Index of Underdevelopment

Introduction

• September 2013, Ministry of Finance, Govt. of India constituted a

committee under the chairmanship of Dr. Raghuram Rajan to develop
a composite development index for states

• Committee proposed a general method for allocating funds from the

Centre to the states based both on a state’s development needs as
well as its development performance.
Components of underdevelopment index
• 1) Monthly per capita consumption expenditure: Income is proxied for by per
capita consumption expenditure from the Consumption Expenditure Surveys of
the National Sample Survey Organisation (NSSO), and is averaged across
individuals at the state-level.

• 2) Education: The “education” sub-index is computed as a weighted average of (i)

attendance ratio and, (ii) number of institutions for primary and secondary
education per 1000 of state population in the age groups of 5-14 years.

• 3) Health: The “health” sub-index is measured by a single indicator – infant

mortality rate.
Components contd..
• 4) Household amenities: The sub-index for “household amenities” is
a weighted average of the number of households which have the
following (i) electricity as primary source of lighting, (ii) access to
drinking water within premises, (iii) no sanitation facilities within
premises, (iv) mobile/phone facilities, (v) no specified assets.

• 5) Poverty rate: Poverty ratios used in the Report have been taken
from Planning Commission and are based on the definition being
currently used by the Planning Commission.
Components contd..
• 6) Female literacy: Census abstracts

• 7) Percent of SC-ST population: Census abstracts

• 8) Urbanization rate: Census abstracts

• 9) Financial inclusion: Number of households availing banking services

• 10) Connectivity: weighted average of a number of indicators -- length of

surfaced national and state highways, other surface road and rail route per
100 sq. km.
Index calculation
• The simple arithmetic mean of the sub-components create an overall index
for underdevelopment.

• A principal component analysis of the sub-components suggests that they

are all positively correlated with underdevelopment.

• This turns out to be 0.16 for per capita consumption expenditure, 0.08 for
education, 0.10 for health, 0.16 for household amenities, 0.12 for poverty
ratio, 0.10 for female literacy, 0.02 for percent of SC-ST population, 0.11 for
urbanization rate, 0.07 for financial inclusion, and 0.08 for connectivity.
Index calculation contd..
• The Committee also reconstructed the index using the principal component
weights; the resulting index was highly correlated with the one with equal
weights, with a correlation coefficient of 0.99.

• Each sub-component is normalized between 0 and 1 (i.e. Actual- Min/Max-

Min), and rescaled such that 1 indicates a higher degree of
underdevelopment.

• Normalization is necessary to ensure no sub-component has a

disproportionate weight in the overall index.
Index of Underdevelopment Ranking
Sl No State Index Rank
1 Odisha 0.80 1
2 Bihar 0.76 2
3 Madhya Pradesh 0.76 3
4 Chhattisgarh 0.75 4
5 Jharkhand 0.75 5
6 Arunachal Pradesh 0.73 6
7 Assam 0.71 7
8 Meghalaya 0.69 8
9 Uttar Pradesh 0.64 9
10 Rajasthan 0.63 10
11 Manipur 0.57 11
12 Nagaland 0.55 12
13 West Bengal 0.55 13
14 Andhra Pradesh 0.52 14
15 Jammu & Kashmir 0.50 15
16 Gujarat 0.49 16
17 Mizoram 0.49 17
18 Tripura 0.47 18
19 Karnataka 0.45 19
20 Sikkim 0.43 20
21 Haryana 0.40 21
22 Himachal Pradesh 0.40 22
23 Uttarakhand 0.38 23
24 Maharashtra 0.35 24
25 Punjab 0.35 25
26 Tamil Nadu 0.34 26
27 Kerala 0.09 27
28 Goa 0.05 28
Criticisms
• 'Percentage of SC/ST Population' was chosen as one of the variables,
which certainly is not an outcome variable. The understandable
disadvantage of a State, because of a higher percentage of SC/ST in its
population, is adequately captured in the remaining variables.

• An index based on Per Capita GSDP is more likely to generate a

consensus at the All-India level than the one based on MPCE.
 Outcome
• Due to the widespread opposition to the committee, government has
decided against using this for allocation of central funds.