Don't see Rajan index formula adopted in toto: Pronab Sen

The Raghuram Rajan committee prescribed composite development index of states has come under scathing attack from many non-Congress states, the latest salvo being fired by Tamil Nadu chief minister Jayalalitha.

The index measures the development of states based on several criteria like per capita expenditure, literacy, health, percentage of scheduled caste, scheduled tribe people in the state. But former planning commission member and chief statistician of India Pronab Sen, in a discussion on CNBC-TV18, doubted if the finance commission will accept the Raghuram Rajan formula in toto. Dr NK Singh, former revenue and expenditure secretary and JDU MP agrees with Dr Sen saying the finance commission, which is an autonomous constitutional body, will determine its own methodology. Below is the verbatim transcript of their interview on CNBC-TV18 Q: Many political parties including the Tamil Nadu chief minister have accused the Rajan index as being devised for the sole purpose of justifying more funds to the UPA government's recent ally, the JDU of Bihar. Dr Sen can you start by telling us how much money can be given from the centre to the states under the Rajan formula? Is not a lot of money to be transferred according to what the finance commission says? Sen: This methodology can at best be recommendatory to the finance commission. However the finance commission as a constitutional body will take its own decision as to what formula it is going to adopt. So, we can leave that part of the discussion entirely out of it. The Raghuram Rajan committee methodology at best can apply to planned funds. Even within the planned funds if you go back a little bit into history the Gadgil formula used to be applied to the general funds that were transferred to the states that is the untied funds and used to comprise of the majority of the transfer. Over time these general funds under the Gadgil formula had become small and it is the various centrally sponsored schemes run by ministries have become the dominant form of transfer. Now I can't quite see the ministries adopting the Raghuram Rajan formula in toto in every case. I just don’t think that is going to happen. The real issue is that the Raghuram Rajan committee formula can replace the Gadgil-Mukherjee formula or it can replace the formula that has gone into the BRGF which is the backward regions grant fund. However the BRGF currently operates at a district level which means that they would have to then drill down this formula to the district as well. Q: Can you give me some idea of how much money at all it could distribute as a proportion of the total amount of funds that go from the centre to the states. As a percentage, how much does the finance commission distribute and as a percentage how much goes by the Gadgil formula and how much goes by ministries discretion? Sen: The finance commission in fact is the largest form of transfer and the finance commission accounts for somewhere around 56 percent of all transfers. As far as the planning commission transfers are concerned the Gadgil Mukherjee formula now applies to something like less than 20 percent of the total planned transfer. Q: What is your sense; will the Raghuram committee formula replace the Gadgil-Mukherjee formula? Singh: I agree with Pronab that the finance commission which is an autonomous constitutional body will be perfectly free to determine its own methodology. And at best if the ministry of finance, department of economic affairs does choose to transmit to the finance commission the Raghuram Rajan committee report they might take this report onboard and see if in any manner they would wish to reflect this in their recommendation. However, this is the decision which will be entirely taken autonomously by the finance commission which is a constitutional body. I also agree with Pronab that what is now know as the Gadgil-Mukherjee formula, used to be the Gadgil formula till it was replaced in 1990 slightly altered the proportionality between demography and per capita income that largely may not get touched. So, the only third component which is basically the centrally sponsored schemes that is an area between general categories states and those states which are special category states, which are now being subsumed in a new category which has been created by the Rajan committee report to be called the least developed states. The criticism of the Rajan committee report from many quarters seems to not appreciate that it specifically says that it is not designed to replace existing methodologies, much less tinker with the possible recommendations of the finance commission and it is really talking about a small quantum of fund which comes in this third category which I have mentioned. Q: The Tamil Nadu government's acquisition is that it will stand to loose a lot of money if the Rajan formula is used as the touchstone for transferring funds. Do you think that is the case because as both you gentlemen tell me it is only a small proportion of funds which is going to be transferred? What is your reaction to what the Tamil Nadu government is saying? Sen: If what Dr Singh has said is correct then Tamil Nadu would not loose even one cent. If it is being applied only to the centrally sponsored schemes then the state wise allocations are determined by completely different formulae. That is the allocation part. The terms on which the transfers are made those are different. So, Tamil Nadu would not loose anything. What would happen is that states which are least developed would gain. Gain not so much in terms of additional flow of funds but lesser requirement of counterpart funds. So, their own money gets released. Q: So you don’t really rob Peter to pay Paul? Singh: Absolutely correct. Pronab's interpretation is absolutely correct. Q: What is your sense, if this formula is going to be applied only to the centrally administered schemes and some of those schemes are pretty important politically and can't be disturbed, they are entitlement schemes like the NREGS. So, not much can be tinkered with even in these centrally sponsored schemes, isn’t it? Singh: Pronab's interpretation is absolutely right. I totally agree with him that states like Tamil Nadu and so on or the developed states will not loose a dime. If the proportionality between the central contribution and what the states have to do is altered a little bit in favour of now the least developed states, my back of the envelope calculation suggests that by altering this these seven new least developed states will really require an annual expenditure of Rs 14,500 crore per annum which can be easily accommodated in case the gross budgetary support to the planning commission by the ministry of finance is enhanced by this amount. So, nobody looses and these seven least developed states gain somewhat incrementally not mindboggling sums of money as people imagine. Pronab is absolutely right that it is not so much the additional transfer of resources but the burden on those states would be somewhat ameliorated in respect of these kind of centrally sponsored schemes. Q: Dr Singh said that if the central government could find Rs 14,500 crore according to him approximately of additional gross budgetary support to state plans then nobody would loose a dime. This is the central question - actually the central government gross budgetary support to plans has been declining year after year because of the governments assumed responsibilities on various other counts. So, do you think this will ever happen that this extra money will be found? Sen: Rs 14,500 crore is actually quite a small amount. I haven’t made the calculations but I will go with what Dr Singh has said. The big thing is a lot of these states what it relieves them off is the need to go and borrow money from the market. A lot of these states do have a problem in getting the market borrowings done. That is where the real relief is going to be. That is the part that is not getting factored in. It probably leaves out highly indebted states like West Bengal and Kerala but atleast for states like Bihar who have had problems with raising market borrowings I think it will ameliorate their condition quite significantly. Latha Venkatesh CNBC-TV18: The important points that you all have brought to the table is that this is not and need not be as contentious as the developed states are making it out to be. This clearly applies even in the words of the panel to a much smaller kitty of funds and that actually might relieve the less developed states from going to the market, in which case the Rajan panel index is probably getting a bad name for no good reason.