Bihar is the second most backward, and Gujarat is less developed

A panel headed by Raghuram Rajan has recommended a new index of backwardness to determine which States need special assistance.

The new methodology ranks Odisha as India’s most backward State, Bihar, which has been seeking ‘special’ status, as the second most backward, and Gujarat as one of the “less developed” States. Goa is India’s most developed State.

In May this year, the Union government constituted a committee headed by Mr. Rajan, now RBI Governor, to suggest ways to identify indicators of the relative backwardness of the States for equitable allocation of Central funds. Central allocations are governed by the Gadgil-Mukherjee formula that places the greatest weight on the State’s population, followed by other factors like per capita income and literacy. Chief Minister Nitish Kumar’s demand for ‘special category status’ for Bihar has further pushed the government to review how the Centre allocates funds.

The report, which the Prime Minister and the Finance Minister have reviewed, was made public on Thursday. The committee has proposed an index of backwardness composed of 10 equally weighted indicators for monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Caste/Scheduled Tribe population, urbanisation rate, financial inclusion and physical connectivity. The 10 States that score above 0.6 (out of 1) on the composite index have been classified as “least developed,” the 11 States that scored from 0.4 to 0.6 are “less developed” and the seven States that scored less than 0.4 are “relatively developed.”

The report recommends that each of 28 States get 0.3 per cent of overall Central funds allocated and of the remaining 91.6%, three-fourths be allocated based on need and one-fourth based on the State’s improvements on its performance, to be reviewed every five years. Since States now classified as ‘special category’ will “find their needs met” through the new allocations, the term ‘special category’ will be retired.

If the recommendations are accepted, Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh will get a larger share of Central funds than their current share of total Central assistance to State plans and Centrally sponsored schemes, while Kerala, Tamil Nadu and Maharashtra will lose substantially.

One of the panel’s five members, Patna-based Shaibal Gupta of the Asian Development Research Institute, has disagreed substantially with the panel’s choice of indicators, in a long dissent note appended to the report.

Mr. Gupta’s most significant disagreement is with the panel’s decision to use monthly per capital expenditure derived from National Sample Survey Organisation reports as a measure of income, rather than per capita State domestic product, which he said substantially altered State rankings.

In its report, the panel, however, defended its choice of indicator: “Since we are interested in measuring the State population’s well-being, a majority of the committee agreed that consumption from the household survey seems more appropriate than income from the national accounts. This is a judgment call, and we also present the index calculated using per capita net State domestic product. The correlation between indices is 0.997.”