SPECIAL STATUS TO STATES --- POLITICS

Govt. considering ordinance route to confer special status on Seemandhra

The UPA government is believed to be exploring the possibility of promulgating an ordinance to confer ‘Special Category State’ status on Seemandhra as promised by Prime Minister Manmohan Singh in the Rajya Sabha during the debate on Telangana Bill.

The issue could come up at Friday’s Cabinet Meeting.

A day after The Hindu reported that Seemandhra does not fulfil the criteria for special status and only the National Development Council alone can alter the norms, Jairam Ramesh, a key member of the Group of Ministers that drafted the Telangana Bill, wrote to Deputy Chairman of the Planning Commission Montek Singh Ahluwalia on the issue.

Mr. Ramesh had said the GoM originally wanted the revenue from Hyderabad divided, post-bifurcation, between Telangana and Seemandhra. But the idea had to be dropped after Constitution experts pointed out that revenue from a State could not be shared with another.

Andhra Pradesh hoping for special category status

As the new State of Telangana takes birth, the pitch for ‘special category’ status for the successor State has increased. During his recent visit to Delhi, Andhra Pradesh Chief Minister-designate, N. Chandrababu Naidu, made a strong bid for the special package and financial assistance to the fledgling Seemandhra comprising 13 districts.

Though the UPA government promised it, sources say, the special category status requires discussion in the Planning Commission followed by the National Development Council. The proposal includes a six-point development package, comprising tax and industrial incentives as offered to Uttarakhand and Himachal Pradesh.

The A.P. Reorganisation Bill already provides for a special development package for the backward regions of the successor State, particularly the seven districts of Rayalaseema and north coastal Andhra. This is proposed on the lines of the KBK (Koraput-Bolangir-Kalahandi) special plan in Odisha. Officials in the Planning Department here have already prepared the basic framework and are waiting for the new government to take office.

The special category status proposed for a period of five years is expected to put the State’s finances on a firmer footing. Fiscal measures like tax incentives are intended to promote industrialisation and economic growth in both the States. The special package includes expansion of physical and social infrastructure in the backward regions. It proposes setting up of a AIIMS type super speciality hospital cum teaching institute and National Institute of Disaster Management in the successor State besides tribal university one each in both the states.

Other infrastructure projects proposed are a new major port, IOC/HPCL crude oil refinery, Vizag-Chennai Industrial corridor, new railway zone, metro rail facility in Vizag and Vijaywada-Guntur-Tenali-Mangalagiri Urban Development Authority.

Naveen seeks special status

Odisha Chief Minister Naveen Patnaik on Monday met Prime Minister Narendra Modi and demanded special category status for his State but remained evasive on his party allying with the National Democratic Alliance.

However, the Chief Minister said the issue of an alliance did not come up for discussion. “Our support to the NDA will be positive and constructive,” was all that Mr. Patnaik was willing to say after his meeting.

During the meeting, Mr. Patnaik also sought scrapping of Polavaram project in Andhra Pradesh. He said the project will cause displacement and submergence of land in Malkangiri district. The State government has already taken the matter to the Supreme Court.

After the 30-minute meeting, he said Mr. Modi was “quite positive” to his demands and hoped that the NDA government would treat Odisha better than the previous United Progressive Alliance government.

Meanwhile, the Prime Minister’s Office described Mr. Patnaik’s visit with a delegation of MPs from Odisha to Mr. Modi’s South Block office as a “courtesy call.”

Mr. Patnaik also met Finance Minister Arun Jaitley and sought full compensation to the State for the revenue loss due to phasing out of the Central Sales Tax (CST). He demanded that royalty rates on major minerals be revised to 15 per cent from 10 per cent.

The rates were last revised in August 2009. The Chief Minister said either the State should be fully compensated for CST loss or the Centre should restore the CST rate to original four per cent till the implementation of Goods and Services Tax.

According to Mr. Patnaik, Odisha received only Rs. 256 crore as compensation in 2010-11 for phase-out of CST, as against the loss assessment of Rs. 664 crore and no compensation had been received since then. “The FM told me that he will expedite these matters,” he said after the meeting.

Special Category status and centre-state finances

“No one can ignore Odisha’s demand. It deserves special category status. It is a genuine right,” said Odisha Chief Minister, Naveen Patnaik, earlier this month. The Odisha State assembly has passed a resolution requesting special category status and their demands follow Bihar’s recent claim for special category status.

The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. Initially three states Assam, Nagaland and Jammu & Kashmir were granted special status but since then eight more have been included (Arunachal Pradesh,  Himachal Pradesh,  Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand). The rationale for special status is that certain states, because of inherent features, have a low resource base and cannot mobilize resources for development. Some of the features required for special status are: (i) hilly and difficult terrain; (ii) low population density or sizeable share of tribal population; (iii) strategic location along borders with neighbouring countries; (iv) economic and infrastructural backwardness; and (v) non-viable nature of state finances. ¹ The decision to grant special category status lies with the National Development Council, composed of the Prime Minster, Union Ministers, Chief Ministers and members of the Planning Commission, who guide and review the work of the Planning Commission.

In India, resources can be transferred from the centre to states in many ways (see figure 1). The Finance Commission and the Planning Commission are the two institutions responsible for centre-state financial relations.

Figure 1: Centre-state transfers (Source: Finance Commission, Planning Commission, Budget documents, PRS)

Planning Commission and Special Category

The Planning Commission allocates funds to states through central assistance for state plans. Central assistance can be broadly split into three components: Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance. NCA, the main assistance for state plans, is split to favour special category states: the 11 states get 30% of the total assistance while the other states share the remaining 70%.  The nature of the assistance also varies for special category states; NCA is split into 90% grants and 10% loans for special category states, while the ratio between grants and loans is 30:70 for other states.

For allocation among special category states, there are no explicit criteria for distribution and funds are allocated on the basis of the state’s plan size and previous plan expenditures. Allocation between non special category states is determined by the Gadgil Mukherjee formula which gives weight to population (60%), per capita income (25%), fiscal performance (7.5%) and special problems (7.5%).  However, as a proportion of total centre-state transfers NCA typically accounts for a relatively small portion (around 5% of total transfers in 2011-12).

Special category states also receive specific assistance addressing features like hill areas, tribal sub-plans and border areas. Beyond additional plan resources, special category states can enjoy concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.  The Planning Commission also allocates funds for ACA (assistance for externally aided projects and other specific project) and funds for Centrally Sponsored Schemes (CSS). State-wise allocation of both ACA and CSS funds are prescribed by the centre.

The Finance Commission

Planning Commission allocations can be important for states, especially for the functioning of certain schemes, but the most significant centre-state transfer is the distribution of central tax revenues among states. The Finance Commission decides the actual distribution and the current Finance Commission have set aside 32.5% of central tax revenue for states. In 2011-12, this amounted to Rs 2.5 lakh crore (57% of total transfers), making it the largest transfer from the centre to states. In addition, the Finance Commission recommends the principles governing non-plan grants and loans to states.  Examples of grants would include funds for disaster relief, maintenance of roads and other state-specific requests.  Among states, the distribution of tax revenue and grants is determined through a formula accounting for population (25%), area (10%), fiscal capacity (47.5%) and fiscal discipline (17.5%).  Unlike the Planning Commission, the Finance Commission does not distinguish between special and non special category states in its allocation.