One morning about three years ago,an unusual request landed at Yojana Bhawan from Goa. The state cabinet had asked for treating the state as one of a special category,and changing the plan allocation. It made out a persuasive case for such treatment.
The hitch was that Goa topped all the economic indicators for state development and so putting it in a special category would have effectively have endorsed converting the entire country into one of a special category.
Goa could make out its case because the special-category status for a state is not synchronous with economic backwardness. For instance,Uttarakhand is in the special-category list but Jharkhand is not.
Of the five criteria that define the category,only one has anything to do with poverty: its economic and social backwardness. The other four are location on an international boundary,hilly and difficult terrain,nonviable nature of state finances,and finally low population density with high tribal population.
The list was crafted with the northeastern states in perspective. In fact,the list came after the creation of the first two special-category states,undivided Assam and Nagaland in 1969.
The Centre has no criteria yet to decide whether a state is backward,or whether it is a developed one. It has a backward-region grant fund,but that too is built on district-level indicators,and has about 280 of these under its fold.
The special category,then,is just a name that political parties often want to adopt to make an electoral point that their government is aware of the extent to which their state lags the national average on socio-economic indicators.
Then follows a shadow battle with the Planning Commission and by extension with the Centre. But politicians do not educate state citizens that it is the National Development Council,a body comprising all central cabinet ministers and chief ministers,that decides and asks the commission to grant a state that status.
Last week,when Montek Singh Ahluwalia wrote to Naveen Patnaik that the state failed to get more than two ticks in the check boxes for special status,it was accurate. The status depends on getting all five check boxes ticked.
On economic backwardness,for instance,Orissa is about average. The state lags the national average in per capita income and has high infant mortality. But it provides better electricity per capita,and carries a higher length of better-quality road network than most other states do. It has no international borders that create stress on infrastructure,and its finances are healthier than most states.
Behind the demand
Rajasthan too now demands this status. Why do more and more states want to get into the bracket? Some of the reasons have little to do with funding from the Centre.
Several states have since the 1990s got a corporate tax and excise duty waiver. This was exploited especially by Himachal Pradesh and Uttarakhand to attract industry to set up shop. It also helped that these states abutted the developed industrial region of northern India,which allowed companies to shift base at low cost. However,although both Naveen and Nitish have focused on this benefit,it does not follow special category as a rule,and it is also out of favour with states as well as the Centre in view of the upcoming GST regime.
What other benefits does the status confer? In 2013-14,the Centre will transfer about Rs 7.50 lakh crore to all states. Of this,57 per cent is tax and non-plan fund transfer. The former is decided by the Finance Commission and the rest is committed as grants so there is no room for arbitrariness where changing of status will help. Of the rest,the largest share at 59 per cent is assistance for centrally sponsored schemes. These include marquee plans such as NREGA,Sarva Shikshya Abhiyan,PMGSY (rural roads) and midday meal schemes.
The Centre picks up the entire tab for PMGSY; the rest have varying central and state shares in their financing. The advantage for the special-category states is that they bear only 10 per cent of the total cost of the schemes.
The catch is the financing gap that opens up before the Centre. The Centre meets this by dipping into the normal central assistance earmarked for the states. Thanks to successive awards of the Finance Commission,the sum has come down to Rs 27,000 crore for 2013-14 for all states combined.
The 11 special states share 9/16 of this corpus,with the other 17 sharing the remaining 7/16. If Bihar and Orissa muscle into the former club,the share for the existing members like those in the Northeast will have to be cut to accommodate them. This purse cannot expand either. These states have just no revenue source and depend only on this purse to finance their budget.
Backward vs special
What about the backwardness criteria for the states that the finance ministry has promised to sort out through this budget? The yardsticks for defining this fund are different from the definition of special category. Yet the budget speech refers to international borders and terrain issues that are the parameters for the latter. Changing these is the prerogative of the NDC,not of the ministry.
The finance ministry can of course alter the definitions for the backward regions grant funds,but it is hard to see any meaningful impact those changes can make. This grant is only Rs 11,500 crore for all the identified districts,and that means about Rs 41 crore for each. It would be certainly way below the expectations raised by the campaign for special category.
Yet the ministry has set out to rework the definition through a committee chaired by chief economic adviser Raghuram Rajan. The committees terms,unless they are expanded,will follow a very limited remit and will scarcely help settle the clamour for special-category status.
The problem of backwardness that states such as Bihar and even Orissa face are huge challenges. But the equipment they have picked up,that of special category,was never intended to address that challenge. Band-aids like a backward regions grant can go only some distance.
Political parties at various times have worked out solutions that just helped a district,or at best a region. To take on the development crusade in the poorer states,the entire plan allocation pattern has to be relaid,with the inconsistencies wiped out. Only then would a clear allocation pattern emerge to help the people of these states.