Mentors Comment:

With the demand of Andhra Pradesh for SCS, the issue is again back in limelight and there has been loads of commentary going on about it. 14th FC did not explicitly ended the status but reduced the number of states to few and hence, any new demand from other states for the SCS status is now deemed unfit by the GoI. In this backdrop, there has been demands to look into the matters of existing SCSs and their finances. Secondly, with the diluted provisions, there is nothing special into special category states.

This is the premise of the question asked and hence your discussion should be based on this theme.

The structure of the answer will include brief discussion of recommendations of 14th FC and demands of Andhra Pradesh in the intro.

Then discuss the features of SCSs and the benefits they receive.

Jump to the discussion over conditions of SCS in the 14th FC recommendations and how they have become redundant therefore.

Give the alternatives to the examiner as in what else needs to be done by the GoI in order to move away from SCS in long term, while keeping in mind the genuine concerns of backward states.

A brief conclusion is must.

Model Answer:

Following the bifurcation of A.P, the Andhra government has been demanding a Special Category State (SCS) status from Centre. SCS is a classification given by Centre to assist in development of those states that face geographical & socio-economic disadvantages like hilly terrains, strategic international borders, economic & infrastructural backwardness and non-viable state finances.

Though the Fourteenth Finance Commission report gives an impression that the special category status given to some states has de facto been abolished, the reality is that the benefits enjoyed by these states remain well protected.

Benefits of SCS included:

• Significant concession in tax and duties
• 30 percent of central budget
• More funds in terms of Normal Central Assistance, Additional Central Assistance and Special Central Assistance
• Centre bears 90% of the state expenditure (given as grant) on all centrally-sponsored schemes and external aid.
• Unspent money does not lapse and gets carry forward.

14th FC and Special Category States:

• The 14th Finance Commission did away with distinction between general and special category states, as it had taken into account the level of backwardness of states in the proposed transfer of funds to states.
• The special category status was restricted to three hill states and those in the Northeast.
• It was also decided that a revenue deficit grant would be provided for certain states for which devolution alone would be insufficient.
• Andhra was one of the states that were to be given a revenue deficit grant.
• The demand for special status by some states is no longer tenable after the 14th Finance Commission, as it recommended that the states’ share in net proceeds of Union tax revenues should increase from 32% to 42%.
• It also suggested that sharing of taxes should be the primary route for transfer of resources to states.
• With this, it virtually made concessions such as additional funds through ‘special status’ administratively redundant.
• Besides granting states a much larger share of the financial pie, the 14th Finance Commission set aside the distinction between plan and non-plan expenditure.
• It instead stressed higher devolution from the ‘divisible pool’, which is where all government income is first collected before being divided.
• In other words, the 14th Finance Commission devised a new mechanism for the flow of resources between the Centre and the states and also across states without any scope for political mediation or bargaining.
• The era of favouring one state over another is deemed to have ended with the dismantling of the Planning Commission, which used to allocate funds to states.

What can governments do?

• The government should plan to have a balanced growth while considering needs of certain states who face geographical difficulties.
• A better system of fund devolution should be found which promotes ‘cooperative federalism’
• More autonomy to states in various politico-administrative-financial matters
• Since centre bears 90% of state expenditure on all centrally-sponsored schemes, state can take more welfare-based schemes from the new savings.

Conclusion:

Though SCS looks attractive , progressive dilution has almost made them at par with other states.

With effective tax devolution of 42 percent and grant in normal assistance equal to all states, less fund in AIBP and few externally aided projects .Thus there is almost horizontal and vertical balance and SCS do not carry much weight.