Rajan State Report

Published: September 27, 2013

Rajan State Report, 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.

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.

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.

0 votedvote