Published on 11 Aug 2024
The uniqueness of India’s federal structure is highlighted by the special treatment given to various states through Special Category Status. These provisions were introduced to address the diverse sizes, populations, and social and historical contexts of the states. With the current elections creating a crucial situation in Indian Politics, Special category status has reemerged as a major concern.
What is Special Category Status?
Meaning: Special Category Status is a classification assigned by the Centre to support the development of states experiencing geographical and socio-economic challenges.
Origin: This is not a constitutional provision but done as per the recommendations of the 5th Finance Commission in 1969.
The National Development Council, the apex coordination body to implement the five year plans of the Planning Commission granted SCS.
Determinants: As per the Gadgil Formula of Fiscal Transfers, Hilly Terrain, low Population Density and/or Sizeable Share of Tribal Population, strategic location along borders with neighbouring countries, economic and infrastructure backwardness; and nonviable nature of State finances are the determinants of the status.
Beneficiaries: On the basis of this special Category status was first accorded to Jammu and Kashmir, Assam and Nagaland in 1969.Subsequently, eight more states were granted special status, making it 11 out of 28 states, or over a third of Indian states.
Later, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand were granted the special category status.
It was also announced for Telangana.
Later proposal: Raghuram Rajan committee, in 2013, had presented an alternative classification of states based on a multi-dimensional index
Alternative adopted:
Government decision: The SCS system was scrapped with the abolition of the Planning Commission and the categorisation of plan and non-plan funds. Government cited the 14th Finance Commission recommendations and removed the SCS for all states.
It also suggested that the resource gap of the states should be filled by increasing the devolution of tax to 42% from the existing 32% which has been in place since 2015
Finance Commission’s clarification: M. Govinda Rao, a former FC member, clarifies that Fourteenth FC(FFC) is unfairly criticised for not granting special category status. Accordingly,
FFC's Job: The FFC assesses states' finances and recommends ways to address imbalances. It doesn't categorise states as special or non-special.
Report Misunderstood: The FFC report treats all states based on their unique situations, not a pre-defined category.
Special Status History: Special category status is decided by the National Development Council, not the FFC or the Constitution.
Executive Call: Granting special status is always an executive decision, not linked to the FFC.
Distinction from Special Status: SCS differs from Special status which imparts enhanced legislative and political rights, as SCS deals with only economic and financial aspects.For instance, J&K used to have Special status before Article 370 was repealed.
Historical Perspective
Andhra Pradesh
The demand for SCS for Andhra Pradesh stems from the bifurcation of the state in 2014, which led to significant economic challenges and the loss of Hyderabad, where much of the development was concentrated.
Unjust Bifurcation: Andhra Pradesh argues that the undivided state was bifurcated in an unjust manner as the successor state inherited nearly 59% of the population, debt, and liabilities but only 47% of the revenues.
Example: Of the Rs 57,000 crore in software exports from AP in 2013-14, Hyderabad alone, now part of Telangana, accounted for Rs 56,500 crore.
The per capita revenue of Telangana for 2015-16 was Rs 14,411, while it was only Rs 8,397 for AP.
Prime minister's assurance: During the bifurcation discussions, then Prime Minister Manmohan Singh assured special status to Andhra Pradesh for five years. This status was meant to provide additional central assistance, tax concessions, and other financial benefits to foster economic growth.
Political Promises and Friction: Successive governments and political parties have reiterated the promise of special status, making it a crucial electoral issue. Initially, the BJP and TDP alliance promised special status but later offered a special financial package instead, leading to political friction and the breakup of the alliance. Public sentiment in Andhra Pradesh sees special status as essential for the state's development.
Electoral Impact: In the 2019 elections, YSRCP's Jagan Mohan Reddy won decisively, banking on the SCS issue. He criticised Naidu and TDP for failing to secure SCS for the state and accused the BJP of not fulfilling its promise. This led to the TDP severing ties with the BJP-led NDA government in 2018.
Economic Situation: According to the AP government's presentations to NITI Aayog, the 14th Finance Commission estimated AP's post-devolution revenue deficit for 2015-20 at Rs 22,113 crore, but it actually reached Rs 66,362 crore. The state's debt, which was Rs 97,000 crore at bifurcation, now exceeds Rs 3.5 lakh crore.
Bihar
Jharkhand's Long-Standing Demand for SCS: Since Jharkhand was carved out of Bihar in 2000, the state has been seeking SCS. Current CM Nitish Kumar has been a prominent advocate for this status since 2006.
Bihar's Poverty Challenges: According to the Centre's 'Multidimensional Poverty Index' (MPI) report, Bihar is the poorest state in India, with nearly 52 percent of its population lacking adequate health, education, and living standards
Bihar’s per capita income of around ₹60,000 is among the lowest in the country and the State lags behind the national average in several human development indicators as well.
The most recent Bihar caste based survey of 2022 indicates that nearly a third of the State’s people live under the poverty line.
Economic Hardship: With a per capita GDP of around Rs 54,000, Bihar remains one of the poorest states. Nitish Kumar had earlier said that SCS would help secure about Rs 2.5 lakh crore needed for welfare measures over the next five years.
