MGMT OF FINANCIAL ASERVICES

2. HISTORY
•GADGIL FORMULA :
• NAMED AFTER THEN PLANNING COMMISSION CHAIRMAN DR. D R GADGIL.
• WAS INTRODUCED DURING FOURTH AND FIFTH FIVE YEAR PLAN.
• IT HAD THE FOLLOWING FORMULA :-
 SPECIAL CATEGORY STATES LIKE ASSAM, JAMMU AND KASHMIR AND NAGALAND WERE GIVEN
PREFERENCE.
 THE REMAINING BALANCE OF CENTRAL ASSISTANCE WAS SHOULD DONE ON FOLLOWING BASIS –
Weight(%) Criteria
60 Population
10 Tax Effort
10 Per capita state income
10 Irrigation and Power projects
10 Problems of individual states

3. GADGIL-MUKHERJEE FORMULA :
• NAMED AFTER THEN CHAIRMAN OF PLANNING COMMISSION DR. PRANAB
MUKHERJEE.
• THE NEW REVISED FORMULA IS GIVEN IN FOLLOWING TABLE –
Weight(%) Criteria
55 Population
25 Per capita income
5 Fiscal Management
15 Special problems
100 Total

4. WHY
• The level of development of a state is likely to be the consequence of a complex set of historical,
cultural, and sociological factors. An explicit government objective was to have a more egalitarian
society, coupled with balanced development of different regions. Despite taking a number of steps to
reduce the regional disparities, substantial differences in development still exist between states.
• In order to address this issue, the government in may 2013, decided to constitute an expert
committee to consider backwardness of the states for evolving a composite development index of
states.
• The committee came up with a new concept called as composite development index of states.

5. THE COMMITTEE MEMBERS
•DR. RAGHURAM G. RAJAN……..CHAIRMAN
•SHRI SHAIBAL GUPTA ………….MEMBER
•DR. BHARAT RAMASWAMI…….MEMBER
•SHRI NAJEEB JUNG ……………..MEMBER
•DR. NIRAJA G. JAYAL …………...MEMBER
•SHRI TUHIN PANDEY …………..MEMBER

6. THE TERMS OF REFERENCE OF THE
COMMITTEE WERE AS UNDER
• to suggest methods for identifying backward states on the basis of measures such as the distance of the state from the
national average on a variety of criteria such as per capita income and other indicators of human development;
• (b) to suggest any other method or criteria to determine the backwardness of states;
• (c) to suggest the weightage to be given to each criterion;
• (d) to recommend how the suggested criteria may be reflected in future planning and devolution of funds from the
central government to the states.
• (e) to suggest ways in which the absorptive capacity of states for funds and their ability to use the funds to improve
well-being can be assessed and used to influence devolution to incentivise performance.

7. ALLOCATION OF FUNDS
The Committee proposes a general method for allocating funds from the Centre to the states based both on a state’s
development needs as well as its development performance.
The methodology developed by the Committee first allocates funds across states based on need
Need is based on a simple index of (under) development. The index proposed here is an average of the following
ten sub-components: (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv) household
amenities, (v) poverty rate, (vi) female literacy, (vii) percent of SC-ST population, (viii) urbanization rate, (viii)
financial inclusion, and (x) connectivity.
Less developed states rank higher on the index, and would get larger allocations based on the need criteria.

8. DISTRIBUTION PATTERN OF CENTRAL GOVT.
FUNDS
FIXED , 8.4
NEED BASED, 68.7
PERFORMANCE
BASED, 22.9
FIXED NEED BASED PERFORMANCE BASED

9. THE REAL SCENE
• According To Law Of Average Every State Must Have Got 3.6% Allocation
• But This Range Varies Between 0.3% To 16.41%
• There Are 3 Categories Of States According To This Committee:
1. Least Developed: (Under) Development Index Of 0.6 Or More
2. Less Developed: (Under) Development Index Between 0.4-0.6
3. Relatively Developed: (Under) Development Index Of Less Than 0.4

13. The Committee proposes allocations based on the index, but with allocations increasing more than linearly to the
most underdeveloped states. The proposed allocation scheme accommodates differences in needs, even while
recognizing that the truly needy should be given disproportionately more. Importantly, since the index is based on
publicly available data, there is no element of discretion in the allocations.
The value of the underdevelopment index for a state represents the need of an average individual in a state. To
allocate more to underdeveloped states with large areas but small population, the Committee decided to assign 80
percent weight to a state’s share in population and 20 percent to the state’s share in area in determining the factor
by which to multiply need. This follows the approach of a number of committees as well as the Finance
Commission.
This report however, also takes a step forward in trying to draw a balance between “needs” and “performance”.
Given that poor administration or weak institutions in a recipient state can fritter away allocated resources to the
detriment of the population, there should be some recognition for effective governance and the efficiency of
resource use. This becomes all the more necessary since the proposal to give substantially more to underdeveloped
states might create a mild disincentive to develop. The Committee therefore settled on improvements to a state’s
development index over time (that is, a fall in underdevelopment) as the measure of performance.

14. REPLACEMENT OF SPECIAL
CATEGORIZATION CONT...
MERITS OF PREVIOUS SYSTEM
•States under this category have a low
resource base and are not in a position
to mobilize resources for their
developmental.
• Centre to target specific benefits. The Centre may want to offer
additional forms of support to states that are particularly
underdeveloped
ACCORDING TO NEW SYSTEM
The 10 “least developed” states that currently score above 0.6 could,
for instance, be targeted for specific additional
support. Current “least developed” states would be Arunachal Pradesh,
Assam, Bihar, Chattisgarh, Jharkhand, Madhya Pradesh, Meghalaya,
Odisha, Rajasthan, and Uttar Pradesh

15. RECOMMENDATIONS
o The Committee recommends that the framework outlined in this report be used to allocate some of the
development funds that are allocated by the center to the states.
o The Committee recommends that the proposed underdevelopment index be updated on a quintenntial basis and
performance be measured relative to the last update.
o The Committee recommends that the index and the allocation formula be re-examined after 10 years and
revisions proposed based on experience.
o The Committee recommends that “least developed” states, as identified by the index, be eligible for other forms
of central support that the Central Government may deem necessary to enhance the process of development.
o The approach recommended in this report is not intended to replace all existing methodologies, but should be
thought of as one that will channel some fund allocations based on need and performance. Other methodologies may
serve different purposes and should be used in parallel to allocate other funds.

16. CRITICISMS
• Bibek Debroy Says The RBI Governor's Report On Growth Of Indian States Is Flawed.
• Tamil Nadu Chief Minister Jayalalithaa Wrote To Prime Minister Manmohan Singh
Urging Him To Reject The Report.
• Committee Member Shaibal Gupta Sums Up All That Is Wrong With The Methodology
Used To Arrive At The Conclusion.
• 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.

17. PRAISE
• The Report Paves Way For More Funding From The Centre For Odisha, Bihar, And M.P.
And U.P. While Goa, Kerala, Tamil Nadu, Maharashtra And Haryana Stand To Lose.
• Nitish Kumar Welcomes Raghuram Rajan Report Ranking Bihar 'Least Advanced‘ .

18. CONCLUSION
• Changes In The Weightage Of The Parameters Determining The State Development Index.
• Divide States Into Three Categories – Least Developed, Less Developed And Relatively Developed.
• Extra Funding To States According To Above Categories
• The Report Is Being Appreciated By States Under Least Developed Category And Criticized By
States Under Relatively Developed Category.
• Currently The Report Has Been Sent To The Planning Commission For Necessary Actions.