Special category status is overrated
It is an instrument that has outlived its relevance and utility.
PM Narendra Modi speaks at Arrah, Bihar. (Source: YouTube)The special package announced by the prime minister yesterday at Arrah and Saharsa is highly credible. It vindicates the classic economic belief that long-term development requires not sops but investment in infrastructure, skill development, education, energy security and an integrated development strategy. This was the central theme of the PM’s Bihar announcements.
The wider significance of the outcome of Bihar’s forthcoming assembly elections cannot be minimised. Elections inevitably raise large issues: One, the issue of identity politics versus the politics of development; and two, an increasing politicisation of all perceived wrongs done to the state. In this context, special category status is an evergreen issue. This concept is embedded in the history of enhanced policy interventions for target groups or areas. The concept of backwardness has evaded an universally acceptable definition. It means different things in different countries and to different people.
For us, the First Five-Year Plan emphasised the upliftment of backward areas. From the Third Five-Year Plan (1961-66), the approach shifted to target areas. The history of the special category status goes back to 1969, when the Fifth Finance Commission awarded this status to Assam, Nagaland and Jammu and Kashmir. This was subsequently widened to include 11 states, adding Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. The special category status has been given on features that include hilly and difficult terrain; low population density and/ or sizeable share of tribal population; strategic location; economic and infrastructural backwardness; and non-viable nature of state finances.
Multiple committees have examined the approach to backwardness in India. The study group for the Sixth Plan (1966-71) identified five categories of areas — desert, drought affected, hilly, tribal and high density. The Pande Committee (1968) identified these as backward regions, while the Wanchoo Committee concentrated on issues of regional imbalance. The Sukhamoy Chakravorty Committee report in 1972 identified 14 parameters, while the Sivaraman Committee in 1978 identified three characteristics — namely the potential for development, identification of inhibiting factors from realising the potential, and a programme to mitigate the disabilities. Most recently, the Raghuram Rajan Committee in 2013 developed a multi-dimensional development index to measure backwardness and categorised states as least developed, less developed and relatively developed. Ten states on the composite index with a score of 0.6 were classified as least developed, 11 states with a score between 0.4-0.6 were less developed, and seven states, which scored less than 0.4, were relatively developed. This methodology did not conceive of special category status.
The main benefits of special category status are a significant concession in excise and customs duties, as well as income and corporate taxes; and the Centre bearing 90 per cent cost of all Centrally sponsored schemes. External aid is also to be devolved in the same ratio as received by the Centre. For general category states, the grant to loan ratio is 30:70.
There are problems with special category status. First, what about tax breaks in the new approach to tax policies? Both Telangana and Bihar have, in the Finance Bill 2015, been given additional depreciation allowance of 35 per cent and an enhanced investment allowance of 15 per cent over and above the 15 per cent already available for a five-year period. Tax breaks are designed not to enhance
incomes but encourage capital flows. If other parameters like infrastructure, security and regulatory framework are conducive, these tax concessions should encourage capital flows. Second, if the GST is passed, a specific excise abatement would be counterproductive. Exemption at the stage of manufacture would lead to a break in the input tax credit chain and an increase in overall costs due to cascading. The input taxes already paid in manufacturing a product will get loaded on to the cost of the product, thereby making the manufacturing unit uncompetitive. Third, specific project interventions and significantly enhanced Central outlays more than compensate any loss from being deprived of the special category status.
Finally, and most importantly, have these concessions benefitted the intended states? Regrettably not. 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. 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 onset of the sunset clause leads to disruptive capital flight and managerial talent. The transition makes this backlash socially and economically unacceptable.
Special area-based sops have outlived their relevance and utility. There is no substitute for conventional economics. Development propped by sops alone is short-lived.
The writer, a former Rajya Sabha MP from the JD(U), is a member of the BJP.
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