Raghuram Rajan proposes new Method of Classification of States

RBI Governor Raghuram Rajan has proposed a new method of Classification of States to be used for allocation of Central Funds. A Report in this regard, prepared by a Committee chaired by him, has been submitted to the Union Finance Minister Mr. P Chidambaram.

The Committee was formed to suggest methods for identifying backwardness of States using a variety of criteria and also to recommend how the criteria may be reflected in future planning and devolution of funds from the Central Government to the States.

The Committee has come up with a Multi dimensional Index of backwardness based on per capita consumption as measured by the NSSO, the poverty ratio, and a number of other measures which correspond to the multi dimensional approach to defining poverty outlined in the Twelfth Plan.

Finance Minister P. Chidambaram informed in a Statement that the Committee has proposed a general method for allocating funds from the Centre to the States based on both a State’s development needs as well as its development performance.

The Committee has recommended that each State may get a fixed basic allocation of 0.3 percent of overall funds, to which will be added its share stemming from need and performance to get its overall share.

The Committee has recommended that States that score 0.6 and above on the Index may be classified as “Least Developed”; States that score below 0.6 and above 0.4 may be classified as “Less Developed”; and States that score below 0.4 may be classified as “Relatively Developed”.

Chidambaram also stated in his Statement that the Committee has observed that the demand for funds and special attention of different States will be more than adequately met by the twin recommendations of the basic allocation of 0.3 percent of overall funds to each State and the categorization of States that score 0.6 and above as “Least Developed” States. According to the Committee, these two recommendations, along with the allocation methodology, effectively subsume what is now “Special Category”.

Using the index, the Committee has identified the “Least Developed” States as Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Meghalaya, Odisha, Rajasthan and Uttar Pradesh, the Finance Minister added.

Chidambaram informed that the Prime Minister has approved the proposal to place the report of the Committee in the public domain.

Chidambaram further informed that the Prime Minister has also directed that the recommendations of the Committee may be examined and necessary action in this behalf may be taken.

The Ministry of Finance, Department of Economic Affairs has been asked to examine the report and take necessary action, the Finance Minister added.