiday is quite unlikely without relevant changes in the applicable laws. Monetary packages are still possible. Given that 10 states fall in this category, substantial monetary benefit would be difficult to come by. Also, by virtue of Odisha getting ranked higher than Bihar on underdevelopment Index, very justification for demand for ’special category’ stands compromised, especially as Odisha’s claim for the same has already been rejected. Dr. Saibal Gupta rightly criticized this report as a premeditated exercise to create an index by which pursuit of Bihar for ‘special category’ can be nipped in the bud for good. Negating GSDP as an index variable and opting for ‘monthly per capita consumption expenditure’ served to achieve this predetermined outcome. It is obvious from excerpts in ‘topmost box’ that committee has to toil very hard to irrationally brush aside vehement opposition from Dr. Gupta. Nitish, you had asked Dr Gupta to resign if committee fails to pay heed to his demand for Special Category. Dr Gupta has diligently done his duty, even going to the extent of putting a dissent note, but you have erred by praising the same report. Nitish, you have failed Bihar!
