Case for Special Category Status for Andhra Pradesh
- In Current Affairs
- 12:27 PM, Aug 25, 2016
- Shashank Davanagere
In all the hullabaloo that is being raised on Special Status for AP and subsequent denial of request by the Central Government, it is imperative to see what the special status is all about, if any state which has had it benefited from it and, if there is a way that all parties can agree on. The Special Category Status has been promised by the then Prime Minister Manmohan Singh in Rajya Sabha during a discussion on the AP State Reorganization Bill. It was during that debate that Venkaiah Naidu had mentioned that, if BJP came to power, it would extend the Special Category Status to 10 years instead of 5 years promised by Manmohan Singh.
What is Special Status and who are generally granted Special Status
The special status is in the context of Centre-state finances. A special category state gets preferential treatment in federal assistance and tax breaks. The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. Initially three states Assam, Nagaland and Jammu & Kashmir were granted special status but since then eight more have been included (Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand). The rationale for special status is that certain states, because of inherent features, have a low resource base and cannot mobilize resources for development.
Some of the features required for special status are:
- hilly and difficult terrain;
- low population density or sizeable share of tribal population;
- strategic location along borders with neighboring countries;
- economic and infrastructural backwardness; and
- non-viable nature of state finances
Benefits until Fiscal year 2014:
- The special-category states get significant excise duty concessions, persuading industry to relocate/locate manufacturing within their territory [2].
- 30% of “Normal Central Assistance” to Special Category States with grant loan ratio of 90:10 [loans have to be repaid; grants not so much].
- “Special Central Assistance” with 100% grant.
- Under “Accelerated Irrigation Benefit Programme” (AIBP), grant will be 90% in comparison to 25% for other states.
Changes to Central structure from Fiscal year 2015:
- 14th Finance Commission increased the share of States in the divisible pool of taxes from 32% to 42%.
- Hence, the continuation of grants as well as the quantum of money to be given to the States is less and uncertain.
- From the Union Budget 2015-16, Normal Central Assistance, Additional Central Assistance and Special Central Assistance were discontinued.
- At present, there are very few externally aided projects.
- Allocation under AIBP also reduced from Rs. 8,992 crore in 2014-15 to just Rs. 1,000 crore [5].
Center - States revenue and distribution
In India, resources can be transferred from the centre to states in many ways (see figure 1). The Finance Commission and the Planning Commission are the two institutions responsible for centre-state financial relations. This was valid until FY 2015 when NITI Aayog replaces Planning Commission.
[Source: www.prsindia.org]
Planning Commission and Special Category
The Planning Commission allocated funds to states through central assistance for state plans. Central assistance can be broadly split into three components
- Normal Central Assistance (NCA)
NCA is split to favor special category states: the 11 states get 30% of the total assistance while the other states share the remaining 70%. NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30:70 for other states.
However, as a proportion of total centre-state transfers NCA typically accounts for a relatively small portion (around 5% of total transfers in 2011-12).
- Additional Central Assistance (ACA)
The Planning Commission also allocates funds for ACA (assistance for externally aided projects and other specific project) and funds for Centrally Sponsored Schemes (CSS). State-wise allocation of both ACA and CSS funds are prescribed by the centre.
- Special Central Assistance.
Special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.
The Finance Commission
The most significant centre-state transfer is the distribution of central tax revenues among states. The Finance Commission decides the actual distribution and the current Finance Commission have set aside 42% of central tax revenue for states. Until 2015 this was 32.5% of the central tax. This has been increased to 42% in FY 2016. In 2015-16, this amounted to Rs 9.11 lakh crore making it the largest transfer from the centre to states. In addition, the Finance Commission recommends the principles governing non-plan grants and loans to states. Unlike the Planning Commission, the Finance Commission does not distinguish between special and non-special category states in its allocation.
Case for Special Status for AP
In the undivided AP, Hyderabad contributed 8% of the GDP towards State GDP. The revenue loss from Hyderabad would make the best case for granting Special Category status to Andhra Pradesh. In 2015-2016, Andhra Pradesh received Rs 90,122 crore revenue receipts achieving 100 per cent target. The Gross State Domestic Product for AP was Rs 5, 20,000 crores. Transfers from the Centre reported 120 per cent increase over the previous financial year. AP received Rs 21,966 crore under different grants from the Centre [7]. The revenue deficit was pegged at 7,143 crore which is less than 10% of the state’s revenue, which was one of the criteria for granting SCS.
