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Friday, 27 September 2013 00:00
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Rajan formula to cement UPA-Nitish-Mulayam ties

Though it is not clear whether the UPA can possibly allocate more funds for states like Bihar and Uttar Pradesh since the FM has issued a circular saying no fresh allocations can be made other than those cleared in the Budget passed by Parliament, the Raghuram Rajan committee on evolving a new development index for states will go a long way in cementing the UPA’s relations with critical allies like Mulayam Singh Yadav and Nitish Kumar. Both leaders have said they will support a coalition that promises them ‘special category status’, loosely translated to more funds, and that is what the Rajan report has delivered. While it has left the amount of funds to be transferred based on its index to the Centre, the net impact is a bonanza for UP and Bihar. Funds from the centre are transferred to the states through two routes, one, the constitutionally-mandated Finance Commission and the other by way of Plan funds—54% by the former and 46% by the latter at the moment. Since about R2 lakh crore got transferred by the Plan route in FY13, applying the Rajan formula to this will give UP R12,600 crore more per annum—that’s the difference between what it gets right now under the existing formula and what Rajan has recommended—and Bihar R9,240 crore. Considering UP got R80,940 crore and Bihar R49,810 crore from the Centre by way of all transfers in FY13, that’s a large addition. Of course, the Centre can choose to allocate a smaller amount—R1 lakh crore or even R10,000 crore—to be distributed by way of the Rajan index.

Given the report has classified Gujarat as ‘less developed’ despite it having the third-highest per capita income in the country if you leave out city-states like Delhi, Goa and Chandigarh, it is not surprising the report has a dissent note. Indeed, as the note points out, Bihar has half Odisha’s per capita income but is still considered less backward in the index. While such anomalies will crop up in any index, it is not clear what the government was hoping to achieve by constituting the committee. After an elaborate consultation with each state, for instance, the Finance Commission comes up with such an index anyway, giving due weight to the backwardness of the state, its need for infrastructure while giving incentives for fiscal discipline and other such measures. A fourth of the Finance Commission’s weight given for tax transfers, for instance, is the size of the population, a measure on which states like Bihar and UP score well. You can change this to include, as the Rajan panel has done, the population share of SC/ST or health indices, but the populous states tend to be poorer anyway; there is a 47.5% weight for ‘fiscal capacity distance’ or the inability of states to tax as they are under-developed—once again, the Bihars and the UPs score well on this.

Since the current Finance Commission has the option of raising this 54% share of devolutions to 64%, or even 74%, and the Centre can’t effect a big change in other transfers without getting the National Development Council’s assent, this reduces the purpose of the Rajan panel to just a document to demonstrate the UPA’s commitment to giving some states run by potential allies more funds.

 

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