Saturday, 28 September 2013

Why new development Index will not be effective to improve the fortunes of less developed states of India.

Recently, the planning commission has introduced a development index for Indian states and has categorized the states in three categories of least developed, less developed and relatively developed. The index is calculated using factors like monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percent of SC-ST population, urbanization rate, financial inclusion and connectivity. Less developed states will have higher score in the index. This index will be used to allocate central funds in a way that the least developed states will get higher allocation whereas relatively developed states will receive lesser allocation. This is in stark contrast from current allocation methodology which allocates central funds among various states as per the state’s contribution to the central fund from various sources like taxes. The purpose of the new allocation system is to reduce the inequality among Indian states which tends to result in social/political unrest.

India has spent lots of resources behind various upliftment schemes but those schemes are always mired with inefficiencies at the implementation level. Even after allocating huge amounts to help less privileged class of people, India still faces same problems it used to face few decades back. Also, the relative performance of states is also same. Poor states of past continues to be poor and richer states continues to prosper at least as per the growth rates. I could think of two reasons for such persistence of gap and same set of weaker states, which are failure of administration in those states and/or natural disadvantage (difficult geography which makes industry growth difficult). I am not very hopeful that weak administration of such backward states will be able to use the allocated money efficiently which will improve the performance of the state on various parameters. The allocation in this scheme is bound to be wasted unless the government ensures better utilization of state funds. Otherwise, we will have more parks and more statues.

The first problem I mentioned with the implementation of allocated resource is about ability of the administration. The second problem with the allocation is of willingness. The index will have strong unintended consequences. The allocation of money is derived by a formula which uses the need of the state and improvement in performance calculated by change in the index. The second parameter is used to motivate states to improve the performance in order to increase the allocation. However, the need based portion of the formula depends upon the underdevelopment index, which will be reduced if there is improvement in performance. So, if the performance improvement criteria is positive then the need based fund allocation will be reduced and vice versa. So, in most cases, improvement in the underdevelopment index will result in lower allocation and not higher allocation even after adjusting for performance related allocation. Moreover, this incentive will work if the administration really want to improve the fortune of the state. It will be in the best interest for ruling government to maintain existing inefficiency which will ensure higher underdevelopment index ratings and higher need based allocation even though performance based allocation is not received as this will enable more profiteering from diversion of funds.

Third problem lies with the utilization of allocated money. With above national average growth rates from many years, it is very surprising that the state like Gujarat is categorized as the less developed state. The main reason for this categorization is lack of inclusive growth as mentioned by many scholars. Gujarat falls behind many states on many criteria like literacy rate, lower poverty elasticity, unemployment rate etc. The growth model of Gujarat is clearly pro business that favors businesses and not very inclusive. There is no mechanism in the new index to induce improvement on this parameter. The higher than current level of funding that Gujarat will receive under new method may very well be spent on pro-business policies. So, in that sense, the higher allocation can further increase inequality in states which are in the index as less developed/least developed solely due to lack of inclusive growth.


The broad concern with this allocation methodology is that it doesn’t do much to improve the quality of spending.