Context

• Special Category Status (SCS) has played a crucial role in addressing regional disparities, its future remains uncertain amidst evolving political and economic landscapes.
• Leaders of aspiring states push for SCS for political reasons without thoroughly assessing the net benefits.
• The challenge lies in finding a balanced approach that continues to support underprivileged states while ensuring equitable development across the country.

The Concept of SCS and Role of the National Development Council (NDC) and Finance Commission (FC)

• The concept of SCS was introduced in 1969 during the Fourth Five-Year Plan by the Planning Commission, aiming to address the disparities in development among Indian states.
• The NDC played a significant role in this process by providing plan assistance to states using the Gadgil formula, which gave higher weightage to population and economic deprivation.
• This formula ensured that 30 percent of funds were reserved for SCS states.
• The FC also recognised the importance of SCS and incorporated it into their budgetary deficit considerations and tax devolution criteria.
• These states benefited from a funding model where 90 percent of centrally-sponsored schemes were grants and the remaining 10 percent were loans, unlike other states which received 60 or 75 percent grants.

Additional Benefits of Special Category Status

• Concession in Taxes
  • SCS states receive significant relief in excise duties, which are taxes levied on the manufacture of goods within the country.
  • This relief helps local industries by reducing their tax burden, encouraging industrial development and investment in these states.
  • Concessions in customs duties, which are taxes imposed on imported goods, lower the cost of imported raw materials and goods for industries in SCS states.
  • This reduction makes it more economical for businesses to operate and expand in these regions, fostering economic growth.
  • These lower tax rates make the states more attractive to both individuals and businesses, encouraging investment and the establishment of new enterprises.
• Higher Central Plan Status
  • SCS states receive 90 percent of the funding for centrally sponsored schemes as grants, with only 10 percent provided as loans.
  • In contrast, other states receive 60 or 75 percent as grants and the remaining amount as loans.
  • This favourable funding structure greatly reduces the financial burden on SCS states, enabling them to undertake more development projects.
  • The higher central assistance provides SCS states with greater flexibility in utilising funds for various developmental projects.
  • This flexibility allows states to tailor the use of funds to address their specific needs and challenges effectively.
• Enhanced Financial Transfers
  • The Finance Commission's criteria for tax devolution have often favoured SCS states, ensuring a higher share of central taxes is transferred to them.
  • This higher share helps compensate for their developmental lag and geographical disadvantages.
  • The Finance Commission also considers the budgetary deficits of SCS states more favourably.
  • This consideration results in additional financial support to cover gaps in their budgets, ensuring they can maintain essential public services and infrastructure projects.

Transition to NITI Aayog and Current Scenario

• With the replacement of the Planning Commission by NITI Aayog, the mechanism for central plan assistance has changed.
• Now, all Centre-to-state transfers are managed through the Finance Commission, except for specific central sector and centrally sponsored schemes.
• While the structural framework has evolved, the core objective of supporting underprivileged states remains.
• The transition has introduced a more streamlined and accountable process for fund allocation, with a focus on performance-based incentives and outcome-oriented funding.
• However, the fundamental benefits that SCS states received in terms of financial support and tax concessions continue to play a crucial role in their development trajectories.

Recommendations of the 14th and 15th Finance Commissions

• Acknowledgment of Demands and Concerns by 14^th FC
  • The 14th Finance Commission did not consider SCS in its recommendations, though it acknowledged the demands and concerns of various states.
  • It proposed higher allocations for northeastern states, Uttarakhand, and Himachal Pradesh, continuing the trend of higher grants and lower cost-sharing for central projects.
  • Special grants were also sanctioned to address specific challenges faced by these states.
• No Mention of SCS in 15^th FC
  • The 15th Finance Commission did not explicitly mention SCS but allocated 10.5 percent of devolved taxes to the northeastern and hilly states, accounting for only 5.2 percent of the population.
  • This decision resulted in lower shares for southern and western states.
  • The Commission also considered factors like ecology and area, leading to a higher share of divisible taxes for these states.
  • The shift to using the 2011 Census population data, as opposed to the 1971 data, further increased their share due to higher population growth in SCS states, except Himachal Pradesh.

Challenges and Future Considerations

• Political Controversies and Bargaining
  • One of the most significant challenges with SCS is its transformation into a tool for political bargaining.
  • The increased presence of regional parties in the central government has intensified demands for SCS, often driven by political rather than developmental motives.
  • This politicisation of SCS complicates the objective assessment of which states genuinely need special assistance.
• Fiscal Implications
  • The central government faces budgetary constraints and must balance the need for supporting SCS states with other fiscal responsibilities.
  • Allocating a significant portion of funds to SCS states can strain the overall budget.
  • Ensuring equity among states is a challenge, as other states may perceive the benefits to SCS states as unfair, leading to demands for similar concessions.
  • This can create regional tensions and calls for a re-evaluation of the SCS framework.
• Administrative Challenges
  • Ensuring that SCS states effectively utilise the funds and benefits provided is crucial and mismanagement or under utilisation can negate the intended developmental impacts.
  • There needs to be a robust framework for transparency and accountability in the allocation and utilisation of funds.
  • This includes regular audits and assessments to ensure that the benefits are reaching the intended targets.
• Establishing Clear, Updated Criteria
  • The government should develop an inclusive framework that considers a wide range of factors, including economic performance, social development indices, and ecological vulnerabilities.
  • Also, there is a need to establish a mechanism for regular review and updating of the criteria to ensure they remain relevant and effective in addressing emerging challenges.
• Strengthening Institutional Mechanisms
  • Strengthening institutional mechanisms to ensure transparency, accountability, and effective utilisation of resources is crucial.
  • Implementing robust monitoring systems to track the progress and impact of SCS benefits, ensuring they are used effectively for intended purposes.
  • Building the capacity of state governments to manage and implement projects efficiently, ensuring that the benefits of SCS are fully realised.

Conclusion

• The future of SCS in India depends on addressing its current challenges and evolving the framework to meet contemporary needs.
• By establishing clear, updated criteria, strengthening institutional mechanisms, and developing regional cooperation, SCS can continue to play a pivotal role in ensuring balanced regional development.
• The focus must remain on equitable growth, transparency, and accountability to achieve the intended socio-economic transformation of underprivileged states.