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Telugu Desam Party (TDP) president N Chandrababu Naidu emerged as a key player in national politics on Wednesday (June 5), after his party won 16 seats in the Lok Sabha election. TDP is in alliance with the Jana Sena Party and the BJP in Andhra Pradesh.
Naidu’s support is critical for the BJP, which has only 240 seats in Lok Sabha. In return, Naidu is likely to extract several promises and assurances, the most important of which will be the status of a Special Category State for Andhra Pradesh.
In 1969, the Fifth Finance Commission of India introduced the mechanism of SCS to assist certain states in their development and fast-tracking growth if they faced historical economic or geographical disadvantages. Factors such as difficult and hilly terrain, low population density and/ or a sizable tribal population, strategic location along borders, economic and infrastructural backwardness, and non-viable nature of state finances were typically considered to accord SCS.
The system was scrapped on the recommendation of the 14th Finance Commission, which suggested that the resource gap of the states should be filled by increasing the devolution of tax to 42% from the existing 32%.
SCS was accorded to 11 states, including the entire Northeast, and the border hill states of Jammu and Kashmir, Himachal Pradesh, and Uttarakhand. Subsequently, other states too demanded SCS — including Naidu’s AP; Bihar, whose Chief Minister Nitish Kumar is another key NDA ally; and Odisha, where the BJP will now form the government.
When undivided AP was bifurcated to create Telangana in 2014 through the AP Reorganisation Act, 2014, the UPA government at the Centre had promised to grant SCS to AP to compensate for the loss of revenue, and of Hyderabad, where much of the development was concentrated.
After the Narendra Modi government took charge, both Naidu who was CM from 2014 to 2019, and Y S Jagan Mohan Reddy who was CM from 2019 to 2024, repeatedly appealed for SCS, so more funds were made available from the Centre to overcome the “distressing” financial situation of the state.
As per presentations made by the AP government to NITI Aayog, the body that succeeded the Planning Commission, the 14th Finance Commission estimated that the post-devolution revenue deficit for AP for the five-year period 2015-20 would be Rs 22,113 crore, but in reality, this figure stood at Rs 66,362 crore. The debt of the residuary state, which was Rs 97,000 crore at the time of bifurcation, reached Rs 2,58,928 crore by 2018-19, and is more than Rs 3.5 lakh crore now.
AP argues that the undivided state was bifurcated in an unjust and inequitable manner — the successor state inherited nearly 59% of the population, debt, and liabilities of the original state, but only 47% of its revenues. For example, of the Rs 57,000 crore of software exports from AP for the year 2013-14, Hyderabad city — with Telangana after the bifurcation — alone accounted for Rs 56,500 crore.
Today’s AP is essentially an agrarian state, with low economic buoyancy, leading to huge revenue disabilities. This is evident from the fact that the per capita revenue of Telangana for 2015-16 was Rs 14,411, while it was only Rs 8,397 for AP.
According to the AP government, the UPA had assured the nation, and especially the people of AP, that it would be granted SCS for a five-year period as a precondition to bifurcation, and that the residuary state would be adequately compensated through a number of development interventions, investments, and direct financial assistance.
SCS would mean higher grants-in-aid to the state government from the Centre. To illustrate, per capita grants to Special Category States is Rs 5,573 crore per year, whereas AP receives only Rs 3,428 crore.
SCS states enjoy special industrial incentives such as Income-tax exemptions, custom duty waivers, reduced excise duty, corporate tax exemption for a certain period, concessions and exemptions relating to GST, and lower state and central taxes.
In SCS states, the Centre funds central schemes up to 90%, compared to 70% in non-SCS states.
Governments of AP have argued that such special incentives are vital for the rapid industrialisation of the primarily agrarian state, and would lead to improved employment opportunities for the youth and overall development of the state.
Granting SCS would encourage investments in specialty hospitals, five-star hotels, manufacturing industries, high-value service industries such as IT, and premier institutions of higher education and research, AP has argued.
Naidu has been vocal and emotional about SCS, and it vexed him through his 2014-19 tenure as Chief Minister. The TDP was part of the first Modi government when it took power in 2014, and Naidu was frustrated by his failure to persuade the Centre of his case.
In March 2018, expressing anguish over the Centre’s refusal to listen to his pleas, Naidu asked his two ministers at the Centre — P Ashok Gajapati Raju (Civil Aviation) and Y Satyanarayana Chowdary (MoS, Science and Technology and Earth Sciences) — to resign. He then quit the NDA and launched an anti-BJP, anti-Modi campaign for the Assembly election of May 2019.
When Naidu mentioned in the Legislative Assembly that he had gone to Delhi 29 times to meet NDA ministers to seek SCS, Y S Jagan Mohan Reddy and his YSRCP MLAs had laughed and poked fun at him. During the election campaign, Jagan attacked Naidu and TDP for their failure to get SCS for AP. However, after winning a landslide and becoming the Chief Minister in 2019, Jagan faced those same attacks and insults himself.
In February 2024, during the last Assembly session before the elections, Jagan expressed frustration and anguish over the issue, telling the Assembly that he wished that no party gets an absolute majority in Lok Sabha, so that the state can bargain for SCS. Naidu now has exactly that opportunity.
The BJP has fallen short on numbers, and has very few options in its negotiations with Naidu, should he choose to play hardball. The Congress has already sent him feelers — senior leader Jairam Ramesh has said that SCS for AP was part of the party’s manifesto in the state, and the INDIA bloc would accept the demand if it comes to power at the Centre.
Giving Naidu what he wants to the exclusion of other states — notably Bihar and Odisha — will be difficult for the BJP. Also, the 14th Finance Commission had stated that SCS was a burden on the Centre’s resources — this has been used by the NDA to reject Naidu’s pleas since 2014.
As a compromise, the NDA could make a promise similar to the one the UPA made: to give SCS for a specific period — say, five years. The UPA had hoped that would assuage the anger of the people and create some breathing space; however, the BJP will be mindful that the Congress has not won a single MLA or MP seat in AP since 2014.
Naidu’s earlier push for SCS had failed, and he had suffered a crushing defeat in the state as well. This time is different — the BJP is dependent on him, and he has just won a landslide in the state. From his position of strength, he could settle for a compromise with favourable terms — perhaps several Central projects in AP, a halt to the privatisation of the Vizag steel plant, increased assistance to backward districts, setting up of SEZs where the Centre would be able to waive taxes, etc.
All this could be in addition to ministerial portfolios of his choice in the new Modi government.
