Special Category Question

Sub: Polity

Sec: Federalism

Special Category Status (SCS)

SCS was introduced in 1969 by the Fifth Finance Commission to assist states with historical economic or geographical disadvantages.
Criteria for SCS: It was granted based on the Gadgil formula. The parameters were:
- Hilly Terrain;
- Low Population Density And/Or Sizeable Share of Tribal Population;
- Strategic Location along Borders With Neighbouring Countries;
- Economic and Infrastructure Backwardness; and
- Non-viable Nature of State Finances.
The 14th Finance Commission recommended scrapping SCS, suggesting an increase in state tax devolution from 32% to 42%.
States with SCS: It was initially granted to only three states: Jammu and Kashmir, Nagaland, and Assam.
- At present accorded to 11 states, including the seven states of Northeast, Sikkim, J&K, Himachal Pradesh, and Uttarakhand.
- AP, Bihar, and Odisha have also demanded SCS.

Significance of Special Category Status:

The Centre pays 90% of the funds required in a centrally-sponsored scheme to special category status states as against 60% or 75% in case of other states, while the remaining funds are provided by the state governments.
Unspent money does not lapse and is carried forward.
Significant concessions are provided to these states in excise and customs duties, income tax and corporate tax.
Preferential treatment in getting central funds.
Concession on excise duty to attract industries to the state.
30 per cent of the Centre’s gross budget also goes to special category states.
These states can avail the benefit of debt-swapping and debt-relief schemes.
Industrial Incentives: Includes tax exemptions, duty waivers, and lower state and central taxes, crucial for industrialization and employment opportunities.

Concerns:

The SCS puts an additional economic burden when the increased devolution is already flowing to the State as recommended by the 15th FC.
It affects the centre state financial relations and hinders competitive federalism among the states.

AP’s Demand for SCS:

Bifurcation Impact: The AP Reorganisation Act, 2014, promised SCS to AP to compensate for the loss of Hyderabad and revenue.
Financial Strain: Post-devolution revenue deficit estimated at Rs 22,113 crore for 2015-20 was actually Rs 66,362 crore. AP’s debt soared from Rs 2,58,928 crore in 2018-19 to over Rs 3.5 lakh crore.
Economic Disparities: AP inherited 59% of the population, debt, and liabilities but only 47% of revenues from the undivided state. Hyderabad, now in Telangana, accounted for Rs 56,500 crore of the Rs 57,000 crore software exports in 2013-14.
Agrarian Economy: AP’s economic buoyancy is low, with per capita revenue significantly lower than Telangana’s.

Feasibility of SCS for AP:

Accommodating AP’s demand could set a precedent for other states like Bihar and Odisha. The 14th Finance Commission’s stance on SCS as a central resource burden complicates the issue.
NDA might offer a limited period SCS or other developmental projects and financial aid, potentially halting the privatisation of the Vizag steel plant and setting up SEZs in AP.

Source: IE