It pays to be backward?

Amidst the growing hue and cry of States demanding special category status, a six-member committee headed by Raghuram Rajan submitted the report of the Committee for Evolving a Composite Development Index of States on September 26. The report has been met with a chorus of disapproval.

The criticism is that the report severely penalises States that have consistently worked towards the national goals of development and welfare, while it sets aside huge allocations to States that have historically been under-performers.

Policymakers, too,have been expressing disappointment over the report. Analysts on their part have questioned the constitutional validity of the panel when the 14{+t}{+h} Finance Commission chaired by Y.V. Reddy is already working on deciding upon the allocation of central funds to the States. What are the real flaws in the report?

The genuineness of the report is questioned in light of the fact that a member of the committee had strong reservations on criteria used in the report. These were never addressed, forcing him to write a strong, 10-page dissent note that questioned the soundness of economic analysis used by the panel.

Why the hurry?

When committee members are themselves not unanimous over the report and the indicators used, how can an academic exercise be regarded as a report?

What was the need to hurriedly submit this report in spite of serious differences and unresolved discussions? When one member did not agree with the choice of indicators of backwardness, why were his arguments not heeded?

The member had expressed his reservation over using monthly per capita expenditure (MPCE) as an indicator of income which, he contended, would always under-measure the difference between richer and poorer areas compared to per capita income (PCI) which includes savings. This seems to be a logical argument.

Accepting ten clusters of variables — income, education, health, household amenities index, poverty ratio, female literacy rate, percentage of SC/ST population, urbanisation rate, financial inclusion, and connectivity index — the committee recommended that each State be given a fixed basic allocation of 0.3 per cent of overall central funds to which its share stemming from need and performance would be added.

The index is composed of 75 per cent weightage to needs and 25 per cent to performance. Does it mean that needs are necessarily equivalent to under-development?

Clearly, this does not adequately capture ‘performance’. This will severely hamper the future growth prospects of States such as Tamil Nadu, Kerala and Maharashtra which have been utilising the allotted funds judiciously from the very first Five-Year Plan.

When employees are given performance-based incentives in their respective workplaces, why should States be deprived of them?

Other incicators

Aren’t there other variables to gauge the under-development of States? Multi-dimensional index (MDI) can be constructed in numerous ways, and there do arise problems within such composite indices. Imagine there are States where a sizeable segment of the population lives in villages. If there is hilly and difficult terrain, the costs of delivery will be higher. So shouldn’t that be considered as a criterion?

Coming back to the issue of dissent on using PCI instead of MPCE, the former is considered the standard, time-tested indicator which is used by the Planning Commission, the Finance Commission and in the Gadgil Formula.

As rightly pointed out by a committee member, the Finance Minister’s latest budget speech also clearly indicates and instructs on the use of PCI as a parameter in preparing a fresh index.

MPCE is based on a national sample survey which itself concedes that the estimates are subject to errors of estimation, especially in calculating rural-urban differentials across States.

Another problem with MPCE is the presence of inter-State price differentials. Besides, savings, which is very much inherent in a prosperous population, is completely ignored in MPCE, thereby distorting the index.  

Is SC/ST categorisation per se an indicator of backwardness? As long as the SC/ST communities have adequate access to public services, merely the large presence of these “historically deprived” sections in a State does not make it backward.

Moreover, studies by scholars show that being SC per se is no more an inherent disadvantage. 

Not only has the skilled female workforce increased in recent years, even the unskilled female workforce has seen an upward trend thanks to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) which boasts of bringing about gender equality. In this context, why can’t female work participation rate be taken as an indicator instead of female literacy rate?

With respect to connectivity, aren’t pucca roads a good indicator? In financial inclusion, why should only banks be taken into account? 

Why not post offices which also, in recent years, have been designated to carry out financial activities? As pointed out in the dissent note, the report failed to reflect the disadvantages of States with respect to extent of flood prone areas, areas prone to earthquakes, and environmentally fragile areas such as hilly areas, coastal areas, and others.

Besides, components such as per capita availability of water for drinking and irrigation, and environmental status have also not been captured in the index. Aren’t they vital enough to determine the backwardness of a State?

How can urbanisation rate be taken as an indicator of measuring backwardness when it is a phenomenon that occurs as a result of development?

Development and urbanisation go hand in hand and that it would be absent in a “less developed” or “least developed” State is a simple truth.

Sparing the rod

Considering the flaws with the Rajan Committee, the use of poverty and population as indicators to measure backwardness as had been employed by all the previous committees, seems to be the appropriate way out.

Years of misgovernance and anarchy nurtured by administrators and policymakers of so-called less developed States have helped them corner a larger share of central assistance at the cost of penalising well-performing States.

States that have been doing well need central funds to maintain their social and physical infrastructure and an attempt to slash their funds will negatively impact their growth prospects.

If the Rajan Committee formula is accepted, several well-performing States will lose out on funds and could well be looking at ways to flunk such development tests in future. Can a teacher punish good students (well governed States) in order to award marks to undisciplined and inefficient students (misgoverned States)?

(The authors teach economics at Alagappa University, Karaikudi, and Vellore Institute of Technology, respectively.)