The issue of a demand for special category status has once again gained significance with the formation of the new NDA administration at the Center, which is dependent upon two regional parties, Andhra Pradesh and Bihar.
Special Category Status (SCS)
A Special Category Status (SCS) is a designation bestowed by the Center to facilitate the advancement of governments with geographic and socioeconomic challenges.
The evolution of the SCS idea:
In order to help a few underdeveloped states, it was presented in 1969 based on the recommendations of the Fifth Finance Commission, which Mahavir Tyagi presided.
This was given to Assam, Jammu & Kashmir, and Nagaland at the time.
When the National Development Council (NDC) approved the Gadgil formula for financial allocation in April 1969, the concept of SCS was first formally established.
More states were granted the SCS upon becoming states based on this formula.
These include the following: Himachal Pradesh in 1970–71; Manipur, Meghalaya, and Tripura in 1971–72; Sikkim in 1975–76; Arunachal Pradesh and Mizoram in 1986–87; Uttarakhand in 2001–02.
According to the Gadgil formula, states must meet the following criteria in order to be granted the status:
They must be in a difficult, hilly terrain.
They must comprise a substantial portion of the tribal population and/or have low population density.
They have to be placed strategically along boundaries with other nations.
They have to be backward in terms of infrastructure and economy.
The state finances must be in a non-viable state.
Current status:
With the exception of the Northeastern and three hill states, the 14th Finance Commission eliminated the "special category status" for states.
Arunachal Pradesh, Mizoram, Uttarakhand, Telangana, Meghalaya, Sikkim, Tripura, Assam, Nagaland, Himachal Pradesh, and Manipur are all included in this.
Enhanced Central Funding: Ninety percent of the centrally sponsored program is funded by the central government in Special Category States, as opposed to seventy percent in non-SCS states. Unused funds from one fiscal year are carried over and do not expire (non lapsable fund).
Greater grants-in-aid: The Center provides the state governments of the states that fall under the special category with larger grants-in-aid. For instance, Andhra Pradesh (AP), which is advocating for Special Category States (SCS), earns only Rs 3,428 crore annually, while Special Category States receive Rs 5,573 crore.
Tax exemptions and incentives: The SCS states are eligible for a number of unique industrial incentives, including lower state and central taxes, waivers of custom duties, reduced excise duties, income tax exemptions, corporation tax exemptions for a set amount of time, and concessions and exemptions pertaining to GST.
Additionally, SCSs receive Special Plan Assistance for projects that held particular significance for the state.
The provision of special incentives under SCS is crucial for transforming primarily agrarian states by fostering rapid industrialization, which, in turn, creates improved employment opportunities for the youth and catalyzes overall state development.
SCS stimulates substantial investments in infrastructure, including specialty hospitals, luxury hotels, manufacturing sectors, high-value service industries like IT, and top-tier educational and research institutions.
These investments are instrumental in driving economic growth, enhancing the quality of life, and ensuring sustainable development in these states.
For the reasons listed below, the 14th Finance Commission had opposed maintaining special state status:
Increased Burden on Central Finances: Additional funds, tax concessions, and benefits for SCS states significantly strain the central government’s budget, raising concerns about fiscal sustainability.
Inequitable Distribution of Resources: Allocating SCS to some states while excluding others can result in an unfair distribution of resources.
Increase in Dependency and Reduction of Accountability: SCS states may become overly reliant on central assistance, reducing their motivation to mobilize their own resources and hindering the development of a self-sustaining economy.
Permanent Continuation of Temporary SCS Status: Some states continue to enjoy SCS benefits for decades beyond the intended temporary period, lacking regular impact assessments and re-evaluation.
Lack of Constitutional Basis: SCS is not grounded in a clear constitutional or legal framework, being granted by the administrative decision of the National Development Council or the central government, making it susceptible to changes.
Way forward:
Reassessment Criteria for SCS: Revisit and expand SCS criteria to include factors such as the revenue deficit for a more comprehensive evaluation.
Alternative Funding Models: Explore new funding models based on a multi-dimensional index, as suggested by the Raghuram Rajan Committee, to ensure equitable resource allocation.
Increased Devolution by Finance Commission: Enhance devolution by the finance commission to support poverty alleviation, disaster management, agriculture, and policies that attract industries and create jobs.