Gadgil-Mukherjee Formula

The Gadgil–Mukherjee Formula refers to the revised mechanism adopted by the National Development Council (NDC) in 1991 for distributing central plan assistance to states in India. This formula, named after Dr. D. R. Gadgil and Dr. Pranab Mukherjee, evolved from the earlier Gadgil Formula (1969) and sought to make the allocation of central financial resources to states more equitable, transparent, and development-oriented. It balanced the needs of poorer states with considerations of efficiency, performance, and population size.

Background and Evolution

The idea of a systematic formula for distributing central assistance to states arose from the need to ensure fairness and efficiency in India’s planned economic development. Prior to 1969, allocations were made largely on an ad hoc and discretionary basis, often influenced by political and administrative considerations.
In 1969, under the chairmanship of Dr. D. R. Gadgil, then Deputy Chairman of the Planning Commission, the Gadgil Formula was introduced. It provided objective criteria for distributing funds among states during the Fourth Five-Year Plan (1969–74). However, over time, changing economic conditions and demands for more nuanced criteria led to its revision.
In 1991, under the leadership of Dr. Pranab Mukherjee, the formula was modified and came to be known as the Gadgil–Mukherjee Formula, which guided resource distribution until the establishment of the NITI Aayog in 2015.

Objectives of the Formula

The main objectives behind formulating and revising the Gadgil Formula were to:

• Promote balanced regional development.
• Ensure objective and transparent allocation of central resources.
• Provide greater weightage to states with lower levels of development.
• Encourage efficient utilisation of resources through performance-based incentives.
• Strengthen cooperative federalism by addressing disparities between richer and poorer states.

The Original Gadgil Formula (1969)

The Gadgil Formula, as approved by the NDC in 1969, allocated plan assistance among states according to the following criteria:

This structure primarily favoured population as the dominant criterion while making limited provisions for performance and special needs.
However, over time, states argued that the formula did not adequately account for backwardness, fiscal discipline, and effective implementation of development programmes. These concerns led to multiple revisions, culminating in the Gadgil–Mukherjee Formula (1991).

Gadgil–Mukherjee Formula (1991 Revision)

In 1991, the formula was modified to make allocations more equitable and incentive-based. The revised weights were as follows:

Explanation of Criteria:

1. Population (55%)
   • Population remained the dominant factor, reflecting the principle that states with larger populations required greater financial resources for development.
   • The 1971 Census was used as the base to maintain uniformity and control demographic incentives.
2. Per Capita Income (25%)
   • This criterion measured the economic backwardness of a state.
   • States with lower per capita income received higher allocations to promote balanced regional development.
   • Two methods were used:
     • Deviation method – comparing each state’s per capita income with the national average.
     • Distance method – measuring the gap between the highest and lowest per capita incomes among states.
3. Fiscal Management (5%)
   • This parameter rewarded states demonstrating efficient financial management, fiscal discipline, and tax effort.
   • It encouraged states to improve revenue generation and reduce fiscal deficits.
4. Performance (15%)
   • The performance criterion was designed to promote accountability and efficiency in development programmes.
   • It included factors such as:
     • Effective implementation of centrally sponsored schemes.
     • Population control efforts.
     • Growth in agricultural production.
     • Improvements in literacy and social indicators.

Rationale Behind the Revision

The revision under Dr. Pranab Mukherjee aimed to address several limitations of the earlier formula:

• Backward states like Bihar, Odisha, and Madhya Pradesh argued that the earlier formula favoured more developed states due to their better infrastructure and higher absorptive capacity.
• The inclusion of fiscal management and performance encouraged states to adopt prudent financial practices and ensure efficient use of resources.
• The revised weights struck a balance between equity (backwardness) and efficiency (performance and fiscal effort).

Implementation and Usage

The Gadgil–Mukherjee Formula governed the allocation of Central Plan Assistance (CPA) to states from the Eighth Five-Year Plan (1992–97) onwards. It was used until the discontinuation of the Planning Commission and the adoption of the NITI Aayog framework in 2015.
The formula guided allocations under:

• Normal Central Assistance (NCA) for state plans.
• Additional Central Assistance (ACA) for externally aided projects or special programmes.

Special Category States (such as the North-Eastern states, Himachal Pradesh, and Jammu & Kashmir) were treated separately, receiving 90% grant and 10% loan assistance, unlike general category states (30% grant and 70% loan).

Impact and Significance

The Gadgil–Mukherjee Formula had a profound impact on India’s federal fiscal structure. Its major achievements include:

• Equitable resource distribution: Ensured that poorer states received proportionately higher assistance.
• Encouragement of fiscal responsibility: Promoted better management of public finances.
• Incentive for performance: Rewarded efficiency and achievements in key socio-economic sectors.
• Balanced regional development: Helped reduce inter-state disparities in development.
• Transparency: Introduced measurable criteria for fund allocation, minimising political influence.

Criticism and Limitations

Despite its significance, the formula faced certain criticisms:

• Fixed population base (1971): Critics argued that continuing to use outdated census data ignored demographic changes and migration patterns.
• Limited consideration for special needs: States facing unique geographical or environmental challenges sought higher weightage under the ‘special problems’ category.
• Complex implementation: The calculation of backwardness and performance metrics often involved subjectivity.
• Over-centralisation: The Planning Commission retained considerable discretion in the final allocation of resources.

These concerns eventually prompted discussions on reforming India’s planning and fiscal framework, leading to the creation of NITI Aayog in 2015, which replaced the Planning Commission and adopted a more cooperative and consultative model of resource distribution.

Comparison Between Gadgil and Gadgil–Mukherjee Formulae