The Lok Sabha on Friday witnessed friends-turned-foes BJP and Janata Dal (United) jointly articulating the urgency of giving Bihar the special status. Bihars demand grew in intensity amid indications that Seemandhra, which perceives itself to be the loser in the splitting of Indias fourth-largest state, could also get a wholesome financial package besides a five-year special-category tag. Such packages (formalised as special Plan assistance or special central aid) are what would help states like Bihar more than the special category tag, analysts feel.
Coaxed by UPA chairperson Sonia Gandhi, Prime Minister Manmohan Singh is expected to announce the package for Seemandhra soon. Besides Bihar, at least five other states (Chhattisgarh, Jharkhand, Odisha, Rajasthan and Uttar Pradesh) have in the past clamoured for special-category status and are now likely to reassert themselves, causing a headache for policymakers and planners at the Centre.
Pertinently, unlike the 11 special category states eight northeastern states plus J&K, Himachal Pradesh and Uttarakhand the ones that now want the tag are much bigger, economically. Even now, the Finance Commissions criteria for the tax revenue devolution to a state that is indexed, inter alia, to population, land area and backwardness are hugely beneficial to states like Bihar. And these benefits, at least in absolute terms, are much bigger than the special category tag itself would bring certainly so if the excise duty waiver for industries in the special category states is excluded.
The imbroglio that would result from a random raising of the pitch by Bihar and other backward states is a potential threat to the equity of Indias fiscal federalism. It could make things difficult for the Centre, which is actively considering a rejig of the present norms for resource allocation to states using the multidimensional index to identify backwardness proposed by the Raghuram Rajan committee. Experts believe that employing the Rajan index would be much more beneficial to all the six states demanding special-category tag that the tag itself.
The Rajan committee, as finance minister P Chidambaram said in Parliament on Thursday, was mandated to identify states that are far below the national average in terms of various development indicators and suggest ways to lift them above the threshold.
The committee identified Odisha as the least developed, followed by Bihar and Madhya Pradesh. The four other states apart from Bihar and Odisha clamouring for special-category privileges are among those found by the Rajan panel as least developed, requiring more central resources.
Telengana...Andhra Pradesh including Seemandhra is put in the median category of less developed states by the panel. This means that the special package to be announced could come in useful for Seemandhra, if it is additional to the benefits to accrue to it if the Rajan formula is applied.
Bihar has long enjoyed a privileged status when it comes to tax revenue devolution and transfer of Plan and non-Plan funds from the Centre. In FY13, for instance, Bihar's own tax revenue was half the amount it got from the Finance Commission-mandated transfer by the Centre from its gross tax receipts. Together, the 11 special category states received less than a fifth of all central transfers in the year while Bihar's own share was as high as 9% or roughly half of the combined receipts of all special category states.
Of course, with expenditure responsibilities shouldered more by the states than the Centre and the unviably high expenditure-GDP ratios of Indian states, their resources need to be bolstered. The combined revenue (including transfers from the Centre) of states is budgeted to be Rs 15.6 lakh crore for FY14, against the Centre's total receipts (revised estimate) of Rs 15.9 lakh crore (after transferring states' share of gross tax receipts) and including non-tax and capital receipts.
States' revenue productivity has generally been better than previously after the introduction of the state value-added tax. Their fiscal position (as is reflected in the budgeted combined fiscal deficit of 2.2% of GDP for FY14 ) is better than the Centre's (revised estimate for FY14 is a dubious 4.6%).
Despite this, the Centre has in the recent interim budget increased the Plan fund transfers to states from Rs 1.19 lakh crore (20% of the all Plan spending) to Rs 3.39 lakh crore in FY15 (60%) subject to the condition that the additional funds would be used by states only for the designated centrally sponsored schemes. This augurs well for least developed states, while it is doubtful how far the special category status would help.
Special category states are those whose economic growth potential is undermined by natural disadvantages, leading to inadequate fiscal capacity to steer the development schemes. Bihar, Odisha and others have plentiful natural resources including minerals and their economic growth and fiscal capacity can potentially be induced by good governance and investor-friendly policies.
Undue favours to backward states could be infinitely more damaging to the interests of relatively better performing states and lead to serious inter-state tensions. There ought not to be a disincentive for performance.