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A new rallying point

Including Bihar in the Special Status category will allow for a more democratic extension of the government’s liberal policies, writes NK Singh.

india Updated: Mar 20, 2013 22:35 IST

The massive political rally organised by the Bihar Janta Dal (United) Party has certainly not gone unnoticed. No doubt political conjectures have masked the economic issues behind this mobilisation. Leaving aside speculations on numbers, this rally was different on many counts. It was the first rally by any regional party outside their state.

It was a successful mobilisation, not only of participants from Bihar, but also of a significant number of the Bihari population (nearly 25 lakh) living in and around Delhi. Their spontaneous enthusiasm reflected the quest for a new identity and it helped give vent to the neglect and scorn that the migrant community has habitually faced. It was a return to Bihari pride.

Improved governance, better law and order and high economic growth create both pride and identity. Further, the rally was centred around economic issues that cut across class and caste divides. No votes were being sought, nor was it a part of any immediate election campaign. It was an economic campaign to revisit the past and unite for a better future.

Political analysts may perceive a larger picture and possible realignment of parties in the run up to the elections. Yet this rally was a continuation of the process which commenced several years ago to seek a Special Category Status for the state. The resolution adopted at the rally was captioned ‘Right to Development’.

What is a Special Category Status? The history of the Special Category Status dates back to 1969 when the Fifth Finance Commission, acting in line with what is known as the Gadgil Formula, announced a Special Status for three states. The Commission had pointed out that certain states needed larger central assistance on more liberal terms.

Accordingly, three states, namely Assam, Nagaland and Jammu and Kashmir received Special Category Status in 1969, based on their hilly terrain, turbulent international borders and resulting poor infrastructure.

Presently 11 states have special category status, namely Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu and Kashmir, Himachal Pradesh, and Uttarakhand. The last two were added during the NDA regime and were primarily designed to foster manufacturing and industrial activities through tax breaks. While the formula for central assistance was approved by the National Development Council (NDC), the decision on tax concessions is in the domain of the ministry of finance.

What benefits do states which have the Special Category Status receive? First and foremost, a fiscal policy regime by way of tax breaks on direct and indirect taxes, namely income tax, corporate tax, excise and customs duties with a sunset clause of 10 years.

Second, in respect of centrally sponsored schemes, while the states bear 10% of the cost, the balance 90% is borne by the central government.

Third, 30% of the Plan expenditure of the central Budget goes to Special Category states and finally the unspent money does not lapse but can be carried forward. In effect, this helps enhance resources, increase the headroom for access to market funds and incentivise private investments through a favourable tax policy.

The question is who should receive such benefits? In a working fiscal federal structure like ours, an important guiding principle in the allocation of financial resources is to enable the states to provide comparable levels of public service at comparable tax efforts.

When the states are at different levels of fiscal capacity, they can incur comparable levels of social and physical infrastructure only when central transfers offset the fiscal disability of states with low fiscal capacity.

In India, where regional variations in terms of per capita income, tax base and demography are quite large, the equalisation element of central transfers assumes significance. However, the fiscal capacities of the states continue to vary widely.

As a consequence, there is an uneven provision of public services across states, including ‘merit goods’ such as education and health. States with a large population and other cost disabilities (like landlocked Bihar), coupled with geographical and climatic factors, adds to the complexities. An explicit equalisation methodology is yet to evolve.

Successive Finance Commissions and the Planning Commission have failed to ensure such equalisation and outcomes have tended to reinforce existing inequalities. The need to bridge growing regional disparities has assumed priority. Indeed this is one key objective of the recently adopted 12th Five Year Plan.

The policies of the past, instead of convergence, have resulted in a growing divergence among states based on the national mean or average. Development indicators need to be redefined not only in terms of per capita income, but also in terms of Human Development Indicators like education and health, and beyond that in per capita availability of energy, road, rail density, and inclusive finance.

The policy initiatives of any government must enable states who are below the national average to progressively reach the national average if the country as a whole is to make progress.

This has no doubt a component of distributive justice. The transitional disruption would be minimal if the economy grows rapidly. The new approach would also enable these states to become net contributors to the national GDP in proportion to their population, which can minimise overall growth volatilities.

There are other states apart from Bihar who could seek redressal through this new development paradigm. The need to redefine the criteria on the basis of the principle outlined above has received intellectual support in the Economic Survey and a policy commitment in the Budget speech.

Resources alone do not guarantee development. There are enough examples, national and global, that highlight the failed paradigms of a resource-led development model. But there is synergy in seeking enhanced productivity through improved governance and higher resource efficiency. Bihar, with a spectacular growth in the 11th Plan, has been applauded by the prime minister as the fastest growing state.

Bihar is a clear case where aspirations and opportunities can be optimised. A new development paradigm has a compelling appeal that is both moral and economic.

A Special Category Status is not a new legal framework. Instead this is a recognition that the liberal policies applied to some can be extended to others on a more rationale development matrix. The Right to Development is a new “rallying point” for the future.

NK Singh is a Rajya Sabha member and a former revenue secretary. The views expressed by the author are personal.