Before the 2014 Lok Sabha elections, the then Bihar Chief Minister Nitish Kumar – in an apparent political bid to counter BJP and its then Prime Ministerial candidate, Narendra Modi, raised the pitch for special category status for Bihar. Though a lot of changes have taken place politically both in New Delhi and Patna since then still on the run up to the Assembly elections the issue is again likely to come back into political discourse. But to begin with it was definitely a political pitch, Nitish was certainly not so naïve as to believe that this status would transform Bihar and solve all its economic backwardness within three years.
There are eleven “Special Category States” in India, including all the eight states of north east, besides Himachal Pradesh, Jammu & Kashmir and Uttarakhand. Starting with only three states in 1969 – Assam, Nagaland and Jammu & Kashmir –the status was accorded to the other states at different points of time, the last being to Uttarakhand in 2001, to address the problems of their backwardness, lack of infrastructure and shortage of capital and resources.
The special category has no constitutional backing, like the erstwhile Planning Commission, this was also an extra-Constitutional device to address the problems and development and backwardness. Criteria to determine the eligibility for a state to become a special category state as decided by the Planning Commission are: hilly and difficult terrain, low population density, sizeable share of tribal population, strategic location along borders, economic and infrastructural backwardness, and non-viable nature of state finances. All these criteria are meant to address the handicaps these states suffer from – handicaps that arose from reasons of geography.
Bihar does not satisfy all these criteria, and Bihar’s backwardness is not because of its geographical disadvantages, but because of sustained governance failure in the past. It is precisely this failure that Nitish is now trying to reverse. But if governance failure entitles a state to claim the special category status, then many other states in India would be qualified to belong to this category as well. Once the special category status is awarded which carries only rewards but no obligation, the state becomes entitled to higher Central funding.
But what benefits would Bihar actually get if it is made into a special category state? Benefits of the special category status accrue mainly in the form of higher Central plan assistance. Plan assistance to states is given in various forms, as normal plan assistance and additional or special Plan assistance for various purposes. Special category benefits come in the form of higher normal assistance which is given according to the so-called Gadgil Mukherjee formula, under which 30% of total Central assistance for State plans is distributed to the special category states, after setting aside funds for externally aided schemes, Special Area Programmes and North Eastern Council. The rest is distributed to the non-special category state according to a composite criteria involving population, per capita income etc.
During the 11th Plan, under the Gadgil-Mukherjee formula, the Bihar’s share in total NPA was 11%, the highest among all non-special category states save UP whose share was 19.5%. Among the special category states, share of individual states varied between 3.8% for Sikkim to 19.5% for Assam. Besides the higher assistance to special category states, tax breaks for excise duty as well as income tax exemptions are also available for setting up of industries within their territories.
Even though the number of Special category States has increased from only 3 to 11, the kitty of 30% of the Central Plan funds has remained unchanged. As a result, the share of individual states within the category had declined. During the first 3 years of the 11th plan, 11 special category states received Rs 64787 crore as normal plan assistance, or about Rs 2000 crore for each state on an average per year.
As per the 2013-14 budget, the total Central Assistance to states is Rs 1.3 lakh crore, of which the normal plan assistance is only Rs 27636 crore, and about a third of this money would only go to the special category states. This is, however, miniscule compared to the total plan expenditure of Rs 4.2 lakh crore for central and centrally sponsored plans, of which Rs 1.4 lakh crore would be passed to states in respect of flagship welfare schemes of the centre, not through their budgets, but as direct transfers to the implementing agencies in districts. States have no control over this money; lying outside Government accounts, these funds also bypass all controls and lacks transparency. This is a politically maneuvered aberration in the Indian financial system – supposedly a vote catcher from the rural electorate – and is an assault on the principles of fiscal federalism by diluting and undermining the authority of the States.
Over the years such extra-budget direct transfers have increased phenomenally, while the Gadgil transfers have shrunk. Their share in total plan transfers has gradually fallen from 35% during 9th plan to only 10% during 11th plan, while the share of direct transfers has increased from 20% to 52% over this period. Consequently the plan transfers to special category states have also contracted. The plan funds routed through the state budgets now constitute less than 30% of the total transfers of states. During 2011-12, Rs 8958 crore, or 90% of total Central plan grants to Bihar – nearly one fifth of its total revenue receipts – were given as such direct transfers, over which the State Government had no control.
If Nitish/JD(U) government is pragmatic, rather than clamouring for the special category status, they should ask for a share of this money and ask the Centre to stop these direct transfers in the name of ‘centralised welfare’. By becoming a special category state, Bihar does not stand to gain much otherwise. Tax breaks wouldn’t get many industries to the state, as they have not in the north eastern states for so many years. For that, availability of power and infrastructure are more powerful incentives. By getting the special category status for Bihar – chances for which, now look distinctly bleak – Nitish may score a political point, but Bihar’s economy will remain where it is.