This proposition was also supported by the empirical data which showed a negative correlation between population of states and their per capita income.
Tax effort This is an important factor to measure the potential of the state as far as its own resources are concerned.
Therefore, to make the distribution fairer to the smaller states with a lesser than national per capita average income were given extra share in the resources.
In the absence of this share, such states would have suffered huge losses because of these problems and the implementation of their plans could have been hindered.
This was a discretionary element in the formula which required proper scrutiny of the states situation by the Finance Commission.
Therefore, the finance commission was appointed in 1951 for the allocation of resources of revenue between the central and the state governments.
It was held responsible for examining their liabilities, the resources of the states, their budgeted promises and the effort undertaken to fulfil their commitment.
Each five year, the finance commission puts in its recommendations on the proportion of the total collections to be allocated to each of the states.
The grants were supposed to be given to the states which did not have enough capital assets that would have earned them enough money to pay for loans taken from the centre.
The first Five Year Plan had provision of only a marginal central assistance which did not play an important part.
The states with larger resources and power could choose schemes with a greater share of grants in them.
Therefore, in 1965 when the fourth plan was being thought of, the states demanded for a set of firm objective criteria for the distribution of central assistance.
This type of settlement also faced problems because of the artificial division between the plan and the non-plan expenditures.
This problem was partly solved by providing 10% of the total resources to states with lesser per capita income than the national average in the formula.
This solution led to two other problems: The Gadgil Formula, though well-intentioned, did not achieve much success in reducing inter State disparities.
For instance, Andhra Pradesh and Tamil Nadu, which came under the low income category at the time, received below average Plan assistance and Bihar and Uttar Pradesh, just managed to get Plan assistance equal to all the States’ average.
The rank correlation coefficients worked out for the four Plan periods are as follows: Notes: *Significant at 5 percent level **Significant at 1 percent level The low income states received better allocations during all the four Plan periods, as there is a negative correlation.
However, for the Fourth and the Fifth Plans, the correlation coefficients are not significant, which shows that allocations in these periods were only marginally progressive.
Therefore, the modified Gadgil formula resulted in a more progressive distribution of Central Plan assistance.
Therefore, unless the distribution of the Central Plan assistance is made sharply progressive, narrowing down of inter State differentials in per capita outlays will be impossible.
The centre has resorted to funding states for the implementation of Centrally Sponsored Schemes, which form 80 percent of Plan Assistance.
The National Development Council (NDC) meeting held on October 11, 1990; discussed and approved a New Revised formula.
Criteria for inter-state allocation of Plan Assistance Under the new revised formula, Population was given maximum weightage by considering it as most important factor for the allocation of central assistance, but in comparison with old Gadgil formula the weightage has been reduced by 5 percentage points.
At the advent of the 21st century the formula was reviewed and the component of ‘performance’ by the respective states was adopted.
Timely completion of externally funded projects and land reforms undertaken accounted for the remainder of the 7.5 percent figure.