In February 2014, then Prime Minister Manmohan Singh had announced in the Rajya Sabha that special category status would be extended to the successor state of Andhra Pradesh comprising 10 districts, including four districts in Rayalaseema and three districts of coastal Andhra Pradesh, for a period of five years. This would put the state’s finance on a firm footing, he told law makers in the Upper House. Singh also said that according to the Andhra Pradesh Reorganisation Bill, the Central government would take appropriate fiscal measures, including an offer of tax incentives to the successor state, to promote industrialisation and economic growth in both the states. These incentives would be along the lines extended to some other states, he went on to add.
But in the run up to this, there were many in the government who were wary of such a commitment and had flagged the dangers of adopting such an approach, both fiscally and constitutionally. Their argument was that it was a promise that could not be delivered inherently. It proved to be prescient, for within days of Singh’s announcement, a couple of states such as Tamil Nadu were quick to protest the proposal to offer tax incentives, saying it would skew the level playing field.
The 14th Finance Commission, which was then going about its Constitutional mandate of determining the individual share of states in the pool of central taxes, did take into consideration the issue of special category states. The commission appears to have been guided by the fact that the Constitution never categorised some states as special — treating all of them on an equal footing. Perhaps it believed that it wasn’t the remit of a finance commission to identify such states to prescribe measures for them. Or perhaps it deemed it inappropriate to get into tricky terrain, considering that the previous commissions had stayed away from the issue.
On Thursday, Union Finance Minister Arun Jaitley, responding to Andhra Pradesh Chief Minister Chandrababu Naidu’s demand for special status, said that such a category did exist when the state was bifurcated in 2014 but after the 14th Finance Commission’s award, such treatment was “constitutionally” restricted to just the North Eastern and three hill states, which includes Jammu and Kashmir.
There is another aspect to this issue. During the earlier NDA regime under Atal Bihari Vajpayee, three new states were formed — Chhattisgarh, Uttarakhand and Jharkhand. The 12th Finance Commission headed by former RBI governor C Rangarajan had by then a more detailed estimates of revenue and expenditure for these three states, when it finally submitted its recommendations in 2005. The commission in effect had the benefit of data on finances for these newly formed states for two full years — 2001-02 and 2002-03 — while making an assessment of their finances.
But in the case of Andhra Pradesh and Telangana, the challenge of the 14th Finance Commission headed by another former RBI Governor, Y V Reddy, was the absence of audited finance accounts. So what the commission did was to consolidate raw data and apportion it between the two states on the basis of some principles. Both the new states had different estimates, but when the final recommendations of the commission came through, it wasn’t that award that hurt the states but the denial of special category status.
It wasn’t that the earlier bifurcations didn’t lead to similar demands. When Jharkhand was carved out, Bihar strongly felt that it would be hamstrung with much of natural resources and wealth being in the newly formed state. Vajpayee’s senior colleagues in that NDA Government, L K Advani and Yashwant Sinha, engaged with the political leadership in Bihar, with a special assistance package announced for the state. Bihar also received funds to improve and expand its technical institutions and a grant for e-governance. The grants were even welcomed by then chief minister Rabri Devi. Naidu, who then headed the undivided state of Andhra Pradesh, was during that period, pushing for a lot of fiscal support from the Centre. It was a period when most states had huge revenue deficits due to an economic slowdown. Andhra Pradesh too was running overdrafts but the Central government was firm on the state paying up. Later, the Centre found a way out to manage the situation politically, by allowing Andhra Pradesh and a few other states to borrow extra from the market.
All the then new governments — Chhattisgarh, Uttarakhand and Jharkhand — had sought a huge amount of funds to build their new capitals. Chhattisgarh sought Rs 2,000 crore against which the 12th Finance Commission provided Rs 200 crore and Rs100 crore for the police force, while for Uttarakhand, against a demand of Rs 398 crore, it awarded Rs 200 crore. Jharkhand, which sought Rs 5,000 crore to build a state capital at Ranchi, was provided just Rs 200 crore.
The political brinkmanship now on display is a bit reminiscent of the moves Naidu made in the first term of the NDA government between 1998 and 2004. As a powerful alliance partner, he managed to wield considerable influence forcing the government then to locate the office of the then newly formed insurance regulator — IRDA to Hyderabad.
Naidu has said that it is a matter of self-respect of Andhraites and that the Centre should fulfill the assurances made during the bifurcation of the state. Jaitley on his part has said that “sentiment does not decide the quantum of funds. It is the constitutional award of the Finance Commission which decides the quantum of funds that the state gets.” His point is that Andhra Pradesh’s demand for special category status was a “sentimental and political movement,” which could not be accommodated constitutionally.
From a purely Constitutional view point, he may be right. When Bihar was bifurcated, politically it worked perhaps because of the special package worked out by the then Planning Commission and the deft political management. That was marked by both a hard and soft approach that paid off because many senior leaders of the ruling party then worked together closely. It is not clear whether that was the case this time around.
What has muddied waters now is Congress President Rahuls Gandhi’s promise to grant the state special category status if his party is voted to power. Many fiscal managers in India now worry not just about what’s playing out now, but also the future given this political twist.