Rajan Committee Report on Regional Development: Shocking Reading and History Repeats Itself

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By Amar Yumnam

Raghuram Rajan is an internationally established authority on Financial Economics. But he has not contributed to issues relating to development strategies, nor is he known as an articulator in fields relating to development and regional development disparities in a federal structure. His recent short experience as the Chief Economic Advisor of the Government of India must be his first foray into the arena of development policy articulation and making.  In May this year the Government of India constituted a committee headed by him with the following terms of reference:

“(a) 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.”

 

The Committee has submitted the report titled Report of The Committee for Evolving a Composite Development Index of States this September. Though it worked for only three months for the report, the implications of the recommendations are huge, particularly for States like Manipur. This being so, we need to carefully examine the philosophy and the orientation of the report. Here we may recall the opportunities States like Manipur had lost for meaningful catching up in the development process when regional disparities started appearing in a serious way in the development articulation of India. I am talking of the two committees of the Planning Commission commonly known as Pande Working Group for identification of backward areas and the second dealing with the incentives as the Wanchoo Working Group. These two working groups were set up by the Planning Commission in pursuance of the National Development Council resolution. The Pande Working Group submitted its report on Identification of Backward Areas in February 1969 and the Wanchoo Working Group on Fiscal and Financial Incentives for Starting Industries in Backward Areas in April 1969. But what had happened to the recommendations of the two committees consequent upon the pressures of the big and powerful States is now history, and there the small ones like Manipur lost out. Instead of addressing this historical injustice, the Rajan committe report has the potential to repeat history in a more damaging way.

Though the committee suggests that their recommendations may be reviewed after a decade, there is possibility of long term damage to the future development dynamics of States like Manipur given the framework of the governance approach of the Indian federal structure.

As said in the beginning, Rajan’s concentration of research has been in the field of financial issues, and this too mainly with the short business dynamics; his engagement with development research is very little if any. To begin with, the Report opens with these two sentences: “When India gained independence, the country was very underdeveloped, and income was unevenly distributed across regions. An explicit government objective was to have a more egalitarian society, coupled with balanced development of different regions.” This betrays a poor understanding of the evolution of development interventions the Indian government had put in place. Of course the First Five Year Plan did speak of “excessive concentration of industries brings in its wake certain economic and social disadvantages and a wider diffusion of industry is desirable from this larger point of view. Further, if industrial development in the country is to proceed rapidly and in a balanced manner, increasingly greater attention will have to be paid to the development of those states and regions which have so far remained backward.” But this remained as nothing more than verbose as the Plan itself had very little industrial component. In the First Plan document, there is explicit talk of regional imbalances and the imperative for bridging the gap only in the case of Education in Chapter 33.  In fact, balanced regional development became a widely appreciated issue only towards the end of the Third Five Year Plan. It was then that Pande and Wanchoo Working Groups were constituted.

Now this casual understanding of the Indian approach to balanced regional development is coupled by an understanding of the contemporary imbalanced regional development scenario of India which is absolutely biased and reflects a very poor understanding of contemporary development analyses. The Report writes: “In summary, the level of development of a state is the consequence of a complex set of historical, cultural, and sociological factors. Importantly, studies do not find geographic impediments, the lack of natural resources, or climatic factors as prominent reasons for underdevelopment. Additional financial resources may be helpful in increasing growth rates, but the ability to use these resources well is probably most important in distinguishing regions that develop successfully and those that do not. Therefore, any scheme of allocation should take into account both development needs as well as past performance, with the latter serving both to incentivize better performance as well as to allocate resources where they can be most beneficially used.” With this understanding, the Committee recommends the following criteria for allocation of funds to the States:

“(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.”

Given this understanding and index, Manipur is now found in the company of Andhra Pradesh and Gujarat as less developed (second order level of development) and not the least developed category. Now we have some questions. First, where and how geography has been found to be unimportant for development by the Rajan Committee? Has Rajan or any other member of the Committee been accustomed with the contributions of New Economic Geography? Has Rajan or any other member of the committee appreciated geography of India in the sense being understood by development economists today? Second, with whatever index being developed, has India reached a stage of development where the needs of development can be appreciated without knowing geography and the constituent institutions? While emphasis on performance goes very well with the Chicago School where Rajan worked earlier, what about the creation of capabilities through the equalisation of opportunities? Has India ever ensured any effort for regional equalisation of opportunities through building capabilities?

While not explicitly recommending for doing away with the Special Category Status category, the Committee implies in their recommendations for doing away with the General and the Special Category status. Well carry on, Sir!

Well, the Committee should not have taken the liberty of going for overreaching recommendations with only a work for three months. In the articulations of the recommendations, it looks as if the Committee has worked overtime to dovetail them to the political needs of the day for pleasing States like Bihar.

 

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