When India gained independence, the country was very underdeveloped, and income was unevenly distributed across regions. The major tasks before the country were to increase the rate of growth, to reduce inequality in income and wealth, and to promote a more even distribution of economic power. Thus Active state intervention, for example by channeling capital investment into certain areas, was envisaged to reduce the disparities. Therefore the successive Finance Commissions have broadly attempted to address the issues of fiscal need, fiscal capacity, costs of providing similar level of public goods and services and rewarding efficiency in public management, fiscal efforts and outcomes.
Plans were formulated for faster development of the relatively backward regions. In particular, public investment was undertaken by the government to set up public sector units in the backward areas.
Presently the Finance Commission and Planning Commission give greater weightage to populous and poorer states. This aims at ensuring a higher rate of growth of the poorer states and reducing disparities through balanced regional development.
But simply providing fiscal means is not sufficient to achieve faster development. A state may be underdeveloped because it has few natural resources, or because its environment is not conducive to economic activity or because they have never been able to develop the administrative and taxation institutions to raise resources, or when they do obtain resources, they do not have the governance capacity to use them well.
Earlier methodology to measure special category states:
The National Development Council (NDC) has accorded the status of Special Category State (SCS) to eleven (out of twenty-eight States) which have been characterized by a number of features necessitating special consideration. These features include: (i) hilly and difficult terrain, (ii) low population density and/or sizeable share of tribal population, (iii) strategic location along borders with neighbouring countries, (iv) economic and infrastructural backwardness, and (v) non-viable nature of state finances. States under this category have a low resource base and are not in a position to mobilize resources for their developmental needs even though the per capita income of some of these states is relatively high. Moreover, a number of these states were constituted out of former small Union Territories or districts of some other states, necessarily involving creation of overheads and administrative infrastructure that was out of proportion to their resource base. At present there are eleven Special Category States namely, Arunachal Pradesh, Assam, Himachal Pradesh, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand.
Methodology proposed by the panel to mark special category state is as follows:
The proposed methodology allocates funds across states based on need thus underdevelopment index has been constructed.
The underdevelopment index the Committee proposes includes 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.
The 10 States that score above 0.6 (out of 1) on the composite index have been classified as the “least developed,” the 11 States that scored from 0.4 to 0.6 are “less developed” and the seven that scored less than 0.4 are “relatively developed.” 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
The Committee has identified the “Least Developed” States as Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Meghalaya, Odisha, Rajasthan and Uttar Pradesh.
Further the report recommends that each of these 28 States get 0.3 per cent of overall Central funds allocated and of the remaining 91.6%, three-fourths be made allocations based on need and one-fourth based on the State’s improvements on its performance, to be reviewed every five years.
If the recommendations are accepted, Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh will get a larger share than their current share of the total Central assistance to State plans and Centrally sponsored schemes, while Kerala, Tamil Nadu and Maharashtra will lose substantially.