Active Stocks
Tue Mar 19 2024 15:58:41
  1. Tata Consultancy Services share price
  2. 3,977.55 -4.03%
  1. Tata Steel share price
  2. 148.65 -0.64%
  1. Bharti Airtel share price
  2. 1,227.85 0.23%
  1. Power Grid Corporation Of India share price
  2. 258.95 -2.28%
  1. ITC share price
  2. 409.50 -1.89%
Business News/ Politics / Policy/  Rajan committee formula for central funding may trigger Union, states face-off
BackBack

Rajan committee formula for central funding may trigger Union, states face-off

Six opposition-ruled states, Uttar Pradesh are among the top beneficiaries based on the new methodology

A committee headed by Raghuram Rajan has proposed a radical reordering of central funding to states. Photo: Munshi Ahmed/Bloomberg (Munshi Ahmed/Bloomberg)Premium
A committee headed by Raghuram Rajan has proposed a radical reordering of central funding to states. Photo: Munshi Ahmed/Bloomberg
(Munshi Ahmed/Bloomberg)

New Delhi: A committee headed by Raghuram Rajan has proposed a radical reordering of central funding to states, a move that could potentially trigger a face-off between the federal government and the governments (many ironically run by the Congress) of several states that will see a sharp reduction in their share if the recommendations are accepted.

The proposed allocations are based on the development ranking of each state—in effect, those states that have shown improvement in development metrics are facing a proportionate reduction in their share of central assistance.

The net resources transferred by the central government to state and union territories in 2013-14 was 1.6 trillion.

To be sure, at least some part of the increase or decrease in allocation is also on account of the methodology used by the committee. This is especially evident in the case of Goa which, despite emerging as the most developed (or least backward) state, will see the amount of central funding it gets double if the report is implemented.

The committee has also proposed the withdrawal of special category status to 11 states.

Madhya Pradesh, Chhattisgarh, Gujarat, Goa, Bihar, Odisha, all ruled by opposition parties, and Uttar Pradesh, ruled by a party that sometimes supports the ruling Congress-led United Progressive Alliance without being part of the coalition, are among the top beneficiaries based on the new methodology proposed by the committee headed by Rajan, chief economic advisor in the finance ministry when the committee deliberated on this issue, and currently governor of the Reserve Bank of India.

The central government is still considering the recommendations of the committee. The report also made it clear that it was up to the government to decide which part of the central funding to the states, if any, should be done on the basis of its methodology.

The finance commission allocates funds to state governments from the central tax collection. The planning commission also allocates Plan funds to states every year. Another category of funds called normal central assistance is allocated to special category states.

Immediately after making the report public, finance minister P. Chidambaram said: “(The report provides) a sound basis on how to go forward in much-needed financial assistance to the backward states of India because it captures in a better way the degree of backwardness and shows the way forward on how to devolve funds."

According to the committee’s calculations, Bihar should get 12.04% of the total funds allocated for states by the Centre, as against its current share of 7.42% under the total central assistance to state plans and centrally sponsored schemes. Rajasthan should get 8.42% as against 4.79% at present, Odisha 6.53% as against 4.62%, Madhya Pradesh 9.56% as against 6.91% and Gujarat 3.69% as against 3.05%.

Uttar Pradesh will continue to corner the largest share of central assistance at 16.4% of total funds, as against 10.1% earlier. The states which will be the biggest losers under the Rajan formula are Kerala, Tripura and Nagaland.

D.K. Srivastava, chief policy adviser at the India unit of EY (formerly Ernst and Young), said that while the new formula could be used for assistance to least developed states, assistance to special category states may be continued with a reduced weight cost consideration due to their peculiar geographical location.

“In determining assistance to the special category states, the extraordinary cost consideration due to the difficult terrain of such states was a key factor. While it is a balanced deal for least developed states, special category states in general will lose out," he said.

Chidambaram had set up a committee in May this year to examine the backwardness criterion—a move that was attributed to the Congress party-led government’s attempt to woo Bihar chief minister Nitish Kumar, a leader of Janata Dal (United) which severed its coalition with the Bharatiya Janata Party (BJP) over the elevation of Gujarat chief minister Narendra Modi as the chief of its election campaign committee.

The Bihar government has been asking that it be classified as a ‘special category’ state so that it could get access to more central funds. The committee, however, has recommended doing away with the special category status.

Chidambaram said the Rajan committee has created an index based on the backwardness of the states. The committee has shown a way forward for devolution of central government funds to states beyond the Backward Regions Grant Fund, he said.

Under the current criteria, seven northeastern states, Sikkim, Uttarakhand, Jammu and Kashmir and Himachal Pradesh are categorized as “special category states" which receive 90% of central government funds as Plan assistance and 10% as loans from the Backward Regions Grants Fund.

Though Kumar welcomed the report, BJP’s Sushil Kumar Modi, former chairman of the empowered committee of state finance ministers and former deputy chief minister of Bihar, said in a message on Twitter that the Rajan panel had negated the concept of special category status.

“Congress has again betrayed the aspiration of people of Bihar by not granting SCS (special category status) to Bihar. Still Nitishji will you take support of Congress?" he said. Modi said a special category state’s contribution to centrally sponsored schemes comes down and industries in the state get tax exemptions.

Chidambaram said the report cannot be implemented in the current year as allocations have already been made. He said it will be “implemented at an appropriate time, most likely from next financial year".

remya.n@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 26 Sep 2013, 11:52 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App