Since the 14th Finance Commission recommended that no new state should be accorded the SCS, the central government has repeatedly denied their demands.

 

With a coalition government at the Centre, the call for special category status (SCS) for Andhra Pradesh and Bihar has only got louder. Lekha Chakraborty looks at the determinants of SCS and whether there is any alternative to this categorisation.

 

l What is special category status?

 

The SPECIAL CATEGORY status (SCS) is a classification given to states that receive special financial assistance and other benefits from the central government due to their unique developmental needs and challenges. SCS is determined based on the following factors: Whether the state has hilly terrain; Low population density or sizeable share of tribal population; strategic location along borders with neighbouring countries; the state is backward in economic and infrastructure; and, non-viable nature of state finances. These determinants are based on the Gadgil formula of fiscal transfers.

 

l What is the fiscal policy for states with this tag?

 

FOR STATES ACCORDED the ‘Special Category Status’, under the 90:10 formula devised for devolution of funds for Centrally Sponsored Schemes for such states, the Central government provides 90% of the funds and only 10% has to be provided by the State. Also, the unutilised or unspent money of CSS to these SCS states can be carried forward to the next year. These states also enjoy concessions in taxes and duties.

In contrast, for other states, the ratio of fund contribution is 60:40, with the individual states required to contribute 40% of the funds.

 

l Why is it in the news now?

 

THE BHARATIYA JANATA Party (BJP) has formed the government at the Centre with the support of N Chandrababu Naidu’s Telugu Desam Party and Nitish Kumar’s Janata Dal (United), which have emerged as the largest parties in Andhra Pradesh and Bihar, respectively, in the recently concluded Lok Sabha polls. Both the parties have been in the forefront of the demand for special status for their respective states for a long time now. As key allies in the coalition government, they are in a stronger position now to push for special category status for Andhra Pradesh and Bihar.

 

l Can Bihar & Andhra get the SCS tag?

 

THE BIHAR STATE Assembly has passed a resolution seeking the grant of SCS, based on the ‘Bihar Caste-based Survey, 2022’, findings which revealed that nearly one-third of Bihar’s population lives in poverty. Andhra Pradesh, since its bifurcation in 2014, has asked for SCS on the basis of shrunken fiscal space and revenue loss due to its capital city Hyderabad going to Telangana. Odisha has also demanded the SCS tag, on the basis of its climate change related vulnerabilities. Yet another significant determinant is its large tribal population (nearly 22%). Since the 14th Finance Commission recommended that no new state should be accorded the SCS, the central government has repeatedly denied their demands.

 

Currently, 11 states — Jammu and Kashmir (now a Union Territory after revocation of Article 370), Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Arunachal Pradesh, Mizoram, Tripura and Uttarakhand — have the SCS tag.

 

l What is the role of the Finance Commission?

 

THE CONSTITUTION DOES not make a provision for SCS. The 5th Finance Commission recommended the SCS classification in 1969. The special status was first accorded to Jammu and Kashmir, Assam and Nagaland in 1969. Before the dismantling of Planning Commission, SCS for plan assistance was granted by the National Development Council. In the Planning Commission era, SCS states used to receive approximately 30% of central assistance, determined by the Gadgil-Mukherjee formula. After the dismantling of Planning Commission, following the recommendations of the 14th and 15th Finance Commissions, this financial assistance to SCS states has been subsumed in an increased devolution of the divisible tax pool funds for all states. The magnitude of tax transfers has increased from 32% to 42% in 14th Finance Commission and to 41% in 15th Finance Commission.

 

l Is there any alternative to this classification?

 

THE RAGHURAM RAJAN committee, in 2013, had presented an alternative classification of states based on a multi-dimensional index. The 14th Finance Commission had taken the decision to abolish SCS status, offering an exception only to the northeastern region and three hill states. It advised the Centre to increase the state’s share of tax transfers from 32% to 42%, which has been in place since 2015. This would help to close the resource gap in each state. Therefore, the 16th Finance Commis-sion can think about increased tax transfers as an alternative to declaring more states as SCS. However, the bargaining dynamics of the coalition government and the political economy of fiscal federalism will have the final say on this.