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Published on: Aug. 26, 2020, 5:19 p.m.
New formula
  • New development matrix: states like Kerala could see a decline in transfer of Central resources

By Rakesh Joshi. Executive Editor, Business India

In a move that may spark off yet another round of controversy, the 15th Finance Commission is in the process of devising a “development matrix” of states based on their social indicators, especially in health and education. The matrix could serve as a new parameter to decide the transfer of financial resources, such as taxes and grants, to them.

Normally, finance commissions rely on several yardsticks in deciding a state’s share in the nation’s financial resources, such as taxes. Predominantly, income criteria, such as per capita incomes and growth, determine who gets what. Poorer and disadvantaged states get a bigger chunk of the resource pie.

But, as per the new thinking guiding the 15th Finance Commission under the chairmanship of N.K. Singh, per capita incomes are not good enough a basis compared to a holistic development index, not that the two of them are coterminous. So, the commission felt that a development matrix will be a better guide

The new “development matrix” being considered, will for the first time bring the levels of social development, especially access to healthcare and schooling, of states into the framework of how resources are distributed. The idea is this could address deficits in crucial areas, such as healthcare, provided states spend the additional resources for the purpose they are given.

Herein lies the problem. States which have done well on education and healthcare like Kerala could see a decline in transfer of Central resources. Over the years, Kerala’s focus on political empowerment, education and healthcare has made it the socially most advanced state. Of late, even Delhi despite the pressures of being the national capital has taken significant strides on these two counts.

Southern discomfort

One needs to recall what happened when some states, notably the southern ones, were up in arms over the terms of reference of the 15th Finance Commission. As the Finance Commission is mandated to take into account the 2011 census instead of the 1971 census, southern states led by Andhra Pradesh felt that this will result in penalising them for keeping population growth stable, while rewarding the northern states where the population was multiplying. The ex-CM of Andhra Pradesh, N. Chandrababu Naidu even said states like his would be “penalised”. It took the persuasive powers of the then FM, Arun Jaitley, to sort out the matter. The new criteria could lead to similar concerns from states that have done better on social indicators.

Further, economists point out that even if states with poor health and education infrastructure were to be given additional money to develop these facilities, there is still no mechanism to ensure that states use them specifically for these purposes when they run short of cash.

To decide on a state’s share of resources, finance commissions have till now relied upon parameters such as income distance, population size, geographical location and forest cover, etc, which are then assigned weightages. Income distance is the difference between average per capita income and the per capita income of an individual state in question. It gives the most direct measure of how rich or poor a state is. Forest cover is included as a parameter because it is assumed that heavily forested states will have less land to devote to factories, hurting growth. Such states qualify for additional resources.

Some economists have welcomed the move. “If the new development matrix is put in place, states with poor health and education facilities will qualify for additional resources. That’s the implication and it is a welcome move,” said N.R. Bhanumurthy, vice chancellor, Dr B.R. Ambedkar School of Economics.

“We invest so little on health and education. These areas have an intrinsic value of their own, but also help economic growth. Including non-income parameters by the finance commission will be a significant shift,” adds S. Mahendra Dev, director, Indira Gandhi Institute of Development Research.

India’s overall health spending has consistently lagged global averages, leading to poor health outcomes. The total expenditure on health by the Centre and states for 2019-20 was Rs2.6 lakh crore, or just 1.29 per cent of GDP. By comparison, the UK spent 9.6 per cent of its GDP on health in 2019-20, according to the OECD.

The N.K. Singh-led 15th Finance Commission has already submitted its first report to the government for the 2020-21 period. It then received an extension till October 30 to submit its final report covering financial years 2021-22 to 2025-26 (April-March).

Asked whether the new system could spark concerns, Singh recently said, “The commission will uphold the principles of efficiency as well as equity.”

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