Put it in the dustbin: Raghuram Rajan's report on states seriously flawed

The report of the Raghuram Rajan-chaired ‘Committee for Evolving a Composite Development Index for the States’ is too seriously flawed to be used as a basis for framing policy. The most devastating critique of the Committee’s report - now being hailed by Narendra Modi’s critics for exposing the ‘hollow’ Gujarat model – comes from within.

A 10-page long note of dissent written by committee member Shaibal Gupta annexed right at the end of the report sums up all that is wrong with the methodology used by the majority on the Committee to arrive at their conclusions. Gupta’s critics will argue that the Patna-based economist known for his proximity to Bihar Chief Minister Nitish Kumar, had a vested interest in supporting a methodology that would show Bihar at rock bottom. But that would be trivializing the serious questions he has asked about the Committee’s chosen methodology.

[caption id=“attachment_1137679” align=“alignright” width=“380”]  Rajan’s committee has been too careless with its statistical methods to provide a definitive answer. PTI[/caption]

First, Gupta questions the choice of variables used by the Committee. Rajan and the majority, in their wisdom chose ten: 1) Monthly per capita consumption expenditure, 2) education 3) health 4) household amenities 5) poverty rate 6) Female literacy 7) percent of SC/St in population 8) Urbanisation 9) Financial Inclusion 10) connectivity. Gupta questions the inclusion of variable 7 and variable 9 outright. He argues that the percent of SC/ST population is not an ‘outcome’ variable like others and is in any case adequately captured in the remaining variables. Gupta rightly argues that since other variables which also indicated “non-outcome” disadvantages faced by states like affectedness by left-wing extremism and flood proneness were not included, there was no reason to include percent of SC/ST.

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On financial inclusion, he opposed the Committee’s choice using “household banking facility” as an exclusive indicator (he argues that it is already incorporated under variable 4, household amenities) rather than also incorporate variables like credit per capita and credit-deposit ratio.

Second, and this asks serious questions of Raghuram Rajan’s caliber as a quantitative economist: Gupta asks why do each of the ten variables have equal weightage in the construction of the index? The majority on the Committee endorsed this because it was “simple” but the task of constructing an accurate index is complex. Should the percentage of SC/ST in the population have the same weight as female literacy? Should the per capita expenditure variable not have a greater weight than household amenities, given that the latter would follow from the former? Equal weightage of disparate variables makes no sense at all.

Third, and this is potentially the most devastating critique, Gupta questions the use of Monthly Per Capita Expenditure instead of using an income indicator, like per capita gross state domestic product (per capita income). Gupta argues that using monthly expenditure overestimates the well-being of the poorest states (like Bihar) and underestimates the well-being of the richest states (like Gujarat). That is primarily because an income indicator would also account for savings, which expenditure does not. So Orissa, which is the most backward state in India according to Rajan’s estimate, actually has twice the per capita income of Bihar. In per capita income terms, Orissa is in fact richer than Uttar Pradesh, Jharkhand and Assam among others. There is a significant churn in the rankings (even in the bottom third of least developed states) if per capita income is used as a primary indicator.

Writes Gupta sarcastically about the Committee’s findings: “Odisha, which is by far the most backward state according to the proposed index has double the per capita income of Bihar, which has the lowest per capita income…Similarly Gujarat, one of the economically most prosperous states of India appears in the list as a ’less developed’ state.” Gupta, an advisor to Nitish Kumar, is no trumpet-blowing fan of Narendra Modi. He is merely stating the absurdity of the methodology used by the Rajan-led majority.

Gupta tears into the Committee’s arguments that the reason for choosing per capita expenditure instead of per capita income was because the data for the former are more reliable. In fact, the per capita expenditure numbers taken from NSS surveys have serious flaws. The state GSDP data is calculated using CSO guidelines. There may be errors but no more than in the NSS surveys.

Given that Raghuram Rajan was unable to persuade one of the members of his own committee about the soundness of the proposed index, how did he expect that he was going to convince outsiders? The ruckus on Gujarat is the least of the problems - even it creates the maximum political storm – though it would be odd if a prosperous state like that got additional funds because of a flawed index. The real problem still lies in correctly identifying which are India’s most backward states and deserving of special status, in terms of financial assistance from the Centre.

Rajan’s committee has been too careless with its statistical methods to provide a definitive answer. Therefore, their lengthy recommendations on how funds should be allocated based on their flawed index should be consigned to the same fate as most Government committee reports are: gathering dust in a forgotten shelf.