Special Category Status

SYLLABUS:

GS 2  > Polity  >   Centre-State Finance

REFERENCE NEWS:

• The impressive performances of Chandrababu Naidu's TDP and Nitish Kumar's JD(U) in the 2024 Lok Sabha elections, upon which the new NDA government depends, have renewed interest in their demands for special category status (SCS) for Andhra Pradesh and Bihar, sparking discussions on its potential impacts and benefits.

SPECIAL CATEGORY STATUS (SCS)

• Special Category Status (SCS) is a classification granted by the Central Government of India to assist in the development of states facing geographical and socio-economic disadvantages.
•  Although not provided for in the Constitution, this classification was initiated following the recommendations of the Fifth Finance Commission in 1969.

CRITERIA FOR SPECIAL CATEGORY STATUS

The parameters for determining Special Category Status, based on the Gadgil Formula, include:

• Hilly Terrain: States with challenging and mountainous landscapes.
• Low Population Density: States with sparse populations and/or a significant tribal population.
• Strategic Location: States located along international borders.
• Economic and Infrastructure Backwardness: States with underdeveloped economies and poor infrastructure.
• Non-viable State Finances: States with financially unsustainable government finances.

STATES WITH SPECIAL CATEGORY STATUS:

•  Jammu & Kashmir, Assam, and Nagaland were the first states to receive this status based on the Gadgil Formula. Over time, the special category status was extended to include several other states.
• As of now, eleven states in India have been granted Special Category Status: Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, and Uttarakhand.
• 14th Finance Commission's Stance: 
  • The 14th Finance Commission recommended against granting Special Category Status to any state, leading the Union Finance Minister to reject such demands from states like Bihar and Andhra Pradesh. The Commission suggested addressing resource gaps by increasing tax devolution from 32% to 42%.

BENEFITS OF SPECIAL CATEGORY STATUS:

• Increased Central Assistance: 
  • One of the primary benefits of SCS is the higher percentage of central funding for centrally-sponsored schemes. While non-SCS states receive central assistance covering 60% to 75% of the costs, SCS states enjoy a significant boost with the Centre paying 90% of the funds required. This reduction in the financial burden on state governments allows them to allocate resources more effectively to other areas of need.
• Enhanced Grant-in-Aid: 
  • SCS states receive higher per capita grants from the central government. For instance, Special Category States receive Rs 5,573 crore per year compared to Rs 3,428 crore received by states like AP without the status. This significant difference in funding supports broader and more intensive developmental initiatives within SCS states.
• Fiscal Flexibility:
  •  In SCS states, unspent money from the central funds in a financial year is not required to lapse but can be carried forward to the next financial year. This provides states with greater flexibility in managing their budgets and ensures that funds meant for development are fully utilized without the usual bureaucratic pressures of fiscal year deadlines.
• Tax Concessions and Incentives: 
  • SCS states receive substantial tax benefits which include exemptions and concessions on excise and customs duties, income tax, and corporate tax. These fiscal incentives are designed to attract investment and stimulate industrial growth. Furthermore, SCS states enjoy specific concessions relating to GST and reductions in both state and central taxes, which further enhance their attractiveness to investors.
• Socio-Economic Development: 
  • The benefits of SCS are intended to address the infrastructural deficits and socio-economic challenges faced by these states. By reducing the financial strain on these states and encouraging industrial and educational investments, SCS aims to improve employment opportunities for the youth and promote comprehensive state development.

WHY IS ANDHRA PRADESH DEMANDING SPECIAL CATEGORY STATUS?

• Revenue Loss: The bifurcation of Andhra Pradesh in 2014 resulted in the loss of Hyderabad, which was the primary economic hub of the undivided state. This led to significant revenue loss for Andhra Pradesh, as Hyderabad contributed substantially to the state's income from IT and other industries??.
• Debt Increase: The state's debt increased dramatically from ?97,000 crore at the time of bifurcation to over ?3.5 lakh crore by 2019, reflecting the severe financial strain on the state.
• Revenue Deficit: The 14th Finance Commission estimated a post-devolution revenue deficit for Andhra Pradesh of ?22,113 crore for 2015-2020, but the actual deficit was ?66,362 crore. SCS would help bridge this gap through higher central assistance?.
• Industrial and Investment Incentives: The SCS facilitates unique industrial incentives which are crucial for stimulating economic growth. These include income tax exemptions, custom duty waivers, reduced excise duties, and corporate tax exemptions for certain periods. Such incentives are particularly appealing in attracting industries to the state, which is essential for states like Andhra Pradesh (AP) which are primarily agrarian and seeking rapid industrialisation.
• Assurances from 2014: The Andhra Pradesh Reorganisation Act, 2014, included an assurance for SCS to compensate for the economic losses due to bifurcation. This promise has been reiterated by various political leaders, including former and current Chief Ministers? ?.
• Political Pressure and Protests: The demand for SCS has been a significant political issue in Andhra Pradesh, with multiple protests and political campaigns centered around this demand. 

