Why the special category states have gone : A new policy initiative
- Part 1 -

Dr L Krishnamangol Singh *

There has been considerable discussion on the recent decisions of the Centre for withdrawal or discontinuance of the status of the Special Category States including Manipur that may be mainly attributed to the recommendations of the Fourteenth Finance Commission. And, the policy shifts in the discontinuance of the special category status of these states have already attracted the attention of the governments of the earlier special category states of the North Eastern Region including Manipur.

In fact, it is generally known that there are various sources of financing the development plans of states, which may now be conceptualized as financing the states or financing the development programmes of the states in the wake of the abolition or dismantling of the earlier or erstwhile Planning Commission or with the establishment of the NITI Aayog. This article, therefore, proposes to examine the rationale for the withdrawal or discontinuance of the "special status" given to the earlier special category states and touches on the new paradigm shift in the policy of financing the states in India including Manipur.

It may, however, be useful to note that before the replacement of the Planning Commission with NITI Aayog, the resources (i.e. the Central Plan Assistance) were available to the States from the Centre on the recommendation of the erstwhile or earlier Planning Commission for financing the five-year plans of the States. And this model of transfer of resources, referred to as "Central Plan Assistance" was provided to the states in the form of grants and loans that were distributed according to a definite formula, known as the "Gadgil formula".

Here, it is interesting to note that upto the beginning of the Fourth Plan (i.e., 1969), there existed no definite principle for distribution of Central assistance (i.e. the Central plan assistance) for the purpose of State plans. In fact, it was mainly done as a bridging gap between the "agreed plan outlay" of the States and "their own resources".

And, it was only during the Fourth Plan that Gadgil Formula was evolved and applied and it followed in the successive five year plans in order to avoid disagreements among the states. Again, for distribution of federal funds among the States, states were segregated into four groups. It is found that the earlier "special category states (8 in number)" classified by the Centre comprised a "separate group" for the distribution of central plan assistance . And the remaining states were Non Special Category states or the general category states. And they were categorised into three groups (i.e. Group A, B and C), and arranged in a descending order according to per capita SDP (State Domestic Product) during the given year or the particular year.

The States whose per capita income was high or above the States' average by 10 per cent or more were included in Group A. and, the states whose per capita SDP (State Domestic Product, i.e. SDP÷ Population) were nearly 10 per cent of all States' average belonged to Group B. The other states whose per capita SDP was below the States' average by more than 10 per cent were included in Group C. Thus, the Gadgil Formula sought to maintain or follow a definite principle for distribution of Central (Plan) assistance among the states. And, the National Development Council (NDC) adopted the Gadgil Formula in September, 1968.

It may be noted that, according to the Gadgil Formula, "plan assistance" was allocated on the basis of population (i.e. 60 per cent on the basis of their population) and 10 percent each on the basis of (i) backwardness, (ii) tax efforts, (iii) irrigation and power projects and (iv) special problems. Again, under the revised Gadgil Formula (August, 1980), 20 per cent is allocated for backwardness, 60 per cent for population, 10 per cent for tax efforts and 10 per cent for special problems. And, the allocations against irrigation and power projects have also been added to the criteria of backwardness. In short, these are the various weightages given to the states for the distribution of Central assistance.

Today, with the abolition of the Planning Commission, and establishment of NITI Aayog there has been abolition of the principle of Special Category states as the entire pattern or system of financing the States have been changed (altered). For instance, the reduction in the Central Sponsored Schemes (CSSs) or Centrally Sponsored Schemes in the earlier Special Category States will naturally lead to reduction in the Central assistance. Again, in the context of the economic liberalisation process of development in the country (India), the Centre has now started to withdraw the Central Plans from the State Plan schemes.

And, the Central assistance is also available for financing the centrally sponsored schemes in addition to what is provided for all schemes falling within State Plan. Today, the Centre is aware that the Central assistance is liberal and that the degree of supervision is from the top at the policy level. And, in the earlier financing model of development, there is also the mixture of Central Plans and State Plans within the state in a number of ways or fields. In fact, the Central expenditure on various Central sponsored schemes is included in the Central Plan within the state. Again, the Centre takes supervision and control on the Central expenditure made at the states.

