A panel headed by Raghuram Rajan has recommended a new way of determining the backwardness of States for the purpose of deciding how much each State should receive as its share of Central funds. States constantly vie with each other to get more funds from the Centre by simply claiming that they are more backward than others. The present exercise began in the backdrop of States like Bihar, Odisha and Jharkhand arguing that the old ways of determining the share of Central funds were outdated and needed to be reviewed. The Finance Minister had admitted in Parliament that certain categorisations were not so relevant today. For instance, India has historically had special category States, constituted by the backward hill regions, which also shared international borders. These States received higher grants for development from the beginning of the Five Year Plan process. But in recent decades, some of these States like Himachal Pradesh, Uttarakhand and a few in the North-East have done very well for themselves and their per capita incomes are twice that of Bihar and way higher than those of Odisha and Madhya Pradesh. The Rajan Committee was set up to look at a more rational way of determining backwardness. It has proposed an index of backwardness comprising 10 equally-weighted indicators such as monthly per capita expenditure, education, health, poverty rate, female literacy, percentage of SC/ST population and so on. As per this index, the most developed States are Goa, Kerala, Tamil Nadu, Punjab, Maharashtra, Uttarakhand and Haryana. The least developed, or most backward, States are Odisha, Bihar, Madhya Pradesh, Chhattisgarh, Jharkhand, Arunachal Pradesh, Assam, Meghalaya, Uttar Pradesh and Rajasthan.
In between the most developed and the least developed is the middling category where Andhra Pradesh, Karnataka and Gujarat are placed. If the recommendations of this Committee are accepted then the transfer of funds from the Centre to the States will have to follow a new pattern. So far, the Central assistance to State plans has been disbursed according to the Gadgil-Mukherjee formula that gives highest weightage to population and poverty ratio. The transfer of taxes from the Central pool is decided every five years by the Finance Commission based on another set of criteria. Then there is the Backward Region Grant Fund under which special assistance is given to backward areas that are in need of funds. Any new method of disbursing funds would be politically fraught because some States might lose while others gain. So implementing the new formula will require a lot of political will, which the current regime cannot muster. The new government after June 2014 is best placed to examine the implementation of the new recommendations, if at all.