According to one study commissioned by the erstwhile Planning Commission, there was definite positive and significant impact of the package, in the special category states in terms of increase in the number of factories, fixed capital, invested capital, number of industrial workers, total persons engaged in industry, wages to workers, total emoluments, net value added, value of output and gross fixed capital formation [10]. The incentives of the special category status had played a very significant role in attracting investments in these states.
It has also been argued that in the case of Assam, growth rates have remained subdued, while in the case of Himachal and Uttarakhand, after an initial spurt there have been sharp declines [4]. Since these policies were designed to encourage the manufacturing sector, the picture is even more disappointing. In the case of Himachal, the growth rate of the gross state domestic product in manufacturing peaked at 35 per cent and slumped to 3.1 per cent and 2.6 per cent in the last two years. In the case of Uttarakhand, the slump was from 24.4 per cent to 6.4 per cent and 3.1 per cent in the last two years after tax benefits were discontinued. The tax incentives for setting up of industries have sunset clauses after which states have seen a flight of capital and managerial talent. Additionally, with GST being planned to be rolled in April 2017, a uniform tax structure will render SCS very hard to implement
One very important criteria for furthering growth after SCS is that the sites should be capable of becoming high quality locations if the impact of the measures is to continue beyond the duration of the package. If this is not the case it is possible that, once benefits are no longer available, the industries in some locations will collapse to such an extent that the industrial plots and sheds will become unsaleable [10].
To summarize, the following are some of disincentives of SCS:
- Threat to cooperative federalism – The categorization often led to unhealthy competition between states to project its ‘backwardness’ for better sops from the center.
- Discourages productivity and efficiency – states which perform better on socio-economic front tend to lost out on financial incentives to weaker performing states.
- Lack of enthusiasm to improve – SC has often resulted in shifting the focus to top-down rather than a decentralized bottoms up approach to growth.
Andhra Pradesh is a state which has always performed well on the socio-economic front and has always tried to woo investors by showing how much better it is than by showing its ‘backwardness’. The CM has recently started a Mandal Domestic Product index to identify and improve the state at a mandal level. Given this background, it is my opinion that AP should not request of SCS rather, it should request Center for a “package” to develop the infrastructure. The infrastructure includes, and not limited to, roadways, railways, waterways, Labor Reforms, ports, IT etc. SCS is an idea way past its expiration date. Development propped by sops alone is short-lived. A secure way towards a better future can only be achieved by Infrastructure Driven Development.
References
- http://www.prsindia.org/theprsblog/?p=2593
- http://articles.economictimes.indiatimes.com/2009-05-16/news/27636616_1_special-category-plan-assistance-central-funding
- http://indianexpress.com/article/explained/andhra-pradesh-wants-special-treatment-why-and-why-the-govt-isnt-keen-2960372/
- http://indianexpress.com/article/opinion/columns/special-category-status-is-overrated/
- https://www.quora.com/What-is-the-meaning-of-a-special-status-to-an-Indian-state-What-are-the-criteria-to-get-it-and-how-does-it-help-a-state-to-grow-well
- http://www.dnaindia.com/money/report-14th-finance-commission-states-share-in-taxes-to-go-up-to-42-2063767
- http://timesofindia.indiatimes.com/city/hyderabad/Andhra-Pradesh-pips-Telangana-in-revenue-collection/articleshow/51735944.cms
- https://in.finance.yahoo.com/news/simplified--raghuram-rajan-panel-report-on-state-backwardness-064423690.html
- http://www.insightsonindia.com/2015/08/26/2-given-that-economic-benefits-under-the-special-category-status-are-minimal-and-have-been-diluted-over-the-years-states-would-be-better-off-seeking-a-special-package-analyse/
- A STUDY ON IMPACT EVALUATION OF PACKAGE OF SPECIAL CATEGORY STATES, Planning Commission
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