WHY IS BIHAR DEMANDING SPECIAL CATEGORY STATUS?

• Low Per Capita Income: Bihar’s per capita net state domestic product for 2022-23 was ?31,280, one of the lowest in the country. This reflects the state's economic backwardness and need for additional support? ?.
• High Poverty Levels: According to the National Family Health Survey 5, Bihar is the poorest state in India, with 33.76% of its population being multidimensionally poor. SCS would help address these socio-economic challenges?.
• Infrastructure Development: Chief Minister Nitish Kumar has highlighted the need for approximately ?2.50 lakh crore to implement various developmental schemes. SCS would facilitate higher central funding for infrastructure projects and public welfare schemes??.
• Balanced Regional Development: SCS would enable Bihar to attract more investments and boost industrial growth, which is crucial for balanced regional development and reducing economic disparities within the state??.
• Long-standing Demand: Bihar's demand for SCS is not new. It has been raised multiple times, with various committees, including the Raghuram Rajan Committee in 2013, identifying Bihar as a state requiring special assistance.

CONCERNS ASSOCIATED WITH SPECIAL CATEGORY STATUS

• Fiscal Implications for the Centre: Providing additional financial resources to special category states places a significant burden on the central government's finances. This can be challenging, especially in times of economic downturns.
• Equity and Fairness: The designation of some states as special category states can lead to perceptions of inequity among other states, especially those that are close to meeting the criteria for SCS but do not receive it. This can lead to regional disparities and feelings of neglect or unfair treatment.
• Dependency Culture: Dependence on central government for financial assistance might discourage states from becoming self-sufficient. Over-reliance on central subsidies might impede the drive towards generating their own revenue through internal resources.
• Political Tool: The allocation of SCS can sometimes be seen as a political tool, influenced by the central government's political alliances with state governments. This can undermine the objective criteria for granting SCS and lead to politicization of economic support.

WAY FORWARD:

• Objective Criteria for Granting SCS: There should be clear, transparent, and non-political criteria for the designation of SCS to avoid it being used as a political tool.
• Performance-based Incentives: States with SCS should be encouraged to improve their own revenue generation through performance-based incentives that reward fiscal efficiency and economic diversification.
• Strengthening Local Governance: Enhance the capacity of local governing bodies to plan, implement, and monitor development projects effectively, reducing dependency on state-level interventions.
• Regular Review and Assessment: Regular review of the status and benefits associated with SCS can ensure that the support remains relevant and effective in addressing the needs of the states.
• Recommendations of the 14th Finance Commission: The 14th Finance Commission made significant changes regarding the provision of funds to states, including those with special category status. Key recommendations relevant to SCS include:
  • Discontinuation of Normal Central Assistance: The 14th Finance Commission recommended discontinuing the Normal Central Assistance (NCA) and additional central assistance for SCS, and instead increasing the untied share of central taxes to give states more flexibility in spending based on their priorities.
  • Increase in Devolution to States: The commission recommended increasing the share of states in central taxes from 32% to 42%, the highest ever increase since the establishment of the Finance Commission. This was aimed at giving states more fiscal autonomy and reducing their dependence on the centre for financial support.
  • Sector-Specific Grants: While the general purpose grants were increased, the 14th Finance Commission also suggested sector-specific grants for states to address particular challenges, such as health, education, and infrastructure, which are critical for the upliftment of backward regions.

PRACTICE QUESTION:

Q. What is the Special Category Status (SCS)? Discuss the socio-economic benefits that Special Category Status aims to provide to states and the potential challenges it poses for the Union government. (15 marks, 250 words)