07-June-2024-Editorial

SPECIAL CATEGORY STATUS 

The demand for special category status (SCS) by states like Andhra Pradesh and Bihar has recently gained prominence with the formation of the new NDA government.  

What is Special Category Status? 

Special Category Status (SCS) is a designation given by the central government to support states with substantial geographical and socio-economic challenges. The purpose of this status is to expedite the development of these states by offering financial aid and various other advantages. 

History of Special Category Status 

Introduction: The SCS mechanism was introduced in 1969 based on the recommendations of the Fifth Finance Commission. 

Aim: The aim was to support states facing historical economic or geographical disadvantages, using the Gadgil formula as a basis. 

Factors Considered for SCS (Gadgil Formula) 

• Difficult and hilly terrain 
• Low population density and/or sizable tribal population 
• Strategic location along borders 
• Economic and infrastructural backwardness 
• Non-viable nature of state finances 

Changes by the 14th Finance Commission 

The 14th Finance Commission recommended doing away with SCS for most states, except the Northeastern and three hill states. It suggested increasing the tax devolution to 42% from the existing 32% to fill the resource gap. 

Reasons Behind Andhra Pradesh’s and Bihar’s Demand for SCS 

Andhra Pradesh’s Demand 

• Bifurcation of Andhra Pradesh: The creation of Telangana led to a loss of revenue and a developed capital around Hyderabad. 
• Increased Debt Levels: Andhra Pradesh’s debt rose from Rs 97,000 crore at bifurcation to Rs 2,58,928 crore by 2018-19. 

• Reduced Post-Devolution Revenue Deficit: The 14th Finance Commission’s estimates were significantly lower than the actual deficit. 
• Unjust Distribution: Andhra Pradesh inherited 59% of the population and liabilities but only 47% of the revenues. 

Bihar’s Demand 

• Economic Backwardness: Bihar has a low per capita GDP and a significant portion of its population living in poverty. 
• Impact of Bifurcation: The bifurcation led to industrial decline as many industries moved to Jharkhand. 
• Natural Challenges: Regular floods and droughts affect agriculture and livelihoods. 
• Need for Welfare Funding: Bihar seeks substantial funds for welfare measures. 
• Lack of Resources: Limited natural resources and continuous water supply issues hinder development. 

Benefits Associated with Special Category Status 

• Higher Grants-in-Aid: SCS states receive higher per capita grants from the central government. 
• Example: SCS states receive Rs 5,573 crore per year, compared to Andhra Pradesh’s Rs 3,428 crore. 
• Enhanced Central Funding: The central government funds 90% of centrally sponsored schemes in SCS states, compared to 70% in non-SCS states. 
• Unspent funds do not lapse and are carried forward. 
• Tax Exemptions and Incentives: SCS states benefit from various industrial incentives, such as income tax exemptions and reduced excise duty. 
• Improved Employment Opportunities: Resources from special incentives aid in industrialization, creating jobs and fostering development. 
• Investment in Infrastructure: SCS encourages investments in healthcare, education, manufacturing, and high-value service industries. 

Concerns with Special Category Status 

• Increased Burden on Central Finances: Additional funds and benefits for SCS states strain the central government’s budget and raise concerns about fiscal sustainability. 
• Inequitable Distribution of Resources: Granting SCS to some states while denying others can lead to an unequal distribution of resources. 
• Dependency and Accountability: SCS states may become overly dependent on central assistance, reducing their incentive to mobilize local resources and build a self-sustaining economy. 

• Permanent Continuation of Temporary Status: States initially granted SCS for a limited period have continued to enjoy it for decades without periodic reassessment. 
• Lack of Constitutional Basis: SCS lacks a clear constitutional or legal foundation, making it vulnerable to changes in administrative decisions. 

Way Forward 

• Reassessment Criteria for SCS: Revisit and expand the criteria for granting SCS to include factors like revenue deficits. 
• Alternative Funding Models: Explore new funding models based on multi-dimensional indices, as suggested by the Raghuram Rajan Committee. 
• Increased Devolution by Finance Commission: Enhance tax devolution to address poverty, disaster management, agriculture, and policies attracting industries. 
• Focus on Capacity Building: Strengthen state capacities for better resource management and self-reliance. 
• Periodic Assessment and Review: Implement regular impact assessments and reviews to ensure the benefits of SCS are effectively utilized and justified. 

Conclusion 

The demand for special category status by states like Andhra Pradesh and Bihar highlights the need to balance development assistance with fiscal responsibility and equity. By revisiting the criteria and mechanisms for SCS, India can ensure a fair and effective approach to addressing regional disparities and fostering inclusive growth.