Seemandhra sops will spur similar demands
The Central government may have staved off the immediate Telangana crisis by promising a slew of incentives for the proposed Seemandhra state, including giving it ‘special category’ status, hitherto reserved for a group of 11 states that get easier access to central funds—these states get 90% of normal plan assistance in the form of grants from the Centre as compared to just 30% in the case of general category states. Some like Uttarakhand have even got excise duty exemptions that have helped develop local industry over a period of a decade. The 11 special category states include Assam, Nagaland, Jammu & Kashmir, Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand. This, however, is where the Central government’s problem begins since, first off, whether a state is ‘special’ or not is something that can be decided only by the National Development Council which includes all states, and the decision has to be unanimous—given how Uttar Pradesh and Bihar are also looking to get included in this category, it is not certain that they will agree to this. The other option for the Central government is to use the Raghuram Rajan committee report (when he was chief economic advisor, not RBI Governor) which uses a different set of indices—as compared to those used by the Finance Commission which deals with around 60% of all funds transferred to states. So while Bihar, for instance, gets 7.42% of all non-Finance Commission transfers to states at the moment, under the Rajan index, it will get 12.04%; Uttar Pradesh’s share rises from 10.09% at present to 16.41%.
A more useful comparison, of course, is one in monetary terms. Since around R2 lakh crore was transferred to states by the Centre under the non-Finance Commission route, using the Rajan index would give Uttar Pradesh R12,600 crore more per annum—considering the state got R80,940 crore from the Centre by way of all transfers in FY13, that’s a large addition. Given how, for the states that are badly off, like Bihar and Uttar Pradesh, central transfers are so large, a special category statute for Seemandhra, will trigger off similar demands from them. Bihar, for instance, accounts for 8.6% of India’s population but just 2.8% of its GDP and 2.4% of all taxes collected by state governments on their own. But since it got 11% of all central tax transfers in FY13, getting a higher share of devolutions (through the Raghuram Rajan Index) or softer loans and excise duty relief (through special status) is a great prize to strive for. It’s a different matter that the real kick to growth cannot come from central transfers—in Bihar’s case, the share of industry in overall state GDP is a mere 5%. And while states can clamour for special status, it is also a good idea to keep in mind that what they may get from increased shares in devolutions, if the overall pie falls, they stand to lose much more. In FY14, thanks to a dramatic shortfall of R77,000 crore in central government tax collections, the states collectively stand to get R29,000 crore less than originally budgeted for.