The discussion on granting special status to Bihar and Andhra Pradesh has regained momentum following the BJP-NDA alliance's victory in the 2024 Lok Sabha elections.
The Bharatiya Janata Party (BJP) finds itself in a precarious position within the National Democratic Alliance (NDA).
The weakened mandate might compel the BJP to accede to long-pending demands from the Janata Dal (United) and Telugu Desam Party (TDP) for special status for Bihar and Andhra Pradesh.
While this move might appear politically expedient, it carries significant economic risks that warrant a closer examination.
What is Special Category Status?
Introduced in 1969 by the Fifth Finance Commission's recommendation, Special Category Status is a classification granted by the central government to aid the development of states facing socio-economic or geographical disadvantages. Criteria considered include:
- Hilly and challenging terrain.
- Low population density or a significant tribal population.
- Strategic location along international borders.
- Economic and infrastructural backwardness.
- Non-viability of state finances.
Currently, states with Special Category Status include Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, and Uttarakhand.
Benefits
Previously, states with Special Category Status received grants based on the Gadgil-Mukherjee formula, allocating nearly 30% of total central assistance to these states. However, following the abolition of the Planning Commission and recommendations from the 14th and 15th Financial Commissions, this assistance has been merged into increased devolution of funds for all states, rising from 32% to 41% in the 15th FC.
Additionally, Centre-State funding for centrally sponsored schemes in Special Category Status states is divided in a 90:10 ratio, significantly more favorable than the 60:40 or 80:20 splits for other states. These states also enjoy various incentives such as concessions in customs and excise duties and income tax rates.
Granting special status to Bihar and Andhra Pradesh seems like a strategic maneuver to secure political alliances and maintain stability within the NDA. However, this approach could undermine the fiscal discipline that the BJP-led central government has prided itself on over the past decade.
Special status would mean increased financial assistance for these states, which, while beneficial for their development, could add substantial strain to the Centre’s finances.
Special status translates into higher central transfers for welfare schemes, preferential allocations, and sometimes tax incentives. Analysts warn that these additional expenditures could inflate the fiscal bill at a time when India aims to achieve a 4.5% fiscal deficit-to-GDP ratio by FY26.
The current fiscal year is already expected to see a deficit of 5.1%, down from 5.6% in FY24. Any further increase in expenditure could derail these consolidation efforts and weaken India’s fiscal health.
There is no denying that Bihar and Andhra Pradesh have compelling reasons for seeking special status. Bihar’s persistent lag on various economic indicators and Andhra Pradesh’s ambitious welfare promises necessitate significant financial support.
Special status would indeed strengthen their finances, facilitating development projects and welfare schemes that could uplift their populations.
Yet, the question remains: Should the central government prioritize these demands at the expense of broader fiscal stability?
Former RBI Governor Raghuram Rajan’s 2013 committee recommended a more holistic approach to fund allocation based on a state’s development needs and performance, rather than the special category status.
This method was intended to ensure a more equitable distribution of resources, reflecting the nuanced realities of each state’s developmental trajectory.
There is also a broader concern about the rising tide of populism in Indian politics. Analaysts cautioned that, the BJP, in a bid to regain political momentum, might introduce populist measures that could reverse the hard-won fiscal consolidation of recent years.
While welfare schemes are crucial for social equity, they must be balanced against the imperative of fiscal sustainability, they said.
Excessive populism risks creating a cycle of debt and dependency, stymying long-term economic growth.
These states need support, but the solution must be balanced and fiscally prudent.
Enhanced central assistance could be coupled with stringent accountability measures and targeted development programs that ensure funds are used efficiently and effectively.
The Centre could also explore innovative financing mechanisms, such as public-private partnerships, to reduce the fiscal burden while promoting sustainable development.
Additionally, cultivating a culture of self-reliance and capacity building within states can help them generate their own revenues and reduce dependency on central funds over time.
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