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Given that economic benefits under the ‘Special Category’ status are minimal and have been diluted over the years, States would be better off seeking a special package

A number of States have staked their claim for the ‘Special Category’ status in recent years. The issue has again taken centre stage following the Union Planning Minister Rao Inderjit Singh’s reply to a pointer in the Lok Sabha on July 31, 2015 that the question of granting such status to any State does not arise. The reason given by the Minister was that the Fourteenth Finance Commission (FFC) had increased the tax devolution to States from 32 per cent to 42 per cent of the divisible pool of central taxes obviating the need for specific categorising. Given the emotive discourse around the demand, understanding the issues involved in it will facilitate a dispassionate stand on the subject both by the Union government and the States.
Under the ‘D.R. Gadgil formula’ for the distribution of central plan assistance, which became operational during the fourth Five Year Plan, the requirements of Assam, Jammu and Kashmir and Nagaland were to be met first and the balance of central assistance distributed to the remaining States based on certain criteria.
At the time of the formulation of the fifth Five Year Plan, it was decided to include Himachal Pradesh, other Northeastern States and Sikkim in the above category. For the first time, these 10 States were categorised as ‘Special Category States’ to distinguish them from others. Later on, Uttarakhand was accorded the ‘Special Category’.
Traits for categorisation
‘Special Category’ status had been granted in the past by the Union government to States having certain characteristics based on the recommendations of the National Development Council. These included i) hilly terrain; ii) low population density and/or sizeable share of tribal population; iii) strategic location along borders with neighbouring countries; iv) economic and infrastructure backwardness; and v) non-viable nature of State finances.
Under the revised Gadgil-Mukherjee formula, which was in operation till 2014-15, 30 per cent of the normal central assistance was earmarked for ‘Special Category States’ and the remaining 70 per cent to General Category States. ‘Special Category States’ were entitled to get such assistance in the grant-loan ratio of 90:10 as compared with 30:70 ratio for other States.
In addition to their earmarked share in normal central assistance, special plan assistance for projects (90 per cent grant) and untied special central assistance (100 per cent grant) were being given only to ‘Special Category States’. Other benefits to ‘Special Category States’ include assistance for externally-aided projects in the grant-loan ratio of 90:10, whereas such assistance to other States is on back-to-back basis.
Under the Accelerated Irrigation Benefit Programme (AIBP), ‘Special Category States’ get 90 per cent of the project cost as grant as compared with 25 per cent grant for others. The matching contribution in respect of Centrally Sponsored Schemes (CSS) is usually lower for ‘Special Category States’, more particularly, for those in the Northeastern region.
Though all the ‘Special Category States’ are provided with central incentives for the promotion of industries, there is no explicit linkage between the incentives and the special status. The package of incentives is different for the States of Jammu and Kashmir, Himachal Pradesh, Uttrakhand and the States located in the Northeastern region. These packages have more to do with their backwardness than the status.
Progressive dilution
Several changes over the years, more particularly those introduced in the Union Budget 2015-16, have resulted in considerable dilution of benefits to the ‘Special Category States’. The loan component of normal plan assistance was dispensed with in 2005-06 and since then such assistance is being given only in the form of grants to all States, including those in the general category. Following this, the share of ‘Special Category States’ in total normal central assistance has been around 56 per cent from 2005-06 onwards. But the share of normal central assistance in total plan assistance, which was the predominant channel of central plan assistance to States, had come down to about 15 per cent with the proliferation of Centrally Sponsored Schemes (CSS), with resultant dilution of the benefit of untied grants to States. Following the increase in tax devolution to States from 32 to 42 per cent of divisible pool of central taxes, the Centre has dispensed with normal plan assistance, special central assistance and special plan assistance from 2015-16 onwards.
There are very few externally aided projects in the ‘Special Category States’. The Union Budget 2015-16 has drastically reduced the allocations under AIBP from Rs.8,992 crore in 2014-15 to just Rs.1,000 crore. AIBP is now included in the list of schemes to be run with higher matching contribution by States.
The ‘Special Category’ status is not so special anymore following the above changes. The only attraction that remains is the benefit of assistance for externally aided projects (90 per cent grant). But even this will be of limited benefit if any new state is accorded special category for a limited period of five years or so as disbursal of external assistance cannot be substantial in such a limited period. The benefit of lower matching contribution for ‘Special Category States’ for CSS is unlikely to be substantial with the reduction of assistance to State plans by over 40 per cent to Rs.1,96,743 crore in 2015-16.
New criteria
Following the demand for Special Status by Bihar, a committee was appointed under Dr. Raghuram Rajan in 2013. This committee suggested that States classified as ‘Special Category States’ and those seeking inclusion in that category, would find that their need for funds and special attention more than adequately met by a basic allocation to each State and the categorisation of some as ‘least developed’.
Furthermore, it is not politically feasible to consider special status to any new State as any such decision will result in demands from other States and dilute the benefits further. It is also not economically beneficial for States to seek special status as the benefits under the current dispensation are minimal. States facing special problems will be better off seeking a special package.
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Financial assistance provided by Government of India to support State’s Five Year/intervening annual plans is called Central Plan Assistance (CPA) or Central Assistance (CA).

