Special Category Status

• 12 Feb 2020

• Recently, the Andhra Pradesh government urged the Central government to grant Special Status Category (SCS) to Andhra State as being promised earlier by the Centre.

Background

• Andhra Pradesh was promised Special Category Status by the Congress government, which was at the Centre during the state bifurcation, and by the BJP during the course of its 2014 election campaign. The then ruling government promised special category status would be extended to Andhra Pradesh for five years to help put the state on a firmer footing.
• Other than Andhra Pradesh, Bihar, Odisha, Rajasthan and West Bengal are demanding the status of special category.

Why Andhra Pradesh is demanding Special Category Status?

• Andhra sought special category status on the grounds that it was at a disadvantage, since it would lose a significant amount of revenue as a result of Hyderabad going to Telangana.

Why the Central Government is denying Andhra SCS demand?

• The 14^th Finance Commission, tabled in Parliament in February 2015, did away with the distinction between states with SCS and other states and instead recommended a higher share of taxes — 42% instead of 32% — for states and revenue-deficit grants for those states in need, like Andhra. It meant that SCS had ceased to exist so there was no question of granting Andhra the status.
• Recently, the 15th Finance Commission, in its interim report for 2020-21, has made it clearly that the special category status demand remained entirely in the domain of the Union government, which can take an appropriate decision after due consideration.
• Further, despite the disadvantage of losing Hyderabad, an information technology and pharma hub, in the bifurcation, Andhra has grown at nearly 10% annually between 2013-14 and 2017-18, compared with Telangana’s 8.6%, and is estimated to have a fiscal deficit of 2.8% in 2018-19, compared with Telangana’s 3.5%.

What is Special Category Status?

• Special Category Status (SCS) is a classification given by Centre to assist in the development of those states that face geographical and socio-economic disadvantages like hilly terrains, strategic international borders, economic and infrastructural backwardness, and non-viable state finances.
• The Constitution does not include any provision for categorisation of any State in India as a Special Category Status (SCS) State.

Historical Background

• The concept of a special category status was first introduced in 1969 when the fifth Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks, establishing special development boards, reservation in local government jobs, educational institutions, etc.
• This formula was named after the then Deputy Chairman of the Planning Commission, Dr Gadgil Mukherjee and is related to the transfer of assistance to the states by centre under various schemes.
• Initially, three states; Assam, Nagaland and Jammu & Kashmir were granted special status but from 1974-1979, five more states were added under the special category. These include Himachal Pradesh, Manipur, Meghalaya, Sikkim and Tripura.
• In 1990, with the addition of Arunachal Pradesh and Mizoram, the states increased to 10. The state of Uttarakhand was given special category status in 2001.
• But after the dissolution of the planning commission and the formation of NITI Aayog in 2015, the recommendations of the 14th Finance Commission were implemented which meant the discontinuation of the Gadgil formula-based grants.

Note: Jammu and Kashmir (J&K) enjoyed a special status as per Article 370 and also Special Category Status. But now that Article 35A has been scrapped and it has become a union territory with legislature, SCS doesn't apply to J&K anymore.

Criteria for SCS

• Hilly and difficult terrain
• Geographical isolation
• Low population density or sizeable share of tribal population
• Strategic location along borders with neighbouring countries
• Economic and infrastructural backwardness
• Economic and infrastructure backwardness
• Non-viable nature of state finances

Benefits under SCS

Economic Benefits

• The central government allocates 30 percent of its plan expenditure to special category states while the remaining 70 percent goes to other states.
• In the case of the centrally-sponsored schemes (CSS) and external aid, special category States get 90 percent as grant and 10 percent as loan. For general category States, it is 30 percent grant and 70 percent loan.
• Unspent funds don't lapse and get carried forward in the case of special category States while they lapse in the case of non-special category States.

Tax Benefits

• The central government offers a host of tax benefits for the new industrial units set up in the special category States.
• They include capital investment subsidy, income tax exemption for five years, interest subsidy, comprehensive insurance subsidy, central excise duty exemption and transport subsidy.
• Further, these states avail the benefit of debt-swapping and debt relief schemes.

Way Forward

• The Andhra Pradesh and other State’s government demanding for SCS should explore other options to put their state on faster development, put its finances in order in order to develop their respective states, rather than sticking to and crying over the SCS.
• States must understand their industrial strengths and create a policy environment to leverage their exclusive resources instead of relying on Centre’s support.