Forget special status, link less funds to central schemes
Given that, for poorer states like Bihar and Uttar Pradesh, central transfers comprise a significant part of incremental GDP, it is not surprising that states are lining up to be included in what is called ‘special category’ status. The 11 special category states get 90% of normal plan assistance in the form of grants as compared to just 30% for general category states—in the case of some, like Uttarakhand, if excise duty concessions are thrown in, the benefit is far greater. While Seemandhra chief minister-designate, and BJP ally, Chandrababu Naidu met finance minister Arun Jaitley to discuss giving his state special category status, Odisha chief minister Naveen Patnaik met prime minister Narendra Modi for, among other things, a similar status. Prior to the elections, both Patnaik and Bihar chief minister Nitish Kumar had said they would support, at the Centre, whichever formation offered them a special category tag. The UPA also played along then with, for instance, then chief economic advisor Raghuram Rajan coming out with an index that would have resulted in potential UPA allies like Bihar and Uttar Pradesh getting more central funds. Given that special plan assistance and special central assistance—both have a high degree of Central government discretion—are up from 6% of all central assistance to state Plans in FY01 to 17% in FY13, the Centre has even more aces up its sleeve.
Getting special category status for Seemandhra, however, isn’t going to be easy since it has to be agreed to by all states in the National Development Council, most of who will be displeased by more assistance to one state. A better idea, instead, will be to free up the states using the Finance Commission. Around 54% of all funds transferred to states today are based on an automatic Finance Commission formula—32% of all central taxes are divided among states based on a formula that normally benefits the poorer states. Bihar, for instance, accounts for 8.6% of India’s population and 2.8% of its GDP, but gets 11% of all Central tax transfers and 8.8% of all devolution of funds from the Centre. A rich state like Maharashtra, in contrast, accounts for 9.3% of India’s population and 13.9% of GDP, but gets just 6.2% of all Central devolution. It would be far more meaningful if states like Seemandhra were able to pursue their own schemes instead of Central ones—as happens in the current scheme of centrally-sponsored schemes, for instance. The best way to do this is to, apart from a few flagship programmes, stop all central schemes and get the Finance Commission to simply raise the share of central taxes that are to be automatically devolved to states.