CPA or CA primarily comprises of the following:
(a) Normal Central Assistance (NCA): The distribution of the NCA is formula based (see Gadgil-Mukherjee Formula) and is untied. Gadgil Formula of determining the Central Assistance to the State is being adopted from the fourth five year plan and revised subsequently. Planning Commission makes the allocation and Ministry of Finance, release the funds in 12 Monthly Installments. From 01.04.2015 onwards, there is no allocation under NCA. This is because the 14th Finance Commission (FFC) has substantially enhanced the share of the States in the Central divisible pool from the current 32 % to 42 %, which is the biggest ever increase in vertical tax devolution. FFC recommendations factor in both Plan and Non-plan revenue expenditure of the States and tax devolution is untied. The last two Finance Commissions i.e. 12th FC (2005-10) and 13th FC (2010-15) had recommended increase of 1% and 1.5% respectively. Besides share of central taxes, FFC has recommended grant – in –aid amounting to Rs.5.4 lakh crore over its award period to cover Revenue Deficit of States, local body grants (both to rural and urban local bodies) and grants for augmenting the State’s Disaster Response Fund (SDRF). Seen over the Finance Commission’s award period, there is an increase of about Rs. 25 lakh crore in tax devolution and Rs.2.7 lakh crore in grant-in-aid recommended by the FFC as compared to the 13th Finance Commission. During 2015-16 alone, increase in transfer to States over 2014-15 (both from tax devolution and FFC grants together), is estimated to be about Rs. 2.1 lakh crores.Since NCA was an untied assistance, higher transfer of untied devolution of taxes is expected to take care of no allocation under NCA. From 2015-16 onwards, the allocations under NCA are subsumed in the increased rate of tax devolution.
(b) Additional Central Assistance (ACA):This is provided for implementation of externally aided projects (EAPs), and for which presently there is no ceiling. Unlike NCA, this is Scheme based. The details of such schemes are given in the Statement 16 of the Expenditure Budget Vol. I. There can be One time ACA and advance ACA. One time ACA are assistance given by Planning Commission to particular States for undertaking important State specific programmes and schemes. These are one time assistance and thus not recurring. These assistances are discretionary in nature. Advance ACAare advances given to special category states in times of financial stress and recoverable in ten years.
(c) Special Central Assistance (SCA), which is provided for special projects/programmes e.g., Western Ghats Development Programme (WGDP), Border Areas Development Programme etc. (In exceptional situations, Advance Central Assistance, may also be provided.) This special plan assistance is given only to special category states to bridge the gap between their Planning needs and resources. In other words, SPAs are ACA to special category States. Special Plan Assistance (SPA) is provided to the Special Category States for funding of projects identified by the States that are not covered by any Central scheme and for non-recurrent expenditure of a developmental nature, based on the recommendation of the Planning Commission. From 01.04.2015 onwards, there is no allocation under SPA and SCA (untied).

CPA is provided, as per scheme of financing applicable for specific purposes, approved by Planning Commission. It is released in the form of grants and/or loans in varying combinations, as per terms & conditions defined by Ministry of Finance, Department of Expenditure.

Central Assistance in the form of ACA is provided also for various Centrally Sponsored Schemes viz., Accelerated Irrigation Benefits Programme, Rashtriya Krishi Vikas Yojana etc. and SCA is extended to states and UTs as additive to Special Component Plan (renamed Scheduled Castes Sub Plan) and Tribal Sub Plan. Funds provided to States under Member of Parliament Local Area Development Scheme @ Rs.5 crore per annum per MP also count as CA.

The term Plan Grants generally comprise of 'Block Grants’ which consists of Normal Central Assistance (NCA), Backward Regions Grant Fund (BRGF)- Scheme (State Component), Additional Central Assistance (ACA) for Externally Aided Projects (EAPs), Special Central Assistance (SCA), Special Plan Assistance (SPA), etc.
Since 2015-16, pursuing the recommendations of the 14th Finance Commission, Some of the schemes like NCA, SCA (untied), SPA, Additional Central Assistance for Other Projects (ACAOP), Other ACA, SCA for Hill Areas Development Programme (HADP/WGDP), SCA under Backward Regions Grant Fund (BRGF), National e-governance Plan (Mission mode project) and ACA for Left wing Extremism (LWE) Affected Districts have been discontinued or subsumed under higher devolution of taxes.
In the Union Budget 2016-17 it was stated that the Plan and Non-Plan classification will be done away with from fiscal 2017-18.A broad understanding over the years has been that Plan expenditures are good and Non-Plan expenditures are bad resulting in skewed allocations in the Budget. This is proposed to be corrected to give greater focus to Revenue and Capital classification of Government expenditure.