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Thursday, 21 March 2013 00:24
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Special category status matters less than GDP growth


Bihar deputy chief minister Sushil Kumar Modi hit the nail on the head when he pointed to the R10,000 crore shortfall in the share of central taxes all states got in FY13. And, when added to various non-plan grants, assistance for state plans and centrally sponsored schemes, he said, this amounted to a 10.6% shortfall over what was budgeted for the year. While Modi compared this to the much lesser fall in central government’s own expenditure, his boss Nitish Kumar has made granting of special category status to Bihar as the deciding factor if he is to support the UPA in the next election—special category states get more grants than others and also get some excise duty concessions.

There is little evidence that poor states like Bihar get a lesser share of central devolution—through share of central taxes or even other grants to states. In the case of Bihar, which accounts for 2.8% of India’s GDP and 8.6% of its population, the share of central devolution that it got in FY13 was around 8.8%. This is because the tax-sharing formula which accounts for 50-60% of all central devolution benefits the poorer states and penalises the richer ones like Gujarat, Tamil Nadu and Maharashtra.

The larger point, however, is that the states get a lot more, and the Centre spends a lot more on development, at a time when the economy is growing well. Between FY95 and FY03 when per capita GSDP rose 3%, central development spend rose 8.9% per annum; when per capita GSDP growth rose to 6.9% in the FY04 to FY10 period, development spend growth was 17% per annum. In the case of central devolution, this grew 28.4% in FY08 when GDP grew 9.3%. In FY09 when growth fell to 6.7%, central devolution grew just 12.9%. Similarly, when FY12 GDP grew 6.2%, devolution was up 28.4%—when FY13 GDP growth moderated to 5%, devolution growth slowed to 17.9%. A similar trend can be seen for states like Bihar and Uttar Pradesh. Moral of the story: if political parties collaborated to get critical legislation through to facilitate growth, everyone would be better off.


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