Pros and cons of special category status in Himachal :

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.

Criteria :

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.

Himachal Pradesh meet the criteria laid out bythen Planning commission. It has mountainous and hilly terrain and low population density. Himachal Pradesh shares the border with China. Special category states get benefits in funds and resource allocation. The Planning Commission allocates funds to states through Normal Central Assistance (NCA), Additional Central Assistance (ACA) and Special Central Assistance(SCA). Normal Central Assistance favours special category states and they get 30% of the total assistance while the other states share the remaining 70%. Special category states get funds in 90:10 ratio (90 % as grants and 10 % as loans), while the ratio between grants and loans is 30:70 (30 % grants and 70% loans)for other states. There is no fixed formula for SCA and it depends on the basis of the state’s plan size and previous plan expenditures. Besides this, special category states 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 for the purpose of assistance for externally aided projects and other specific project.

Pros of getting special category status :

• Preferential treatment in federal assistance and tax break.
• Significant excise duty concessions. Thus, these states attract large number of industrial units to establish manufacturing facilities within their territory leading to their economy flourishing.
• The special category states do not have a hard budget constraint as the central transfer is high.
• These states avail themselves of the benefit of debt swapping and debt relief schemes (through the enactment of Fiscal Responsibility and Budget Management Act) which facilitate reduction of average annual rate of interest.
• Significant 30% of the Centre’s gross budget goes to the Special category state.
• In centrally sponsored schemes and external aid special category states get it in the ratio of 90% grants and 10% loans. For the rest of the states as per the recommendations of the 12th Finance Commission, in case of centrally sponsored schemes only 70% central funding is there in the form of grant. The rest of the states receive external aid in the exact ratio (of grants and loans) in which it is received by the Center.

Cons of special category status :

1. Some states lobby central government to classify them in special category.

2. Data reveals that after granting special category status  not much economic progress  has been noticed among states.

3. After the 14th  Finance commission announcement of tax devolution to states increased from 32 % to 42 %, so that matter central assistance discontinued to even specisl category states.

4. 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.

Raghuram Committee recommendations :

Raghuram Committee proposed changes in providing special status. The proposed methodology allocates funds across states based on need thus underdevelopment index has been constructed.
The underdevelopment index the Committee proposes includes the following ten sub-components: (i) monthly per capita consumption expenditure, (ii) education, (iii) health, (iv) household amenities, (v) poverty rate, (vi) female literacy, (vii) percent of SC-ST population, (viii) urbanization rate, (viii) financial inclusion, and (x) connectivity. The Committee recommends that “least developed” states, as identified by the index, be eligible for other forms of central support that the Central Government may deem necessary to enhance the process of development.
Following the constitution of the NITI Aayog (after the dissolution of the Planning Commission) and the recommendations of the Fourteenth Finance Commission (FFC), Central plan assistance to SCS States has been subsumed in an increased devolution of the divisible pool to all States (from 32% in the 13th FC recommendations to 42%) and do not any longer appear in plan expenditure.