*** Information in this post is extracted from "Teaching and Research Associate, Gujarat National Law University, Gandhinagar" and http://planningcommission.gov.in/ website. ***
What is "Special Category Status" means..??
The decision to grant special category status to States lie with the National Development Council
composed of the Prime Minister, Union Ministers, Chief Ministers and members of the Planning
Commission, who guide and review the working of the Planning Commission. Initially, three
states namely Assam, Nagaland and Jammu & Kashmir were accorded special category status
and later on eight other states were also given special category status namely: Arunachal
Pradesh, Manipur, Meghalaya, Mizoram, Uttarakhand, Tripura, Himachal Pradesh, and Sikkim
and thus the list is now increased to eleven.
The bases on the basis of which NDC decides
whether a State should be accorded special status or not includes: hilly and difficult terrain; low
population density and or sizeable share of tribal population; strategic location along borders
with neighboring countries; economic and infrastructure backwardness and non-viable nature of
state finances. At the time of resource allocation by the centre to States, these special category
States are at a beneficial position. After the Report of Fifth Finance Commission, a formula was
fixed for the distribution of resources between the states. This formula was named after the then
deputy Chairman of Planning Commission Dr. Gadgil Mukherjee.
The Gadgil-Mukherjee
Formula adopted by consensus in 1991 was made the basis for the distribution of tax revenue and
grants during 8th Five Year Plan (1992-97) and has since been in use. Among states, the
distribution of tax revenue and grants is determined through the formula accounting for
population (25%), area (10%), fiscal capacity (47.5%) and fiscal discipline (17.5%). The Finance
Commission and the Planning Commission are bodies entrusted with the work of transferring the
resources from the Centre to the States.
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. Normal Central
Assistance favours special category states and they get 30% of the total assistance while the
other states share the remaining 70%. NCA is in the form of 90% as grants and 10% loans for
special category states, while the ratio between grants and loans is 30:70 for other states. There is
no fixed formula for Special Central Assistance 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. The Finance Commission is entrusted with the work of distribution of central tax revenues
among states. The Finance Commission also recommends the principles governing non-plan
grants and loans to states.
In order to achieve the status of a special category state, a state has to project itself as socioeconomically
or strategically vulnerable state however it is ironical that a number of states are
demanding their names to be included in the list of special category states in order to exploit the
numerous benefits conferred to states which are accorded this special status by NDC.
Distribution of Central Plan Assistance:
General and Special Category States
A major change happened when in the dispensation of plan assistance, plan loans
were delinked from plan grants after the recommendations of the Twelfth Finance
Commission. Since the implementation of delinking of plan loans from plan grants, a review
of criteria on the basis of which grants are distribute across states has also become more
relevant because the principles on which loans should be given and the principles on which
grants should be given are entirely different. In particular, loans can be given based on
capacity to utilize and service the loans efficiently while grants should be given based on
needs.
Finance Commission Criteria and Plan Grant Criteria
One of the terms of reference to this Working Group has asked us to examine the case
for adopting the Finance Commission resource allocation formula for the inter se allocation
of plan grants. There is a major difference in the objectives that guide the formulation of
resource transfers undertaken by the Finance commission and that by the Planning
Commission although there is also a clear inter-connection between the two streams of
resource transfer.
In the case of Finance Commission, the objective is to make allocations such that
fiscal capacities are equalized with a view to enabling the states to provide public services
and merit services at equal standards to all citizens in the state provided that comparable tax
effort is made by the states. In other words, differences in the service standards should be due
largely to deficiency in own tax effort and not due to deficiency in fiscal capacity. In
determining the interse shares, at any point of time fiscal capacity is taken to be given.
Plan grants in combination with borrowed resources aim at the developmental effort
of the state. The objective is to change the fiscal capacity itself. Plan grants therefore must
aim at reducing the differences in fiscal capacity: larger transfers should be given to states
with lower development levels. Since per capita incomes is generally taken as summary
indicator of the level of development, it should be the main determinant in the case of plan
grants: lower the per capita income higher the transfer. However, deficiency in development
effort should not be rewarded.
Gadgil-Mukherjee Formula:
A Review
The Planning Commission used to provide developmental grants to states as part of an
overall assistance package. This package was determined as a composite of loans and grants.
The relative ratios of loans and grants were different for the special category states as
compared to the general category. For the general category states, assistance was 30 percent
grant and 70 percent loan. For the special category states, 90 percent of assistance was given
as grant and 10 percent as loan. The expenditure side of state budgets may be divided into
four parts: non-plan revenue expenditure, plan revenue expenditure, plan capital expenditure,
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and non-plan capital expenditure. The first and second components combined to give the
revenue account of a state, which pertains to recurrent (revenue) expenditures. Plan assistance
was meant for the second and third components taken together. In the initial stages, when
plan assistance was conceived of in terms of an overall package, the expectation was that
nearly 30 percent of the plan would actually be in the nature of recurrent expenditures and 70
percent would pertain to capital expenditures. In accordance with such an expectation, the
grant to loan ratio in plan assistance was fixed as 30 and 70 percent of total plan assistance. It
was expected that all capital expenditures would be met by borrowing and by surpluses on
revenue account. As such no capital grants were envisaged for the general category of states
in plan assistance.
