Gadgil formula

The Gadgil formula was formulated with the formulation of the fourth five year plan for the distribution of plan transfers amongst the states. It was named after the then deputy chairman of the Planning Commission Dr. D R Gadgil. The central assistance provided for in the first three plans and annual plans of 1966-1969 lacked objectivity in its formulation and did not lead to equal and balanced growth in the states.

Gadgil formula  was evolved in 1969 for determining the allocation of central assistance for state plans in India. Gadgil formula was adopted for distribution of plan assistance during Fourth and Fifth Five Year Plans The National Development  Council  (NDC) approved the following formula:

1. Special Category states like Assam, Jammu and Kashmir  and  Nagaland  were given preference. Their needs should first be met out of the total pool of Central assistance.

2. The remaining balance of the Central assistance should be distributed among the remaining States on the basis of the following criteria:

§      60 per cent on the basis of population;

§      10 per cent on the basis of tax effort, determined on the basis of individual State's  per capita tax receipts as percentage of the State's per capita income;

§     10 per cent on the basis of per capita State income, assistance going only to States whose per capita incomes are below the national average;

§     10 per cent on the basis of spill-over into the Fourth Plan of major continuing irrigation and power projects;

§     10 per cent for special problems of individual States.

Reasoning behind the given weights:

i. Population

In a country like India population acts as an apt measure to represent the requirements of the people because a major portion of the population lives below the poverty line. This proposition was also supported by the empirical data which showed a negative correlation between population of states and their per capita income.

ii. Tax effort

This is an important factor to measure the potential of the state as far as its own resources are concerned. This relative measure incentivizes the states to undertake measures to increase their own potential through various tax measures.

iii. State per capita income

A problem regarding unequal development amongst the states was faced in the earlier plans because of larger states with their large plans were able to get a larger share of resources from the centre. This led to increased inequalities amongst the states. 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.

iv. Special Problems

This factor was introduced so as to provide enough resources to states to overcome problems like droughts, famines etc. 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.

v. Irrigation and power projects

These projects have been in the process of implementation before the fourth plan was formulated. They needed extra resources for the successful completion of these projects.