Bihar’s Chief Minister, Nitish Kumar has been unrelenting in his pursuit of the “special category” status for the State in recent months – and with elections around the corner, we may not hear the end of it anytime soon. Could it merely be a key poll plank for the party in the upcoming elections or dare we see it as the answer to Bihar’s many development woes? – We explore these questions below.

What is the concept of a “special category state”?

In 1969, when the Gadgil-Mukherjee[1] formula for sharing Central Plan assistance among states was conceived, Assam, Nagaland and Jammu & Kashmir were characterized as ‘special-category’ – or states that needed an extra push to bring them on par with development levels in other states. Over time, the number of special category states grew and today there are 11 such states – Arunanchal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, Himachal Pradesh and Jammu & Kashmir (We may soon have a 12th entrant with the government having recently announced special category status to Seemandhara). The initial identifying features of special category states were harsh terrain (hilly regions, international borders), backwardness and social problems prevalent in the state.

The key benefits of a special status to a State are:

• A higher share in the Union government’s resource allocation – 30% of the Centre’s Plan Budget support goes to special category states.
• Significant excise duty concessions aimed at attracting investments in industries to relocate/locate manufacturing units to the State.
• Until 2004-05, 90 % of the Central assistance to special category states used to be treated as a grant and the remaining 10 % was considered as an interest free loan. (This ratio was 70:30 for general category states).
• The 12th Finance Commission recommended the Centre give only grants, and leave it to the states to raise loans. In fact, since 2005-06, with the advent of large Centrally Sponsored Scheme (CSS), the loan component for both categories has been reduced substantially. Instead, States are required to provide matching grants under such scheme, with differing norms for the 2 categories. For instance, under the Sarva Shiksha Abhiyan (SSA), general category States need to provide 35% of the total expenditure and 65% is borne by the Centre. For special category states, however, the ratio is 10:90.

Not just Bihar, but Chhattisgarh, Jharkhand, Odisha, West Bengal and Rajasthan have all also been demanding special category status for a decade now. We compare some of Bihar’s key financial indicators with other BIMARU states to see what makes Bihar special in its need for a special category status.

Overview: Per Capita Income, Population and GSDP

Uttar Pradesh has the lowest per capita income of all the BIMARU States, closely followed by Bihar.

*at 2004-05 constant prices

Source: The Planning Commission

Ability to raise revenue internally

Of all the BIMARU states, Bihar seemingly has the hardest time raising revenues internally.  As a percentage of total tax revenue generated by general category states internally, Bihar has only a 2.4% share. The figure is even lower for non tax revenue at 1%.  By no means is this a result of the State’s population (as a loose proxy of the size of its economy) as Bihar ranks second only to UP among the 4 states.

In this context, it may be argued that such granting special status to the state of Bihar may create incentives for investment to come in to the State, generating incomes and raising the ability of the State to raise resources internally. Of course, merely granting tax holidays to investors may not be enough to bring them in and other complementary measures may be needed to be taken the state government as well.

All figures as % of respective totals for all states in the category (special/ non special)

Source: “State Finances: A Study of Budgets, 2014”, RBI

Social Sector Spending

Of all BIMARU states, Bihar spends the least per capita on the social sector. These numbers should be interpreted carefully. Viewed simply, they could signal that the state’s resource envelope is so small that it is unable to spend any higher amount on its social sector. This can also be seen above in low per capita income figures and a low ability of the state to generate revenues internally. However, such low spending can also indicate more fundamental, systemic problems with the State’s ability to spend the money available with it. Such problems may manifest themselves in many ways – inadequate planning, bottlenecks in the flow and release of funds, lack of financial autonomy with the end user of funds, a top down approach to fund allocation often leading to a mismatch between what the money is allocated for and what really needs to be spent on – so on and so forth.

In such circumstances, merely a higher allocation of funds to the State via a special status route may not be enough.

Source: “State Finances: A Study of Budgets, 2014”, RBI

Central Assistance: Loans, Grants and Share in Central Taxes

Bihar receives 12% of all Central taxes being distributed among the general category states in 2011-2012. This is the second highest share not only among BIMARU states, but among all the general category states, with no close second. Even among the share in grants, Bihar receives a significant share – placing it in the top 5 states across the non-special category. (Pradesh, Andhra Pradesh, Maharashta and West Bengal are the 3 states receiving a higher share of Central grants than Bihar)

* As % of respective totals for all states in the category (special/ non special)

Source: “State Finances: A Study of Budgets, 2014”, RBI

Looking at the 3 heads under which a State may receive money directly from the Centre, we see that Bihar performs significantly above the average and receives considerable Central assistance. Of course, whether this is adequate or not may be debated but it remains true that not only are there other poor states that receive significantly less (for instance Orissa received 2.3 billion INR in loans in 2011-2012, and had a 5.3% share in central taxes and 6.3% share in central grants) – but also that there exist far deeper problems in our poor states (including Bihar) that cannot be solved by just throwing more money at them.

It must be noted that there exist no objective criteria for distribution of funds among the special category states. While the main considerations should be relative poverty and development needs (including those arising out of structural issues such as terrain), often these may be politically motivated decisions – led by the relationship of the incumbent State and Central governments. The concept of special category states may also need to be revisited and it must be recognised that poverty and growth are complex problems that demand complex solutions addressing not just financial issues, but also questions of political will,  governance, administrative accountability, capabilities and deep, systemic changes.

[1] The Gadgil-Mukherjee Formula works in two stages. First, 30 percent of total assistance money is earmarked for the special category states. This may be distributed among these states on the basis of their plan size and past plan expenditures, without using any explicit criteria. The remaining 70 percent are distributed among the general category states according to a set of criteria with relative weights. These criteria have been summarised in Avani Kapur’s blog on “Backwardness and Special Status”.