Report of the Dr. Raghuram Rajan Committee for Evolving A Composite Development Index of States Submitted to the Union Finance Minister ; Committee Proposes 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 Report of the Dr. Raghuram Rajan Committee for Evolving a Composite Development Index of States has been submitted to the Union Finance Minister Shri P.Chidambaram. The Committee had been asked 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 Finance Minister Shri P.Chidamabaram 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 Finance Minister Shri P.Chidamabaram further informed that 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. 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”.

The Finance Minister Shri P.Chidamabaram 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 categorisation 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.

The Finance Minister Shri P.Chidamabaram informed that the Prime Minister has approved the proposal to place the report of the Committee in the public domain.

The Finance Minister Shri P.Chidamabaram 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.

Composite development-based fund allocation: fixed basic share plus need and performance components to determine state funding. The report recommends a Composite Development Index to allocate central funds by granting each State a fixed basic allocation supplemented by additional shares determined by measured need and performance using multidimensional indicators such as per capita consumption and poverty ratios; States are classified by index thresholds into development tiers and certain States are identified as highest-need under this framework, with the methodology intended to subsume existing special-category treatment.