Special Category Status- Explained Pointwise

With the formation of the new NDA government at the Centre dependent upon two regional parties of Bihar and Andhra Pradesh, the issue of demand for special category status has again gained prominence. In this article we will look at the benefits associated with special status and the concerns surrounding it.

What is Special Category Status? What is the history of Special Category status and the factors considered while awarding it?

A Special Category Status(SCS) is a classification given by Centre to assist in the development of those states that face geographical and socio-economic disadvantage.

History of Introduction and Aim- SCS mechanism was introduced in 1969, on the recommendation of the Fifth Finance Commission of India. It was based on the Gadgil formula. The mechanism of SCS was developed to assist certain states in their development and fast-tracking growth, if they faced historical economic or geographical disadvantages.

Factors considered for according SCS (According to Gadgil Formula)
a. Difficult and hilly terrain
b. Low population density and/ or a sizable tribal population
c. Strategic location along borders
d. Economic and infrastructural backwardness
e. Non-viable nature of state finances

The 14th Finance Commission has done away with the ‘special category status‘ for states, except for the Northeastern and three hill states. According to the 14th Finance Commission, the resource gap of the states should be filled by increasing the devolution of tax to 42% from the existing 32%.

This includes the Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand and Telangana.

What are the reasons behind Andhra Pradesh’s and Bihar’s Demand for Special Category Status?

Andhra Pradesh Special Category Status Demand

1. Bifurcation of Andhra Pradesh to create Telangana- Andhra Pradesh had to suffer a loss of revenue and the loss of developed capital around Hyderabad due to AP Reorganisation Act, 2014.

2. Increased debt level of Andhra Pradesh- The debt of the residuary state of Andhra Pradesh, which was Rs 97,000 crore at the time of bifurcation, has reached Rs 2,58,928 crore by 2018-19.

3. Reduced Post-devolution revenue deficit- The 14th Finance Commission had estimated that post-devolution revenue deficit for AP for the five-year period 2015-20 would be Rs 22,113 crore. However, the actual post-devolution revenue deficit has been Rs 66,362 crore.

4. Unjust and inequitable Distribution- The successor state of Andhra Pradesh has inherited nearly 59% of the population, debt, and liabilities of the original state, but only 47% of its revenues.

Bihar Special Category Status Demand

1. Economic Backwardness- About one-third of Bihar’s population lives in poverty. The state has a low per-capita GDP of around ₹54,000, marking it as one of India’s poorest states.

2. Impact of Bifurcation- Bihar’s bifurcation led to industrial decline, with many industries moving to Jharkhand, resulting in fewer employment opportunities.

3. Natural Challenges- The state faces regular floods in the north and droughts in the south, impacting agriculture and livelihoods.

4. Need for Welfare Funding- Bihar’s Chief Minister highlighted the need for SCS to secure approximately ₹2.5 lakh crore for various welfare measures over five years.

5. Lack of Resources- Bihar argues its lack of natural resources and continuous water supply for irrigation contributes to its underdevelopment.

What are the benefits associated with the special category status?

Special category status provides significant financial and tax benefits to the recipient states from the central government. This aims to aid their development, to overcome their geographical and socio-economic disadvantages.

1. Higher grants-in-aid- Higher grant-in-aid provided to the state government of the special category states from the Centre. For ex- Per capita grants to Special Category States is Rs 5,573 crore per year, whereas Andhra Pradesh (AP) which is pushing for SCS receives only Rs 3,428 crore.

2. Enhanced Central Funding- In the Special Category States, the Central government funds 90% of the Centrally sponsored scheme, compared to 70% in non-SCS states. The unspent money in a financial year does not lapse and is carried forward.

3. Tax Exemptions and incentives- The SCS states enjoy special industrial incentives such as Income-tax exemptions, custom duty waivers, reduced excise duty, corporate tax exemption for a certain period, concessions and exemptions relating to GST, and lower state and central taxes.

4. Improvement of employment opportunities- Special incentives to the special category states provide resources which are vital for the rapid industrialization of the primarily agrarian state. It also leads to improved employment opportunities for the youth and overall development of the state.

5. Investment in infrastructure- Granting of SCS encourages investments in specialty hospitals, five-star hotels, manufacturing industries, high-value service industries such as IT, and premier institutions of higher education and research.

What are the Concerns with Special State Status?

The 14th finance commission had opposed the continuation of special state status on the following grounds.

1. Increased Burden on Central Finances- Provision of  additional funds, tax concessions and other benefits to SCS states puts a significant financial burden on the central government’s budget. This also leads to concerns about fiscal sustainability.

2. Inequitable Distribution of Resources- Allocation of Special Category Status to some states while denying it to other states can lead to an inequitable distribution of resources.

3. Increase in Dependency and Reduction of Accountability- There are concerns that the SCS states may become overly dependent on central assistance. This also reduces their incentive to mobilize their own resources and hinder the development of a self-sustaining economy.

4. Permanent continuation of temporary SCS Status- Some states which had received SCS  only for a temporary period have continued to enjoyed it for decades. There is lack of periodic impact assessment and re-evaluation.

5. Lack of Constitutional Basis- SCS lacks a clear constitutional or legal foundation. It is granted by the administrative decision of the National Development Council or the central government, making it vulnerable to changes.

What Should be the Way Forward?

1. Reassessment Criteria for SCS- There is a need to revisit the criteria for SCS. It can be expanded to consider the revenue deficit.

2. Alternative Funding Models: Following the Raghuram Rajan Committee’s suggestion, w must explore new funding models based on a multi-dimensional index.

3. Increased Devolution by Finance Commission- There must be an increase in the devolution by the finance commission to address the poverty alleviation, focused aid for disaster management and agriculture, and policies that attract new industries and create job opportunities.