Why the special category states have gone : A new policy initiative
- Part 2 -

Dr L Krishnamangol Singh *

And, as already noted, the FFC has substantially increased the share of the States in the Central divisible pool from the current 32 per cent to 42 per cent which is the biggest ever increase in vertical tax devolution. In fact, as per the recommendation of the FFC, the Centre seeks to maintain and improve the fiscal space or fiscal consolidation in the interest of the nation as a whole while preserving or providing more fiscal autonomy to the States.

Another essential feature of the FFC is that, although there has been reduction in the Central Assistance to the states (CAS) there has been significant increase in the quantum and distribution of grant-in-aid (non-plan grants to states) to augment the State government finances. Thus, with flexibility in funding for the States, the Centre now seeks to strengthen the State Plans and maintain a sustainable fiscal situation of the States.

As the Economic Survey 2014-15 (Vol.I) has clearly pointed out, "the FFC has made far-reaching changes in the devolution that will move the country towards greater fiscal federation, conferring more fiscal autonomy on the States". Thus, the States will now have greater autonomy on fiscal federalism or fiscal resources on the revenue and expenditure front. And, they will also get more resource transfers through tax devolution due to the increase in the share of the states in the Central divisible pool.

However, the Special Category States have the apprehension that the reductions on the Central transfers of resources in various forms such as Central Assistance to States (CAS), Centrally Sponsored Schemes (CSS), Special Central Assistance (SCA) for the Hill Areas Development Programmes will affect their financial resources. The later is for the Hill Areas Development in addition to the normal flow of funds to the hill areas from the State Plans.

There is, therefore, the need to examine the mechanism of the benefits that can be provided to the earlier Special Category States after the withdrawal of the Special Category status. In fact, the concept of "Special Category State" has been dropped and it is not used now in financing for the backward states as per the recommendation of the FFC.

However, it can be pointed out that the concept of the "Special Category State" was first used in 1969 (although it was adopted by the NDC in September, 1968) when the Fifth Finance Commission sought to provide certain disadvantaged or backward states in the form of central assistance and other benefits. It is found that initially three states, viz., (1) Assam, Nagaland and (2) Jammu and Kashmir were granted special category status, but eight more states i.e. (i) Arunachal Pradesh, (ii) Himachal Pradesh, (iii) Manipur, (iv) Meghalaya, (v) Mizoram, (vi) Sikkim, (vii) Tripura and (viii) Uttarakhand were also included in the list of special category states. And, all the remaining states have been treated as General Category States (i.e. Non-Special Category States).

The rationale for "special status" for Central transfers of federal finance has been that these states could not develop as per other relatively developed or more developed states if they were not given certain preferential treatment in terms of Central Assistance. And, some of the basic features or criteria that required for a Special Category State (SCS) or a "special status" are (i) hilly and difficult terrain, (ii) low population density or sizeable tribal population, (iii) strategic location along borders with neighbouring countries (iv) economic and infrastructural backwardness, and (v) non-viable nature of state finances.

In the context of Manipur, it can be pointed out that the State (Manipur) is a hilly state. In fact, most of the States in the North Eastern Region are hill states. But, it has been observed that the objectives of hill development or economic development in the hill areas of the Northeastern region including Manipur could not be fulfilled due to a number of complicated factors, which are generally known.

The normal central assistance and the normal flow of funds to the hill areas from the State Plan, special central assistance for hill areas development, etc. are not sufficient for implementing various programmes of development in the hill areas of the State. Therefore, there is the need for alternative financing model for the States.

And, the other criteria required for a Special Category State are dynamic in nature. Thus, the Centre has now evolved alternative development strategies for the hilly states bordering with the neighbouring countries by developing inter-state infrastructure in terms of transport and communication, inter-state power transmission, strategic facilities for inter-state trade, border trades with the neighbouring countries or neighbouring foreign countries, etc. And this paradigm shift in the financing of hilly states or hill states is also designed to strengthen the State Plans in order to enhance flow of financial resources for hill areas development. (To be contd)

In fact, the Central Government and the FFC are aware that present data-base of the Special Category States including the Northeastern states have revealed that there has been significant or marked improvement in terms of a large number of socio-economic parameters since the introduction of the concept of Special Category State in 1969 (the beginning of the Fourth Plan).

However, the Central Government and the FFC have also clearly seen the various indicators that still characterize the critical areas of economic and infrastructure backwardness of the Special Category States. Thus, after a long experience of the implementation of the various strategies or models of development for both Special Category States and General Category States, the Fourteenth Finance Commission has abolished the (status of) Special Category States in order to evolve a new financing system for the states in the country.

Now the crucial question is: Why the Central Government has withdrawn the special category status while the levels of economic development of these special category states are still lagging behind as compared to other relatively developed states?

In fact, this question requires critical examination in the process of the distribution of the quantum of grant-in-aid (i.e. non-plan grants) to the earlier Special Category States. It is in this context that a rational ideas or merits for the withdrawal of the Special Category Status may be set out in the following ways.

Merits for Withdrawal of Special Category States

In the first place, it can be pointed out that the allocation of Central Assistance for State Plans other than Special Category States was based on the Gadgil Formula (1969). As stated by the earlier Planning Commission, since the criteria in respect of on-going programmes were weighted in favour rich states, Gadgil Formula was modified in the beginning of Sixth Plan, and the weightage for on-going schemes was added with per capita income, making its weight (at) 20 per cent.

Thus, in the original Gadgil Formula, the weightage (in percentage) of per capita income below the national average (deviation) was 10 per cent, which increased to 20 per cent in the Sixth Plan. And, the allocations of Central Assistance for State Plans of Non-Special Category States were made during the Sixth Plan as per the modified Gadgil Formula.

However, the earlier Planning Commission adopted that the distribution of Central Assistance for the Special Category States' Plan was, as in the modified Gadgil Formula, on the basis of 30 per cent taken out of total allocable resources among States aside from the pre-assigned amount including NEC, additional Central Assistance for externally aided projects, etc. Thus, only 30 per cent of the total Central assistance was fixed for distribution to the Special Category States.

Here, it can be pointed out that the Gadgil Formula, which was later revised as Gadgil-Mukherjee formula with 20 per cent weightage for States whose per capita income were lower than the national average was applied only to the non-special category states or general category states. It is thus found that while the Gadgil-Mukherjee formula applied only to non-special category states or the general category states, only 30 per cent of the total NCA (National Central Assistance) or the total Central Plan Assistance was earmarked separately for the Special Category States (SCSs) right from the days when the Gadgil Formula was adopted at the beginning of the Fourth Plan.

And, the 30 per cent of the total NCA has not been changed over the years. Thus, the earlier Special Category States have many advantages to switch over to the new pattern of financing the states for various programmes of socio-economic development as the new policy shift in financing the states is more flexible. As the size of the total Normal Central Assistance or Total Plan Assistance was fixed at 30 per cent for Special Category States, the SCSs will get limited share in the allocation of the funds.

As many backward states are also waiting to get or to return to the status of Special Category States, the share of the funds (i.e. the NCA or the total Central assistance) for the Special Category States will become thinner. In fact, if the size of the cake is small, the share of the states will also be small. It is, therefore, necessary that effective policy measures need to be urgently taken up for launching various programmes of development in Manipur.

Concluded..