The >bifurcation of Andhra Pradesh by the United Progressive Alliance government has left a troubled legacy. The six-paragraph statement by then Prime Minister Manmohan Singh in Parliament on February 20, 2014 contained the promise of according a >“special category” status to the successor state of Andhra Pradesh. The Congress, which orchestrated the bifurcation, suffered heavily in terms of electoral reverses and people’s goodwill in both Andhra Pradesh and Telangana. Furthermore, the issue of special category status became a >cause of much consternation for the Centre and heartburn for the people and government of Andhra Pradesh.
The Central government has announced a special package to the State on September 7 which has raised considerable controversy. The package is generous in terms of resources to augment its infrastructure and to create institutions of governance and development, but falls short of declaring it as a “special category State”. Some political parties have laid the blame for this at the door of the Fourteenth Finance Commission, which is clearly misleading.
As regards Andhra Pradesh, the additional terms of reference merely stated that the commission should take into account the >resources available to the successor or reorganised States in accordance with the Andhra Pradesh Reorganisation Act and the Ministry of Home Affairs notification. That did not require the commission to deal with the question of according special category status and it did not therefore make any recommendation in that regard. Therefore, the statement in the notification on special package that “… following the recommendations of the 14th Finance Commission, the class of special category States ceases to exist” is misleading.
Basis for special category The classification of the States into general and special categories was not the creation of the Constitution. The asymmetric arrangements for some of the States are made only in Article 370 for Jammu and Kashmir and in Articles 371 A to H for the States in the Northeast. Grants from the Union to these States to raise the level of administration of Scheduled Areas are provided in Article 275 (1). The classification of States into general and special categories was done by the Planning Commission based on five considerations, namely: (i) hilly and difficult terrain; (ii) low population density and /or sizeable share of tribal population; (iii) strategic location along borders with neighbouring countries; (iv) economic and infrastructure backwardness; and (v) non-viable State finances.
The demand of Andhra Pradesh to enable it a level playing field to compete for investment after the bifurcation is clearly legitimate. In fact, clause 94 (i) to (iv) of the Andhra Pradesh Reorganisation Act states that the Central government shall take appropriate fiscal measures including tax incentives for industrialisation, support the programmes for development of backward areas, provide special financial support for the creation of the new capital and institutions of governance. It does not state that the Union government should accord the successor States special category status. Admittedly, it is difficult for the Union government to accede to the demand for special category status on objective grounds. It could open a Pandora’s box as the economically backward States of Bihar and Odisha too have been demanding the status for long.
The major benefit from the special category status was the generous Central assistance for plan purposes under the Gadgil-Mukherjee formula where 30 per cent of the assistance was earmarked to these States, 90 per cent of which was given as grants and 10 per cent as loans. However, after the recommendation of the Twelfth Finance Commission that the Central government should discontinue lending to the States and the latter should borrow from the market, funds earmarked for special category States were substantially reduced. With the Fourteenth Finance Commission assessing the total requirements of the States without making a distinction between plan and non-plan, the grants given under the Gadgil-Mukherjee formula for State Plan Schemes got subsumed in the formula for tax devolution and grants. Therefore, the benefit of higher Central assistance due to special category status simply does not exist anymore. Thus, the State gains immensely from the special package in addition to the transfers recommended by the Finance Commission.
Boost for infrastructure One important benefit from the special category status is the income tax and excise duty exemptions on investments. This is meant to reduce the cost to the prospective investors who otherwise will have to suffer heavy infrastructure deficit, transportation cost and remoteness of markets. The case of Andhra Pradesh is surely not akin to that of north-eastern or Himalayan States and full income tax and excise duty exemption would result in flight of capital from Karnataka, Maharashtra and Tamil Nadu, creating distortions in resource allocation and disharmony between the neighbouring States. Nevertheless, the Central government has already legislated the tax incentives in terms of additional investment allowance and accelerated depreciation. The assistance package announced by the Central government is generous by any account and certainly more than what the special category status could have brought in.
It has given Rs.3,979 crore as revenue gap grant, which is more than three times the amount recommended by the Fourteenth Finance Commission for 2016-17 (Rs.1,293 crore). Similar facility to cover revenue gaps in the future too has been promised. It has already given Rs.2,500 crore for building the new capital and has promised an additional Rs.1,000 crore. An amount of Rs.1,050 crore has been disbursed as a special package for backward areas. The Central government has agreed to meet the entire expenditure of the Polavaram project on the Godavari river which at 2011 prices was expected to cost Rs.16,010.45 crore. In addition, the package includes the establishment of several educational institutes. The Cabinet Committee has also given an in-principle approval for the establishment of a major port in Dugarajapatnam on public-private partnership basis, and there are proposals to set up units of Steel Authority of India and Indian Oil Corporation. There are also proposals for the expansion of the international airport at Visakhapatnam and airports at Vijayawada and Tirupati.
The National Highways Authority of India and Railways too have been directed to improve road and rail connectivity. Never in the history of this country have bifurcated States received such a generous package even when they were extremely backward. Bihar and Madhya Pradesh lost the areas rich in minerals when they were divided. Chhattisgarh and Jharkhand had to start afresh without such a package. Surely, the Chief Minister of Andhra Pradesh has leveraged well his partnership in the National Democratic Alliance and friendship with the Bharatiya Janata Party.
M. Govinda Rao is Emeritus Professor, National Institute of Public Finance and Policy, and Chief Economic Adviser, Brickwork Ratings. He was a member of the Fourteenth Finance Commission.
