Recently, the planning commission has introduced a development
index for Indian states and has categorized the states in three categories of
least developed, less developed and relatively developed. The index is calculated using
factors like monthly per capita
consumption expenditure, education, health, household amenities, poverty rate,
female literacy, percent of SC-ST population, urbanization rate, financial
inclusion and connectivity. Less developed states will have higher score in the
index. This index will be used to allocate central funds in a way that the
least developed states will get higher allocation whereas relatively developed
states will receive lesser allocation. This is in stark contrast from current
allocation methodology which allocates central funds among various states as
per the state’s contribution to the central fund from various sources like
taxes. The purpose of the new allocation system is to reduce the inequality
among Indian states which tends to result in social/political unrest.
India has spent lots of resources
behind various upliftment schemes but those schemes are always mired with
inefficiencies at the implementation level. Even after allocating huge amounts to
help less privileged class of people, India still faces same problems it used
to face few decades back. Also, the relative performance of states is also
same. Poor states of past continues to be poor and richer states continues to
prosper at least as per the growth rates. I could think of two reasons for such
persistence of gap and same set of weaker states, which are failure of
administration in those states and/or natural disadvantage (difficult geography
which makes industry growth difficult). I am not very hopeful that weak
administration of such backward states will be able to use the allocated money
efficiently which will improve the performance of the state on various
parameters. The allocation in this scheme is bound to be wasted unless the government
ensures better utilization of state funds. Otherwise, we will have more parks
and more statues.
The first problem I mentioned with
the implementation of allocated resource is about ability of the
administration. The second problem with the allocation is of willingness. The
index will have strong unintended consequences. The allocation of money is
derived by a formula which uses the need of the state and improvement in
performance calculated by change in the index. The second parameter is used to
motivate states to improve the performance in order to increase the allocation.
However, the need based portion of the formula depends upon the underdevelopment
index, which will be reduced if there is improvement in performance. So, if the
performance improvement criteria is positive then the need based fund
allocation will be reduced and vice versa. So, in most cases, improvement in
the underdevelopment index will result in lower allocation and not higher
allocation even after adjusting for performance related allocation. Moreover,
this incentive will work if the administration really want to improve the
fortune of the state. It will be in the best interest for ruling government to
maintain existing inefficiency which will ensure higher underdevelopment index
ratings and higher need based allocation even though performance based
allocation is not received as this will enable more profiteering from diversion
of funds.
Third
problem lies with the utilization of allocated money. With above national
average growth rates from many years, it is very surprising that the state like
Gujarat is categorized as the less developed state. The main reason for this
categorization is lack of inclusive growth as mentioned by many scholars.
Gujarat falls behind many states on many criteria like literacy rate, lower
poverty elasticity, unemployment rate etc. The growth model of Gujarat is
clearly pro business that favors businesses and not very inclusive. There is no
mechanism in the new index to induce improvement on this parameter. The higher
than current level of funding that Gujarat will receive under new method may
very well be spent on pro-business policies. So, in that sense, the higher
allocation can further increase inequality in states which are in the index as
less developed/least developed solely due to lack of inclusive growth.
The broad concern with this
allocation methodology is that it doesn’t do much to improve the quality of
spending.