In fact, at the policy level, the large expansion of the Central sponsored schemes and the liberal Central assistance or plan assistance in addition to the State Plan as a whole is likely to affect the decentralised financing model of development of the states or the political power structure of the states. Thus, there has been gradual reduction of the centrally sponsored schemes or the central sponsored schemes in different states with the new changes in the economic policy of the Centre, and also with the establishment of the NITI Aayog in which the States have also important role to participate in the decision making process of development.

Again, in the case of central sponsored schemes where the funding pattern is fixed on the basis of 90:10 (i.e. 90 per cent grants from the Centre and 10 per cent from the State's share/loans, the Centre has a more direct interest in them. But, the various schemes could not be fully implemented due to the lack of a State's matching share (i.e. due to the lack of a State's revenues or the failure to take loans for the purpose). The States, therefore, felt that the Central sponsored schemes need to be transferred to the State Plans or to their own plans. In fact, the Centre has now adopted the policy that seeks to withdraw many of the central plans or central plan schemes from the States and decided to strengthen the State Plans. And, Centre has also increased the general revenue share (i.e. the devolution of shareable taxes) of the States, and provides for large financial transfer under the awards of the 14th Finance Commission from 32 per cent to 42 per cent as a means to supplement the revenues of the States.

However, the Central Plans for specific schemes or projects (e.g. transport, power, etc.) that are implemented or that needs to be implemented in the states cannot be left to the States themselves or cannot be withdrawn as they have national concerns and interests. In fact, there are transport projects or power projects which cannot be left to the states only or States themselves as they have the national and State's benefits of development. And such projects which have not only national implications, but also international implications cannot be operated through the general process of "plan assistance" and State Plans. And, in the federal structure of the country, the States have also many strengths along with certain limitations. Thus, many of the important schemes operated in the states are still within the Central Plan or the Central sector that can be implemented with active cooperation and role of the States.

However, it is essential to note that after the replacement of the earlier Planning Commission with the NITI Aayog there has been a substantial change in the economic policy for financing the states or financing the State Plans in the country. In fact, the weightages for financing the States have also changed from time to time and deviated from the Gadgil formula. And, there has also been reductions in "Central Assistance" to States (CAS) known as "plan transfers" as per the suggestions of the Fourteenth Finance Commission (2015-16 to 2020-21). However, as per the recommendation of the 14th Finance Commission, the Centre seeks to provide fiscal autonomy to the States by increasing the share of states from 32 per cent to 42 per cent of the divisible pool of resources. However, this is also likely to affect the fiscal space or fiscal consolidation path of the Centre. Therefore, the large increase in the share of the States of the "divisible pool" has resulted in unexpected reductions or commensurate reductions in the Central Assistance to States (CAS) or "plan transfers".

In fact, it would be very difficult for the States to change this new financing model of the Centre as there is the need to ensure that the Centre's fiscal space is secured in order to save the Indian economy from the global financial crisis and help the States to promote/achieve rapid economic growth and development.

In fact, in preserving the fiscal space of the Centre, there are many options or choices, such as
(1) proportionate cuts across the States in Central Assistance to States (CAS),
(2) ensuring the implementation of legally backed/mandated schemes (e.g. Sarva Shiksha Abhiyan (SSA), MGNREGA, Member of Parliament Local Area Development Scheme (MPLADS), Special Plan Assistance (SPA) to Externally Aided Projects (EAP), PMGSY, etc., and then proportionately cutting the residual (federal transfer of resources),
(3) equal per capita distribution of Central Assistance transfers (CAS),
(4) implementing the legally backed schemes and then distributing the remaining amount in line with the FFC formula for tax devolution, etc.

And the Centre now applies the suggestion or recommendations of the FFC for commensurate reduction in the Central Assistance to States (CAS), and wants to withdraw many of the Centrally Sponsored Schemes (CSS) in order to back them to the States as per the "State List" or State Plans.

To be continued..