The 15th Finance Commission is in the process of formulating a “Development matrix” of states based on their social indicators, particularly health and education, for the transfer of financial resources, such as taxes and grants. This would be a new parameter for deciding state’s share of the country’s financial resources, such as taxes and grants.

Earlier Finance commissions used “income” as a major criteria for deciding the devolution of resources. Usually, Poor and deprived states receive a large share of the resource pie.

“But per capita income is not a sufficient basis in comparison to an overall growth index, not that the two are in harmony with each other. Therefore, we felt that a development matrix would be a better guide,”15th Finance Commission Chairman NK Singh told HT. A “Development matrix”, as is being believed, would bring levels of social development for the first time, particularly access to health-care and schooling, into the framework of states as to how resources are distributed.

Analysts say it can overcome deficiencies in key areas such as health care, provided states are given the objective of spending additional resources.

“If the development matrix is ​​implemented, states with poor health and education facilities will qualify for additional resources. This is an implication and it is a welcome move,”said NR Bhanumurthy, the vice-chancellor of Bengaluru Dr BR Ambedkar School of Economics.

Economists widely believe that over time, poorer states should come to the level of richer states, as richer states hit their development limits.

Singh said the dilemma was that poor states in India were not catching up with rich states. Referring to poor investment in social infrastructure, he said, “We need to know what is behind this.” Singh said that as the 15th Finance Commission was there, weighed down the idea of ​​including regional initiatives like health and education in the development matrix.

S Mahendra Dev, director of the Mumbai-based Indira Gandhi Development Research Institute, said the inclusion of non-income parameters by the Finance Commission would be a significant change.

It seems to some southern states that, as a result, will be punished for stagnating population growth, while rewarding northern states.

In 2018, Andhra Pradesh Chief Minister N Chandrababu Naidu said that states like him would be “Punished”, and new development metrics could generate similar concern from states that have done better on social indicators.

Background

The Constitution, through Article 280 to 281, provides for Finance Commissions a mechanism for the division of taxes and between the Center and States and horizontally, and between all states, on the basis of development, prosperity and regional needs revenue. Finance Commissions rely on parameters such as income distance, population size, geographical location and forest cover, etc. for the sharing of resources.

The income distance gives the most direct measure of how rich or poor a state is. It is the difference between the 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 states with heavy forests will have less land to devote to factories, thereby harming development.

Indian states broadly fall into high, middle and low-income categories and, unlike China, poor states have shown no signs of moving up the income ladder for national income convergence.