Gadgil - 2

-- This is a continuation of Gadgil -1 --

Modified Gadgil Formula

The formula was modified on the eve of the formulation of the Sixth Plan. The 10 percent indicator for ongoing power and irrigation projects was dropped and the share of per capita income was increased to 20 percent, to be distributed to those states whose per capita incomes were below the national average. The modified Gadgil formula continued for the Sixth and the Seventh Plans. Compared to the allocations in the Fourth and Fifth Plans, the allocations during the Sixth and the Seventh Plans show a definite shift in favour of the poorer states. All the low income states, except Tamil Nadu, received Plan assistance higher than the average income of the 14 states taken into consideration at the time. This can certainly be attributed to the higher weightage given to per capita income as per the modification. Per capita income serves as a suitable proxy for changes in the economy. If the states are ranked according to their per capita income as well as their per capita Plan assistance and the rank correlation coefficient is worked out, it should give a fair idea of the effectiveness of the modified Gadgil Formula in terms of progressivity.


The rank correlation coefficients worked out for the four Plan periods are as follows:

Significant at 1 percent level

The low income states received better allocations during all the four Plan periods, as there is a negative correlation. However, for the Fourth and the Fifth Plans, the correlation coefficients are not significant, which shows that allocations in these periods were only marginally progressive. In the Sixth and the Seventh Plan periods, there was a marked improvement in the progressivity of Plan allocations, as can be deduced from the statistically significant correlation coefficients. Therefore, the modified Gadgil formula resulted in a more progressive distribution of Central Plan assistance. In the period spanning the beginning of the Fourth Plan to the Seventh Plan, the dependence of the states on Central Plan Assistance for financing their Plan outlays has been declining for all states. Despite this trend, the low income states depended heavily on Central Plan assistance for funding their outlays, despite this assistance increasing considerably after the modification made to the Gadgil formula.

Also, it has been seen that the states with a higher per capita outlay are usually the high income states. Therefore, unless the distribution of the Central Plan assistance is made sharply progressive, narrowing down of inter State differentials in per capita outlays will be impossible. While Plan outlays have increased by over nine times, Central Plan assistance has increased only by half the amount from the Fourth to the Seventh Plan period. This is the reason for persistent inter state inequality. The Centre has resorted to funding states for the implementation of Centrally Sponsored Schemes, which form 80 percent of Plan Assistance. This has led to the sidelining of the states’ own Plan outlays. Due to the problem of increasing gaps between the assistance provided and outlay of the states, calls for further revision of the Gadgil Formula increased, which resulted in the next revision of the formula in 1990.

Gadgil-Mukherjee Formula

The National Development Council (NDC) meeting held in October 11, 1990; discussed and approved a New Revised formula. The new revised formula is popularly known as Gadgil-Mukherjee formula after the name of then deputy chairman of Planning commission Dr. Pranab Mukherjee. The new revised formula as approved by NDC is given in the following table. Criteria for inter-state allocation of Plan Assistance.

Under the new revised formula, Population was given maximum weightage by considering it as most important factor for the allocation of central assistance, but in comparison with old Gadgil formula the weightage has been reduced by 5%. The share of Per Capita Income has increased from 20% to 25%. Out of 25%, 20% will continue to be allocated on the principle of The Deviation method (The per capita state domestic product is calculated by taking an average of per capita state domestic product whose actual data are available, for the latest three years.) to those states whose per capita income is below the average national per capita income and the rest 5% will be allocated to all states on the principle of The Distance method (The distance of per capita income of each state from the state which has the highest per capita income is calculated, then these values are multiplied with the respective value of the population of each state. This was done to meet the objections like, less developed states were allocated less and given low weightage, also the states whose per capita income were slightly higher than the average national per capita income, were deprived of share under this particular criterion.

Fiscal management, as a new criterion has been introduced with 5% weightage by discarding the earlier Tax effort criterion which was given 10% weightage in old Gadgil formula. Fiscal management criterion is to be assessed on the basis of a state’s actual resource mobilization for its plan in comparison with the target agreed upon the Planning Commission. Therefore this criterion is considered to be more comprehensive for fiscal efficiency than The Tax effort criterion. The Fiscal Management was given only 5% weightage due to the danger arises from the manner in which it is defined. It can develop an unhealthy competition among the states to show their resources less at the time of preparing initial resource estimates. The remaining 5% weightage of Tax effort has been given to The Special problems criterion due to which its weightage increased from 10% to 15%. The NDC has defined special problems under these seven heads:


i. Coastal areas
ii. Flood and drought prone areas
iii. Desert problems
iv. Special environmental issues
v. Exceptionally sparse and densely populated areas
vi. Problem of slums in urban areas
vii. Special financial difficulties for achieving minimum reasonable plan size.

By comparing the new revised Gadgil formula with the old Gadgil formula as a whole, only 85% of the total central assistance has been distributed on the basis of four well defined criteria, whereas, in the old Gadgil formula these criteria were given 90% weightage.

The Gadgil Formula in 2000

At the advent of the 21st century the formula was reviewed and the component of ‘performance’ by the respective states was adopted. The allocation accruing to the states under this head was 7.5 percent. Within this, 2.5 percent of the allocation was based on tax efforts of the states, 2 percent for fiscal management at state level and 1 percent for undertaking population control measures. Special attention was also paid to the sluggish improvements in female literacy and 1 percent allocation was set aside taking female literacy into account. Timely completion of externally funded projects and land reforms undertaken accounted for the remainder of the 7.5 percent figure.


Source : Wikipedia

--------------------

Centre State relations have always served as a question mark on the federal character of our constitution. The Gadgil formula is one of measures aimed at its minimisation.