Recently, the Telugu Desam Party Chief has demanded a Special Category status for Andhra Pradesh.

Background

JDU and TDP, the key  constituent units of the NDA government have put forth a demand of  special  Category status.

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About Special Category Status (SCS)

• Special Category Status (SCS) is a designation conferred by  the central government to aid states with geographical and socio-economic challenges.
• Introduction: It was introduced ​​In 1969, based on the recommendations of the Fifth Finance Commission of India.
• Criteria for granting SCS: 
  • Difficult and hilly terrain
  • Low population density and/ or a sizable tribal population
  • Strategic location along borders
  • Economic and infrastructural backwardness
  • Non-viable nature of state finances 

Benefits of Special Category Status

• Financial Grants: Under the Gadgil-Mukherjee formula allocated approximately 30% of total central assistance to Special Category Status (SCS) States. 
  • However, with the abolition of the Planning Commission and changes in funding mechanisms, assistance is now part of the increased devolution of divisible pool funds for all states (increased to 41% in the 15th Finance Commission from 32%). 
• Centre- State Funding for schemes: In SCS States, the funding ratio for centrally sponsored  schemes is favorable at 90:10  (Centre-State), compared to the 60:40 or 80:20 splits for general category states. 
  • Schemes such as 
• Incentives for Investments: Several incentives to attract investments, including concessions in customs and excise duties, income tax, and corporate tax rates. 
• Debt Management Privileges: These states can avail the benefit of debt-swapping and debt relief schemes by increasing the time period or giving exemption in interest rates.
• Carry forward provisions for Unspent Funds: Special category states enjoyed the provision where unspent funds in a fiscal year would not expire but instead be carried forward to the subsequent fiscal year.
  • For Example: If the center allocates 1000 crore for a special category state for a particular financial year, the unused funds can be carried forward to the next financial year. In contrast, for a general category state, the unused funds lapse.
• Initial States with SCS (1969):  Jammu, Kashmir, Assam, and Nagaland in 1969. 
• Current states with SCS:  Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, and Uttarakhand were granted this status
  • Telangana, the newest state of India accorded status.

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Concerns Regarding Special Category Status

• Disagreement over Criteria: States disagree on the criteria for awarding Special Category Status (SCS). 
  • For Example: Uttarakhand, a Himalayan state bordering China, was granted SCS, while Jharkhand and Chhattisgarh were not awarded the same status despite lagging behind Uttarakhand in various growth indicators.
• Inter-State Disparities: Providing special status to specific states could raise concerns about unequal economic and social structures, potentially exacerbating inter-state disparities.
• Promotes Fiscal Irresponsibility: Debt-swapping and debt-relief initiatives indirectly incentivize states to exceed their capacity for servicing debt, resulting in prolonged liabilities. 
  • For instance, in Jammu and Kashmir, outstanding guarantees represent 20% of the Gross State Domestic Product (GSDP), while in Himachal Pradesh, it stands at 10%.
• Demand Chain Reaction: Giving special status to one state often prompts others to seek the same, leading to a series of requests and reducing the intended benefits.
  • For Instance: In November 2023 the Bihar Government (Cabinet) passed a resolution seeking the grant of special category status (SCS) to Bihar. 

Abolition: The 14th Finance Commission abolished most states ‘special category status’, retaining it only for the Northeastern states and three hill states.

Reasons for Abolishing Special Category Status Since 2014

• Enhanced Devolution: The 14th Finance Commission raised the vertical devolution to states to 42%, up from 32% in the 13th Finance Commission.
• Revised Formula: The 14th Finance Commission introduced factors such as “Forest and ecology” into the formula for horizontal devolution, so states with hilly and challenging terrain might see an uptick in devolution from the central government.
• Additional Grants: Apart from tax devolution, the Finance Commission recommends grants for local bodies, disaster management, revenue deficit, and other specified areas outlined in the government’s Terms of Reference.
• Special Assistance: The central government extends support to states through mechanisms such as GST compensation to offset any tax revenue losses incurred due to the adoption of the GST system and interest-free loans for capital expenditure, lasting up to 50 years.

Why is Andhra Pradesh Demanding Special Category Status?

• Bifurcation of the State: Since its division in 2014, Andhra Pradesh has sought Special Category Status, citing revenue loss resulting from the transfer of Hyderabad to Telangana.
• Higher Grant-in-Aid: SCS would mean higher grants-in-aid to the state government from the Centre. 
  • To illustrate, per capita grants to Special Category States is Rs 5,573 crore per year, whereas AP receives only Rs 3,428 crore. 
• Increase Employment: The governments of AP have argued that such special incentives are vital for the rapid industrialisation of the primarily agrarian state and would improve employment opportunities for the youth and the overall development of the state.
• Encouraging Investments: Granting SCS would encourage investments in speciality hospitals, five-star hotels, manufacturing industries, high-value service industries such as IT, and premier institutions of higher education and research.

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Way Forward

• Consensus on Criteria: A critical need for a general  consensus among states regarding the principles guiding the grant of Special Category Status (SCS).
• Economic Policy integration:  While SCS benefits act as a stimulus, the real impact rests on individual  state economic policies. 
• State Capacity Empowerment: States should recognize their industrial strengths, fostering a  policy environment for self-reliance rather than excessive reliance on central support. 
• Alternative Approach: Explore alternative approaches like the one suggested by the Raghuram Rajan Committee, emphasizing a ‘multi-dimensional index’ for fund allocation. 
  • In 2013, the Raghuram Rajan Committee set up by the Centre, placed Bihar in the “least developed category” and suggested a new methodology based on a ‘multi -dimensional index’ for devolving funds instead of a SCS, which can be revisited to address the State’s socio-economic backwardness.