Center –state financial relation & Special Category status : Decoded

In any Federal structure, well defined  financial relation between state and central is necessary for the smooth working of whole political system. As A democracy its also important for India.

We had a beautiful and well defined system of the tax distribution between central and state But at the same time its a complex system. Here is small try to make it simple to understand.

Generally the topic: “central state financial relation “come in limelight on the debate of the demand of “special category” status to some state. Debates in media mislead citizen on such important topic. 

Best way to understand the state-central relation is to understand the income and expenditure of State Govt and Central Govt.  And the role played by various institution in this procedure. ( Check Flow chart).

Special Category Status debate:-

Debate and demand of the special status is purely politically motivated. Here is the  example of it : Bihar government demand for the Special status for the  Bihar and such Other backward state like odisa and on other hand they resistant to the Special status to Sima aandhra and said : A State having sea shore have no right to get special status. Odisa have also a 480 km long seashore.

The concept of a special category state was first introduced in 1969 when the 5th Finance Commission sought to provide certain disadvantaged states with preferential treatment in the form of central assistance and tax breaks. Initially three states Assam, Nagaland and Jammu & Kashmir were granted special status but since then eight more have been included (Arunachal Pradesh,  Himachal Pradesh,  Manipur, Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand).

The rationale for special status is that certain states, because of inherent features, have a low resource base and cannot mobilize resources for development. Some of the features required for special status are:

(i) hilly and difficult terrain

(ii) low population density or sizeable share of tribal population

(iii) strategic location along borders with neighbouring countries

(iv) economic and infrastructural backwardness;

(v) non-viable nature of state finances.

 The decision to grant special category status lies with the National Development Council, composed of the Prime Minster, Union Ministers, Chief Ministers and members of the Planning Commission, who guide and review the work of the Planning Commission.

Why it’s So Important ?

Each state have own financial plan for each year. All the inputs except Normal center assistance and special Central assistance is fixed.  Major imputes of the State budget come from :

(1) State taxes (Depend upon state economy)

(2) Share in Central tax ( Depend upon finance commission -Have a predefined method)

(3) State Borrowing ( Increase he burden on state economy)

(4) Central assistance ( Chance to get extra funds from central through Special category)

Interesting note:-

Central assistance contribution in the State Plan of special category status is about 98% ( Average of 11 states) where in case of other states it’s about only 15% . This stats shows that :-

(1) Concept of “Special Category” States is necessary to counter the regional imbalanced growth of country.

(2) Alliance politics compulsion should be kept away from this .