Special Category Status: A Lifeline for Struggling Indian States?

In the wake of India's recent elections and the formation of a new government, the spotlight has shifted to the hotly debated topic of "Special Category Status" (SCS) for states. This status, aimed at aiding economically or geographically disadvantaged states, has become a focal point for states like Bihar and Andhra Pradesh. But what exactly is SCS, and why is it such a contentious issue?

What is Special Category Status?

Special Category Status is a designation that provides financially struggling states with extra support from the central government. This support can include a higher share of central funds and additional tax benefits, offering a significant boost to the states' economies.

The Genesis of SCS

The concept of SCS dates back to 1969 when the Finance Commission proposed it to assist India's border states, economically backward regions, states with substantial tribal populations, and newly formed states needing time to stabilize. This initiative aimed to provide these states with the necessary support to overcome their unique challenges.

The Contenders: Bihar and Andhra Pradesh

Bihar's Case for SCS

Bihar, a long-time contender for SCS, primarily relies on agriculture, an industry highly susceptible to natural disasters like droughts and floods. The state's limited industrial development has resulted in scarce job opportunities outside agriculture. Historical policies such as Freight Equalization, which subsidized transportation costs nationwide, further disadvantaged Bihar by encouraging industrial development in coastal and market-adjacent areas, rather than in resource-rich but inland states like Bihar.

The separation of Jharkhand over two decades ago exacerbated Bihar's struggles, stripping it of valuable industries and mineral resources. Consequently, Bihar remains India's poorest state, with significant portions of its population lacking access to basic amenities like cooking fuel, electricity, homes, and bank accounts. The state's financial constraints have hindered improvements in education and healthcare, with only about 30% of its revenue coming from its own taxes. Bihar heavily relies on central government transfers to sustain its economy.

Andhra Pradesh's Struggles

Andhra Pradesh's economic woes began with the loss of Hyderabad to Telangana, which significantly reduced its revenue and skilled workforce. The state also faced challenges in funding the construction of its new capital, Amaravati, leading to a rise in debt from 24% to 30% of its Gross State Domestic Product (GSDP). Despite not being as economically distressed as Bihar, Andhra Pradesh believes that SCS could alleviate its financial strain and help it regain stability.

The End of SCS and Its Implications

In 2014, the Indian government ceased granting SCS to new states, limiting this status to the 11 states, including Jammu & Kashmir (now a Union Territory), Himachal Pradesh, Uttarakhand, and the Northeastern states, that already had it. The government argued that SCS was a long-term commitment, and extending it further would strain central finances.

Instead, the central government increased the revenue share for states from 32% to 41% and offered grants to states facing financial shortfalls. However, Bihar and Andhra Pradesh argue that these measures are insufficient. SCS would cover 90% of the costs for centrally sponsored schemes, compared to 60% for other states, and provide tax concessions to attract businesses. The higher tax devolution and one-time financial grants cannot match the benefits of SCS.

The Path Forward

Despite the official end of SCS, states like Bihar and Andhra Pradesh continue to advocate for its reinstatement. The replacement of the Planning Commission with the NITI Aayog in 2014 made SCS allocation optional, giving the central government the discretion to reintroduce it based on NITI Aayog's recommendations. However, this would significantly increase government expenditure, leading to reluctance in granting SCS.

With a new coalition government in place and increased political leverage for states like Bihar and Andhra Pradesh, the debate over SCS may resurface. Will these states succeed in reviving SCS and securing the financial support they need, or will they have to settle for the current system of revenue sharing and grants? Only time will tell.