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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.

  1. Lok Sabha unstarred question no. 667, 27 Feb, 2013, Ministry of Planning
  1. Ravi
    April 20th, 2013 at 09:11 | #1

    There is a minor correction- 13th FC has set aside 32% of central taxes to be partaken by states, not 32.5%

  2. Krishnam Naidu
    June 15th, 2013 at 13:00 | #2

    Great work … keep it up yaar

  3. Krishnam Naidu
    June 19th, 2013 at 10:48 | #3

    could you please elaborate the difference between Special Central Assistance and Special plan assistance and also please explain how centrally sponsored schemes are playing major role in centre-state transfer of finances …. thanks in advance

  4. saurabh
    November 24th, 2013 at 14:17 | #4

    thanks a lottt

  5. February 21st, 2014 at 00:24 | #5

    Today PM has announced special category status for Seemandhra (the residual state of AP). Based on the above explanation how much funds will be given to the new state?

  6. Naren
    April 1st, 2014 at 23:28 | #6

    well organized data and framed the related contents spot on. I was looking for information on SCS and i got it here with details. Thank you and keep up the good work.

  7. November 9th, 2014 at 06:31 | #7

    Is nt it 32% of the net central taxes and duties that go to the states/UTs ,and not 32.5%?

  8. Nirmal
    March 5th, 2015 at 23:13 | #8

    As per the criteria, special status can not be given to Seemandra (AP). More over the AP state has only 6000 crores of revenue deficit which is just less than 10% of state income. I dont think AP needs 90% of financial grants from central govt.

    If AP state govt has revenue deficit why should they offer free power for villages, 43% hike for employees and 40,000 crores rupees of farmer loans wavier?? Its government improper reforms which is making them revenue deficit.

  9. venugopal
    May 10th, 2015 at 16:06 | #9

    I have gone through the requirments for special staus category. In regards to residual state of AP
    the then PM unknowings used the words of “special category’.Let him be excused.
    It is better not to make politics out of it. It is clearly seen tht AP will not come under the category. Then why not the BJP and TDP decides for alternatives for providing finances to AP? .They must stop blame game. As long as public does not understand politics. politicians can talk any thing.
    But when they are aware of your blame game, the parties in power will have to pay very heavily.

  10. srinivas
    October 1st, 2015 at 16:53 | #10

    we want special status

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