Renewed Push for SCS: Caste Survey and Threat of Movement: November 2023, Kumar's cabinet passed a resolution demanding SCS for Bihar, following a caste-based survey revealing 94 lakh poor families. He had even threatened to launch a state-wide movement if the Centre does not grant SCS to Bihar promptly.
Odisha
Odisha has also demanded the SCS tag, on the basis of its climate change related vulnerabilities and large tribal population (nearly 22%).
Benefits
Higher central funding allocation: 90 percent of funds under centrally sponsored schemes was contributed by the Centre, with only 10 per cent being the state contribution. For all other states, the split was 60:40 with the Centre contributing just 60 per cent.
Normal Central Assistance from the Union government: For special category states it comprised 90 per cent grants and 10 per cent loan; for other states, it was 30 per cent grants, and 70 per cent loans.
Budget allocation to special category states: 30% of the Centre’s Gross Budget goes to Special Category states.
Unspent funds: Unspent money in a financial year does not lapse and is carried forward.
Industrial Incentives: 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.
Investments: Granting SCS would encourage investments in specialty hospitals, five-star hotels, manufacturing industries, high-value service industries such as IT, and premier institutions of higher education and research.
Economic transformation and employment : State governments argue that these special incentives are crucial for the rapid industrialisation of their primarily agrarian economies and would create more employment opportunities for the youth.
Tax concessions: Significant concessions are provided to these states in excise and customs duties, income tax and corporate tax.
Financial Benefits: Special Category Status (SCS) would bring significant financial benefits to Andhra Pradesh and Bihar, providing them with more central funds.
Example: The per capita grants to SCS states amount to Rs 5,573 crore per year, while Andhra Pradesh currently receives only Rs 3,428 crore.
Feasibility
Obsolete Concept:The concept of special category status, once tied to Plan Assistance under the Planning Commission, is now obsolete. States seeking this status are essentially requesting a special assistance package, necessitating design and implementation by bodies like NITI Aayog based on state-specific needs.
Financial Commission's Stance on SCS: The 14th Finance Commission deemed SCS a burden on the Centre’s resources, a rationale the central government has used to deny SCS to additional states.
Increased Tax Devolution : To address the resource gap without extending SCS, the tax devolution to states was increased to 42% by the 14th FC and maintained at 41% by the 15th FC.
Prospects with the 16th Finance Commission: However, with the 16th FC now established and formulating the tax devolution formula for the five-year period beginning April 1, 2026, granting special category status to these two states may become easier.
Consequences
Economic Burden: Granting Special Category Status (SCS) imposes an additional economic burden, particularly when increased devolution, as advised by the Finance Commission, is already being allocated to the state.
Center-State Financial Relations : SCS affects the financial dynamics between the centre and the state, creating complexities and hindering the spirit of competitive federalism among states.
Competitive Populism: Political parties vying for power at the Centre may compete to either gain or retain power by promising to grant special status to certain states. This practice can lead to biassed resource allocation and inequitable distribution of federal funds.
Example: The Congress party, for instance, in its 2024 election manifesto promised to grant the special category status to Bihar if it comes to power.
Political Influence: Political considerations play a significant role in the granting of special status to states. States with better political bargaining power with the Centre may secure more funds, either through special status or other means.
Ambiguity: The method for creating new special category states, including legislative considerations, is yet to be determined. According to experts, fund transfers must align with the finance commission's guidelines, as special packages cannot be allocated directly from the Consolidated Fund of India.
Incentivizing Poor Policies:Increased allocation of funds to poorer states may incentivize bad policies and penalise more developed states that have adopted better policies.
More Demands: Granting special category status to certain states may set a precedent, prompting other states to demand the same benefits. This could strain federal resources and create political tensions over fairness and resource allocation.
Way Forward
Redefining Special Designation Criteria: It's crucial to review the standards for special status if it is to be introduced again, including the inclusion of new states in this select category while simultaneously excluding those no longer requiring such assistance.
Harnessing Industrial Potentials Strategically: States should analyse their industrial capacities and develop a policy framework enabling them to leverage their distinctive resources. This strategy seeks to promote self-sufficiency rather than reliance on central government aid.
Strengthening rule of law: Analysts believe states need stronger rule of law rather than more fiscal help from the Centre to improve their economies. While additional funds offer short-term relief, long-term prospects depend on strengthening governance and legal frameworks.
Example: In 2022-23, Bihar's GDP grew at 10.6%, surpassing the national average of 7.2%, and its per capita income grew by 9.4% the previous year, highlighting more fiscal support is not necessary
Holistic Development Strategy: States should be motivated to design complete development plans that prioritise long-lasting growth, job opportunities, building infrastructure, and improving human skills. Special Category Status should be integrated into a larger strategy for overall progress.
Short Takes
Finance Commission: Established under Article 280 of the Indian Constitution, it is appointed by the President to allocate revenue between the Union and State Governments. The current serving commision is the 16th one.
Multidimensional poverty index(MPI): UNDP and OPHI jointly release the MPI, which measures interconnected deprivations in health, education, and living standards, directly impacting well-being.
Gadgil Formula: Named after Dhananjay Ramchandra Gadgil, former vice-chairman of Planning Commission. It was developed in 1969 to determine the allocation of central assistance for state plans in India as part of the five year plans..
Polity
Federalism
Polity
Central-State Relations