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Home / Opinion / Online Views /  Is the Rajan committee report unfair to special category states?

The report of the committee for evolving a composite development index of states, chaired by Raghuram Rajan, has thrown up quite a few surprises. Some of the states in the top half of the list, such as Uttarakhand, Himachal Pradesh, Sikkim and Tripura, are special category states, which get extra funds from the centre. The reason they have been able to perform well in the development rankings is because of these central funds.

Take Jammu and Kashmir (J&K). It ranks 14th out of the 28 states, starting from the most developed. It’s classified as a less developed state, under the Rajan formula, which means it is in the middle rung. But consider the state’s finances. If we take the revised budget estimates for 2011-12 from the Reserve Bank of India study on state budgets, the state received 15,220 crore as grants from the centre. The state’s population was 1.25 crore, according to the 2011 census. That means, on a per capita basis, grants from the central government worked out to 12,176 in 2011-12. In that year, the per capita income at current prices for J&K was 45,380, according to data from the Central Statistics Office. This means that more than a quarter of per capita income in the state is on account of grants from the centre. These grants accounted for 60% of the J&K government’s total revenue in 2011-12.

Moreover, the Planning Commission says that while J&K accounted for 1.05% of total population during the 11th Plan, its total share under various centrally sponsored schemes worked out to 2.24% of total expenditure on these schemes in the country.

The Rajan committee points out, “Centre-state transfers take place mainly through three channels: (a) statutory transfers through the Finance Commission mechanism. These include devolution of central tax revenues (divisible pool) to different states and grants-in-aid; (b) Central Assistance for State Plans including Normal Central Assistance (NCA) grant, which is governed by Gadgil-Mukherjee Formula; (c) grants through central ministries in accordance with guidelines of various Centrally Sponsored Schemes". It says that of the total resources transferred to states from the centre in 2011-12 from non-Plan (Finance Commission route) as well as Plan routes, about 54% were on the basis of Finance Commission transfers and 46% on the Plan side.

Under the current dispensation, J&K’s share under the Plan transfers is 4.92%, while its share through the Finance Commission route is 2.51%. Under the Rajan committee’s new formula, however, J&K will get 1.83% of total funds, a much lower share. It’s clear that most of J&K’s development is due to the funds it receives from the centre. If its share of funds from the total pool is reduced, won’t it result in this strategically very important state sliding back? Of course, the reduction in share can be offset if the total pool of funds that goes to the states is increased.

What is true of J&K is true of the other special category states as well. Take the remote northeastern state of Tripura with a population of 36.74 lakh according to the 2011 census. The state received 4,230 crore as grants from the centre in 2011-12, according to the budget revised estimates. That means, on a per capita basis, the grant works out to 11,513, or 23% of its per capita income at current prices. Two-thirds of the government’s revenue came from central grants in 2011-12. It currently receives 0.81% share of funds from the Finance Commission route and 1.78% share through the Plan route. Under the Rajan committee recommendations, it will receive 0.52% of total funds. Again, the state’s 11th rank in the development index, one notch higher than Gujarat, is due to the central funds that come its way. Will that not be in jeopardy, if funds are shared according to the Rajan formula?

The only two special category states that may not be affected much are Arunachal Pradesh and Meghalaya, for which the Rajan committee shares are higher than their share of funds through the Finance Commission route, although lower than their share through the plan route.

But consider the insurgency-wracked state of Manipur. It got, on a per capita basis, grants from the centre of 16,226 in 2011-12, which was 49% of its per capita income at current prices in that year. Central grants were 71% of the state government’s budget in 2011-12. And yet the Rajan committee reduces its share of funds from its present 1.39% under the Plan route and 0.8% under the Finance Commission route to 0.5% of overall funds. Manipur is at the bottom of the middle less developed states category. Whatever development there is in the state is solely because of central funds. Will not the lower share of funds push it into the least developed category?

Incidentally, while the share of funds going to Nagaland, J&K, Manipur and Assam has been pruned, the share going to Gujarat, which ranks higher than these states on the development indicators, has gone up. Also, the Rajan committee has increased the share of funds going to Goa, which is the most developed state in the country, according to its own indicators. Goa currently gets 0.15% share of funds through the Plan route and 0.23% of funds through the Finance Commission route. The Rajan committee has recommended it get 0.3% share in the total, because that’s the minimum share for all states.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com

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