Planning Commission scraps Raghuram Rajan index for Central fund distribution

Instead,a committee comprising plan panel members Mihir Shah and Abhijit Sen has been set up for a fresh look at the issues involved in transferring money to state governments from plan budget.

The commission’s move is in response to protests made by several states at the new ordering of backwardness that has been drawn up by the committee headed by Rajan as the chief economic adviser before he took up the governorship at RBI. At the core of the dispute is the decade-old Gadgil-Mukherjee formula which determines the allocation of all central funds among the state governments.

The Rajan formula has recommended changing it for allocation from all central schemes including those for backward regions grant. But sources in the commission said making any change to the formula has to be ratified by the states.

“We are considering how to reconcile it (Rajan index) with the different indices we currently use in the Commission,” Planning Commission deputy chairman Montek Singh Ahluwalia told The Indian Express.

He said the Rajan report has to be placed before the National Development Council,the forum which brings all chief ministers and the Union Cabinet together to decide on plan related issues.

So,despite the announcement by finance minister P Chidambaram in Budget FY ’14 no money can be given by the new criteria in FY ’14.

The new government too will have to first call a meeting of NDC and stitch the Shah-Sen report with the Rajan report for any meaningful result.

A plan panel source said,“The scale of coordination means it will be impossible for us to make any meaningful change before the 12th Five Year plan is effectively over.”

Announcing the new approach,Chidambaram had said,“I plan to evolve the new criteria and reflect them in future planning and devolution of funds.” Mihir Shah said that the plan to map backwardness at the sub-district level was a mandate by the NDC.

“Poverty issues are now far more dynamic than state level aggregation”,he said. The Rajan panel had determined backwardness on a 10-point criteria at the state level.

“Our experience shows even among the backward states it is the relatively better off regions that draw in disproportionately higher funds,” said Ahluwalia.

RBI data shows transfer of Central funds to state governments make up about 16 per cent of the total revenue of the latter. From the total tax revenues states get about 32 per cent as per the 13th Finance Commission award.

There are currently four methods through which central assistance to states is handed out. All of these are more than a decade old. The finance commissions come up with its own formula for distribution of tax funds,every fifth year.