The position of the special category states was different in the sense that from the 90
percent that they were getting as grant, 30 percent could be allocated for the revenue
component of the plan, and the balance of 60 percent could then emerge as a capital grant. In
practice however the relative claim of recurrent expenditure continued to increase and has
become on an average 60 percent of plan outlay in the case of general category states.
Borrowing thus basically finances capital expenditure, in the general category states. In fact,
it is not only that there are no capital grants, but also that a substantive part of current
expenditures are also being financed by borrowing.
The overall dispensation of (normal) plan assistance can be summarised according to
special and General category states, and according to grants and loans as indicated in below table. Two other channels of plan assistance are additional central assistance (ACA) and
external assistance. Both were given on the same terms and conditions as normal plan
assistance prior to a change in the terms and conditions for transmission of external
assistance. After the recommendations of the Twelfth Finance Commission, external
assistance is passed on to the states, as additional central assistance on back to back basis that
is, on the same terms and conditions as the original external assistance.
The Planning Commission allocates aggregate (normal) plan assistance among states
under a set of criteria called the Gadgil-Mukherjee Formula. The original formula has been
subjected to changes from time to time and the present version is referred to as the National
Development Council (NDC) revised Gadgil-Mukherjee Formula. As noted, the GadgilMukherjee
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 Table 4.2. A
comparison can also be made between the alternative versions of the formula, as it has
changed over time. The Planning Commission does not publish the actual shares of states
either criteria-specific or aggregate as is done by the FC. The shares may change under each
criterion, as more recent data on income, tax effort, etc., become available. However, as far as
population is concerned, only 1971 population is used.
Notes: 1. Fiscal management is assessed as the difference between states’ own total plan resources
estimated at the time of finalising Annual Plans and their actual performance, considering latest
five years.
2. Under the criterion of the performance in respect of certain programmes of national priorities the
approved formula covers four objectives, viz.: (i) population control; (ii) elimination of illiteracy;
(iii) on-time completion of externally aided projects; and (iv) success in land reforms.
The important elements in this formula relate to factors of population, deviation of
income from mean income, distance of income from highest income, and other factors
reflecting fiscal discipline and achievement of national objectives. Due to the very high
weight given to the population factor, which allocates equal per capita shares to all states,
dispensations under the Gadgil Formula are only mildly progressive.
When the original Gadgil Formula for the distribution of central assistance for State
Plans was approved by the National Development Council in September 1968, it was agreed
that the requirements of Assam, Jammu & Kashmir and Nagaland should first be met out of
the total pool of central assistance. For the three annual plans immediately preceding the
application of Gadgil Formula, the share of Assam, Jammu & Kashmir, and Nagaland in total
plan assistance was 9.26 percent. For the Fourth Plan (1969-74) when the Gadgil Formula
was first applied, an amount was earmarked for these three states, but their share averaged to
a little above 11 percent. For the Fifth Plan, the share of these states was a little 15 percent.
For two annual plans (1978-80), the share of these states became a little more than 16
percent. When the Fifth Plan was formulated, this list was extended to include Himachal
Pradesh, Manipur, Meghalaya, Sikkim and Tripura, making eight states in all. It is only since
1980 that the share of Special Category states was predetermined at 30 percent. In 1990, the
number of special category states was increased to 10 with the inclusion of Arunachal
Pradesh and Mizoram.
The main weaknesses in the application of the Gadgil-Mukhjerjee Formula in its
various mutations are summarised below:
i. There is no explicit basis for a 30 percent earmarking for the Special Category
states.
ii. Shares determined on the basis of tax effort and fiscal discipline indexes are
unscaled implying that if a large state like Maharashtra and a small state like Goa
had the same tax effort ratio, they will get the same share regardless of their size.
This would lead to a very large per capita share for Goa compared to that for
Maharashtra, for example, for the same tax effort.
iii. The link between plan schemes/projects and plan assistance has been lost, leading
to a severing of a link between costs and benefits, and lack of effective project
based monitoring; and
iv. The 30:70 grant to loan ratio has long become irrelevant if the 30 percent grant
ratio was meant to cover revenue expenditure on plans.
v. There are no objective criteria for the distribution of 30 percent earmarked share
among the special category states.
Why Andhra Pradesh Needs Special Category Status..?
Will continue in my next post..!!
