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Tuesday, 18 June 2013 00:00
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As it woos Bihar and Orissa, the Centre risks irking other states in the general category

With Nitish Kumar ending a 17-year-old alliance with the BJP, and the UPA assiduously wooing him for months with all manner of goodies, the last being a Rs 12,000 crore grant from the Backward Region Grant Fund (BRGF), election season is formally upon us. Orissa Chief Minister Naveen Patnaik has also formally declared his willingness to be wooed by talking of how the state is discriminated against in terms of money from the Centre. And to make public its intent to woo, the government has set up a panel under its chief economic advisor to revisit the way states are defined as backward for granting special category status. Special category status states get 90 per cent of normal plan assistance in the form of grants versus just 30 per cent in the case of general category states; in the case of certain special category states, like Uttarakhand, tax breaks are also thrown in for some years.

So here's the rub. Were the Centre to give more states special category status — Assam, Nagaland, Jammu and Kashmir, Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand already have it — it would leave less for the general category states. In a sense, if the UPA is to grant Bihar and Orissa special status, they would have to share the same 30 per cent of the pie with Assam and 10 others. If the slice of the pie kept for special category states is increased, what's left for the general category states reduces. So the decision to help an Orissa has to be juxtaposed with a decision to actively annoy a Maharashtra.

Getting special status, which Nitish Kumar is actively campaigning for, is not going to be easy either. Such decisions lie with the National Development Council, which includes chief ministers of all states. Catch BJP chief ministers voting to include Bihar in the list of special category states, more so when Bihar meets just one of the four criteria for inclusion.

While the Centre has some room to manoeuvre (more on this in a bit), the larger point is that the states that are backward, even if not in the technical sense that makes them eligible for special category status, do tend to get a much larger share of the Central pie. To put some numbers to this, around 60 per cent of all funds transferred by the Centre to the states are accounted for by tax transfers. These transfers are decided by the Finance Commission (FC), a new one set up every five years. So the last FC, the 13th, decided that 32.5 per cent of all Central tax revenues would be given to the states. Given the need to compensate states that could lose revenue in the initial years of the GST, the 14th FC could well increase this share.

Then there is the issue of how this money is to be divided among the states. Give it by the share of taxes the states collect, and the richer states will get a lot more since they generate a lot more GDP and hence taxes. Each FC comes up with a formula for how the inter-state division is to take place and while each formula differs slightly from the others, by and large, the poorer states tend to get a larger share of revenues. The 13th FC, for instance, allocates a fourth of the weight to population and a 10th to area, both of which favour poorer states like Uttar Pradesh and Bihar. A little under 48 per cent of the weight is assigned to what is called fiscal capacity, or the ability of a state to raise revenues — the lower the capacity, as in Bihar, the greater the share of Central taxes, so that the state can use the money to develop. Only 17.5 per cent of the weight was assigned by the 13th Finance Commission to fiscal discipline, where the richer states score.

Once you take into account the fact that around 60 per cent of all Central transfers are through tax-sharing and that this is weighted in favour of the poorer states, the results are revealing. UP accounts for 16.5 per cent of India's population, but just 7.7 per cent of its GDP and 9.6 per cent of the taxes collected by state governments on their own. Well, UP accounts for 19.7 per cent of all Central tax transfers and 14.3 per cent of all devolution of funds from the Centre — this includes tax transfers, grants, assistance. Bihar, the original claimant for special category status, accounts for 8.6 per cent of India's population, 2.8 per cent of the GDP and 2.4 per cent of all taxes collected by the states on their own — it gets 11 per cent of all Central tax transfers and 8.8 per cent of all devolution of funds. Maharashtra accounts for 9.3 per cent of India's population, 13.9 per cent of the GDP, 15.7 per cent of taxes collected by the states but just 6.2 per cent of all Central devolution and transfer of resources.

None of this is to say that the Centre has no room for manoeuvre when it comes to giving out dole to make friends or nourish existing relationships. Around Rs 40,000 crore of railway projects were promised to West Bengal when the Trinamool was in charge of the ministry, though it's not clear how many will eventually come up and the Centre does get to weigh in on where a PSU will make a big investment.

Then there are the special packages from time to time, Nitish Kumar's Rs 12,000-crore BRGF package over five years being one of them. There have been weavers' and Bundelkhand packages in the past and, more important, there has been a sharp jump in the discretionary Special Plan Assistance and Special Central Assistance — as a proportion of the Central Plan Assistance to the Plans of states and Union territories, this has risen from 5.9 per cent in 2000-01 to 16.5 per cent in 2012-13.

That, no doubt, is a lot of money, but the question chief ministers need to ask themselves is whether it is enough to make a difference to their people. In the case of Bihar, the share of industry — which is where good jobs come from — has plummeted to under 5 per cent in 2011-12. Bihar, in fact, would do better to get more farm subsidies — Punjab's paddy farmer gets Rs 12,000 per hectare annually — to be able to develop agriculture in the state and then develop processing industries around it. But in an election year, perhaps that's asking for too much — around 60 per cent of Mamata Banerjee's increased spending targets in 2012-13 were based on more Central grants.


The writer is managing editor, 'The Financial Express'


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