What is Special Category Status? – HPAS Mains

By | June 27, 2024

What is Special Category Status?

SCS is a classification given by the Centre to assist development of states that face geographical and socio-economic disadvantages. Constitution does not make any provision to special category status however according to Article 275 of the Indian Constitution, the central government may provide any state with additional financial aid outside of the recommendations of the Finance Commission. Therefore classification was done on the recommendations of the Fifth Finance Commission in 1969.

Status was first accorded to Jammu and Kashmir, Assam and Nagaland in 1969.SCS for plan assistance was granted in the past by the National Development Council of the erstwhile Planning Commission.

Eleven States including Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand and Telangana have been accorded the special category state status.Telangana, the newest State of India, was accorded the status as it was carved out of another state Andhra Pradesh.

The 14th Finance Commission has done away with the ‘special category status‘ for states, except for the Northeastern and three hill states. It suggested to fill the resource gap of such states through tax devolution by increasing it to 42% from 32%.

Parameters  for special category status (Based on Gadgil Formula):

• Hilly Terrain;
• Low Population Density and/or Sizeable Share of Tribal Population;
• Strategic Location along Borders with Neighbouring Countries;
• Economic and Infrastructure Backwardness; and
• Nonviable Nature of State finances.

Benefits of Special Category Status

• 90% of all state expenditures for all centrally sponsored programs and outside assistance are covered by the central government, and the remaining 10% is given to the state as a zero-interest loan.
• For states in the general category, the typical loan-to-grant ratio is 70% loan and 30% grant.
• Receiving special consideration when applying for government funding.
• Reductions in excise taxes to draw enterprises to the state.
• States in the special category are given 30% of the total federal budget.
• These states have access to programs for debt reduction and debt exchange.
• To entice investment, states with Special Category Status are excluded from excise taxes, customs taxes, corporate taxes, income taxes, and other taxes.
• Unique Category when it comes to receiving central funds, states are given preference, attracting development projects there.
• Unique Category States have the option to carry over any unused funds from one fiscal year to the following without having them expire.

What are the Concerns regarding Special Category Status?

• It causes an increased burden on Central Finances.

• Also, giving special status to a state leads to demands from other states too. For instance, demands from Andhra Pradesh, Odisha and Bihar.

Why in News?

Recently, Bihar reiterated the State’s long-standing demand to be granted special category status by the Centre, a move that would increase the amount of tax revenues that the State gets from the Centre.

Why is Bihar Demanding Special Category Status (SCS)?

• Historical and Structural Challenges: Bihar faces significant economic challenges, including a lack of industrial development and limited investment opportunities.

• The bifurcation of the state resulted in the shifting of industries to Jharkhand, exacerbating the employment and economic growth issues in Bihar.

• Natural Calamities: The state grapples with natural calamities like floods in the northern region and severe droughts in the southern part.

• These recurring disasters disrupt agricultural activities, especially in terms of irrigation facilities and the water supply remains inadequate affecting livelihoods and economic stability. 

• Lack of Infrastructure: Bihar’s inadequate infrastructure hampers its overall development, characterised by poor road networks, limited healthcare access, and challenges in educational facilities. 

• In 2013, the Raghuram Rajan Committee set up by the Centre, placed Bihar in the “least developed category”.

• A recent survey by NITI Aayog reveals that Bihar is the state with the highest number of poor with 26.59% multidimensionally poor in 2022-23 which is much higher than the national average of 11.28%.

• Per-capita GDP of Bihar is Rs. 60,000 compared to Rs. 1,69,496 as the National average for 2022-23. 

• Funding for Development: Seeking SCS is also a means to secure substantial financial assistance from the central government to address long-standing socio-economic challenges.

• The Bihar government last year estimated that the granting of the special category status will help the State receive an additional 2.5 lakh crore rupees over five years to spend on the welfare of 94 lakh crore poor families.

What are the Arguments Against Bihar Getting the SCS?

• However, some critics argue that increased funds might incentivise poor policies and penalise well-performing states, as the funds will be diverted to poorer states.

• Historically poor rule of law in Bihar has been a major barrier to growth and investment.

• The Centre already devolves 42% of taxes from earlier 32% to states as per the 14th Finance Commission. Any additional strain on the Centre’s funds will potentially impact other national schemes and welfare measures.

• Bihar is one of the fastest-growing states in India. In 2022-23, Bihar’s GDP grew by 10.6%, higher than the national average of 7.2%.

• Per capita income in real terms grew by 9.4% in the previous year.

• Although Bihar meets most of the criteria for the grant of SCS, it does not fulfil the requirement of hilly terrain and geographically difficult areas, which is considered to be the primary reason for difficulty in infrastructural development.

• The Central government citing the 14thFC report, which made a recommendation to the Centre that no State be accorded the SCS, has repeatedly denied the demands.

Similarly, Andhra Pradesh has also renewed its demand for special cateogry status. Andhra Pradesh has been facing a significant revenue deficit since the bifurcation of the state. The debts of the State have shot up enormously. Most of its projects and development have come to a standstill and on top of that the building for a new greenfield capital at Amaravati is pending and needs funding.

Read also: Tax base, Pros and Cons of Special Category status of Himachal Pradesh – HPAS Mains

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