The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. The National Development Council accorded the special category status to states if they met certain conditions like:

• Hilly and difficult terrain
• Low population density or sizable tribal population
• Strategic location along borders with neighbouring countries
• Economic and infrastructural backwardness
• Non-viable nature of state finances

Award of special category status provides for the following benefits (under the Revised Gadgil-Mukherjee formula:)

• 30% of NCA (Normal Central Assistance) to states go to the 11 special category states (SCS), while the remaining states get 70% of the allocation
• Nature of transfers of NCA is in the form of 90% grant and 10% loan for special category states, while for other states it is 30% grant and 70% loan
• SCA (Special Central Assistance) for projects is in the form of 90% grants and 10% loan – the untied special central assistance is up to 100% grant given only to special category states
• Assistance for externally aided projects with grant-loan ratio 90:10
• The matching contribution in respect of centrally sponsored schemes is usually lower for Special Category states, for e.g. in AIBP (Accelerated Irrigation Benefits Programme) central share is 90% for special category while it is 25% for other states.
• Beyond additional plan resources, special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.

However, these benefits have been progressively diluted in the following ways:

• The loan component of the normal central assistance has been removed since 2005-06 and NCA is given entirely as grant to all states. This has reduced the share of NCA for SCS to around 56% (earlier 70%).
• Further, NCA has reduced to account for merely 15% of central plan assistance, as there was a proliferation of centrally sponsored schemes, thereby diluting the benefit of untied grants to states
• With the increase in tax devolution share from 32% to 42% of divisible pool of central taxes, the centre has dispensed with NCA, SCA and special plan assistance from 2015-16 onwards.

There are very few externally aided projects for special category states and the centre has drastically reduced allocations under AIBP in the budget 2015-16. Further the benefits of lower matching contributions to SCS are unlikely to be substantial, as central assistance to state plans has reduced by over 40% in 2015-16.

In 2013, a committee under Dr. Raghuram Rajan was constituted to recommend on the demand of special status to Bihar. Recommendations of the committee were:

1. The SCS and SCS seeking states to be provided more fund and special attention.
2. The demand is political oriented rather than development oriented
3. The demand is not politically feasible as more states will start demanding.
4. The demand is not economically feasible as center has reduced the externally aided programs.
5. So it will better for states to come with demand of special package for special problem.

In the light of increasing demands by states such as Bihar, Odisha and Andhra Pradesh for ‘special category’ status, the 14th finance commission has recommended its discontinuation in its report on sharing of finances between centre and states. Therefore, the centre has dispensed with the NCA, SCA and special plan assistance from 2015-16 onwards.

Over the years, the effectiveness of Special category status is found not so progressive as majority of the states designated under the special category states have not improved their performance significantly despite the funding support from the centre.

“Even though the number of special category states increased from only three in 1969 to 11 in 2001, its kitty of 30% of the central plan funds, after setting aside funds for externally aided projects and special area programmes in certain states, remained unchanged – there was no proportionate increase in resources set out for this category as new states were added on. As a result, the share of individual states within the category had to decline..” (The reality of special category states– Mr. Govind Bhattacharjee, Director General at the Office of the Comptroller and Auditor General of Bharat in New Delhi. Published in Economic & political Weekly, October 4, 2014. )

A review of the performance of the 11 states that have been accorded special category on select parameters like GSDP, infant mortality rate, poverty, unemployment and literacy indicates the following rankings:

GSDP Rankings, 2014-15

(Source:  “Report on Fifth Annual Employment-Unemployment Survey (2015-16)” (PDF). Ministry of Labour and Employment. p. 120.).

Ranking by literacy rates (2011 Census)

(Source:  “Ranking of states and union territories by literacy rate: 2011” (PDF). Government of India.)

The special category status does not contain any specific targets/mile stones to be achieved through the funding assistance provided under the special category, nor any time lines for the same. Therefore, understandably central govt’s funding assistance to the states has gradually shifted from the earlier outlay approach to outcome linked approach which favours awarding special packages meant for specific programmes/projects rather than continuing the extant mechanism of special category status. The 14th Finance Commission has only formalized this mechanism by putting the last nail in the coffin.

AP is currently left with no choice other than the special package. The proposed special development package mentioned in the AP Reorganization Act, if felt as not adequate (and rightly so), then the state can take up the matter with centre and request to enhance the same, considering the circumstances under which the state bifurcation has taken place.

It is prudent for the Andhra Pradesh State Government to negotiate with the Centre to implement the commitments made under the AP State Reorganisation Act in letter and spirit and get additional funds over and above the commitment made under the Reorganisation Act in order to address the issues in backward regions like Rayalaseema and North Andhra.

In September 2016, the Central Government announced tax rebates for seven districts of Andhra Pradesh (notified as backward areas) — Anantapur, Chittoor, Cuddapah, Kurnool, Srikakulam, Vishakhapatnam and Vizianagaram, under the Andhra Pradesh Re-organisation Act, 2014. This tax rebate covers 15 per cent of higher additional depreciation and 15 per cent of investment allowance on the cost of plant and machinery acquired by any manufacturing undertaking setup during the period 1st April 2015 to 31st March 2020 in these seven districts. There is a need to extend this period to 10 years in view of the fact that the newly formed Andhra Pradesh state does not have any existing industrial corridor or a state capital.

AP is now ranking in number 1 slot (jointly with Telangana) in terms of ease of doing business among the 29 states in Bharat as per the recent World Bank study. In the present liberalised world, no country feels that it cannot develop since it is lacking financial resources for development. Finance is one of the important resources and not the only resource. AP has abundant natural resources (which ironically has gone against the state in getting special category status) and it only needs capital to augment these natural resources to develop the state.

Therefore AP needs to continue its efforts on providing investor friendly climate by framing a long term policy, ensuring good governance on one side to attract investors from Bharat and abroad, and on the other side keep negotiating with the Centre to obtain a commitment on the release of the quantum of funds for the specified purposes/projects in a time bound manner for a period of at least 10 years. No doubt this is a tight rope walk but the state has a Chief Minister who is a master in this craft.

– B.N.V.Parthasarathi

(Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected])

(Featured Image Credit: india.com)

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