Abstract
Special Category States of India is an authoritative take on the special category states of India, with a special focus on the status as such. The provision of special category status (SCS) was created in the late 1960s by the Planning Commission to address the problem of underdevelopment. Backwardness was defined in terms of six criteria: hilly and difficult terrain, low population density, sizeable share of tribal population, strategic location across borders, economic and infrastructural backwardness and the non-viable nature of state finances. SCS bestowed special treatment in intergovernmental transfers and provided additional fiscal incentives. Concessions in direct and indirect taxes were offered to industries for setting up production units in the region. The minutes of National Development Council Meeting of 1967 noted that although there was a lack of unanimity among the chief ministers of various states about the criteria, there was a general feeling that states like Assam, Jammu & Kashmir and Nagaland, in any way, have to receive special treatment. The special treatment should ‘enable them to have a modest and reasonable Plan’ which would be impossible otherwise. During 1968–1969, at the time of creation, the three states had a share of 9 per cent of the total normal central plan assistance provided to all the states. This share doubled immediately after they were granted SCS. It would rise gradually to about a third of the total central assistance for all states (p. 18).
The case for special treatment of some states is founded in the logic of asymmetric federalism (Chapter 1).
In symmetric federalism, there is no distinction between the constituent units in terms of their powers or autonomy within the federation. In contrast in asymmetric federal systems, different subnational entities are allowed to exercise differential powers, with some entities enjoying higher degrees of autonomy than others. (p. 55)
For India, Articles 370 and 371 as well as the Sixth Schedule of the Constitution are in the spirit of asymmetric federalism. Conferring SCS to some states can be seen as an extension of this logic by incorporating an additional element of liberal central assistance into the asymmetrical arrangement.
With the attainment of statehood, all the northeast states of India including Sikkim and the northern states of Jammu and Kashmir, Himachal Pradesh and finally, Uttarakhand were granted SCS. It bolstered the finances of these states. At the time of formation of these states, all the states were financially unviable. Share of central taxes had never been a significant part of revenues of these states except for Assam. The Finance Commission formula for devolution of central taxes, with high population weightage, disadvantaged these states. After their recognition as special category states, adequate funding was secured through plan grants. In a detailed analysis of the 11th special category states of India, the history, socio-economic landscape, public finance and development planning are explored (Chapters 2, 4, and 5–7). For each state, the author evaluates how their socio-economic circumstances have transformed after getting the SCS.
In case of all Northeastern states, it was evident that central support was not only essential in their survival, but also most vital for their subsequent socio-economic growth and development. Heavy spending on health and education by the Government in all these states was a key factor for improvement of socio-economic indicators and reduction of poverty. (p. 259)
The author notes that without the SCS, these states would not have achieved the status they have achieved with about half of the states (Sikkim, Himachal Pradesh, Mizoram, Uttarakhand and Tripura) attaining levels of socio-economic development comparable to the national standards by the year 2010–2011.
And yet, the provision of SCS has been deeply problematic from a number of dimensions, argues the author.
SCS and Its Clash with the Neo-liberal Perspective
The SCS created dependence on central transfers that the states are unable to shrug-off. Most of the revenue expenditure of these states is not met through their own resources. While the central funds have sustained the state finances, a solution based largely on transfer of central funds is inadequate. There was no real attempt at hand holding to overcome structural weaknesses and to remove the supply side constraints.
The other distortion, the argument runs, was owing to the arbitrariness on matters of intergovernmental transfers, in general, which reflected on the special category states. As a category, SCS is extra-constitutional, just as was the Planning Commission which promoted the idea of special category states, the author notes. Planning Commission, ‘an anachronistic relic of an outdated and dysfunctional Nehruvian model of socialism’ was not a Constitutional but a political body (p. 461). The Constitutional mechanism for flow of funds from the Centre to the states is necessarily through the Finance Commission. Unlike the Finance Commission transfer, plan transfers do not have any such statutory authority and are therefore discretionary in nature. The granting of SCS and liberal central assistance is at the Centre’s discretion rather than based on any strict principle/criterion. Allocation of resources by Planning Commission was influenced by political rather than economic considerations. Over the years, with the proliferation of centrally sponsored schemes of ‘questionable value’—the rule-based component—the proportion of funds decided by the Gadgil formula fell—and the discretionary element increased. The generous central assistance—often without proper accountability mechanism—led to misuse and diversion of these easy funds and fed and fuelled corruption and rent seeking activities. The author goes on to argue that the real transformation for the special category states occurred with the globalisation and liberalisation of the economy, with the near double-digit growth causing healthy growth in revenues and therefore central transfers to the special category states.
These are familiar arguments and form the core of neo-classical critique of central planning (as against decentralised market-based mechanism). It reflects the rules versus discretion debate in macroeconomics and forms a part of the macroeconomic consensus view where discretion is always viewed as source of instability in the economy. While self-awareness is important, to dismiss the Planning exercise and announce the institution of Planning Commission as a failure would not be a correct reading of post-independence economic history. In his classic commentary on development planning, Sukhamoy Chakravarty notes that deficiencies of the market mechanism in promoting balanced regional growth were recognised early in the planning exercise (Chakravarty, 1987). Where the initial endowments are distributed so unevenly, with small fragmented markets and high production costs, spatial trickle down would not work. There was a genuine apprehension of development strategy further polarising the distributive balance through investment decisions and the new agricultural strategy that relied on betting on the strong. It was also thought that goals such as equity are better served in open budgetary exercises than hidden in subsidised commodities and services, although the latter were not exactly absent (e.g., the expansion of banking services through regional banks).
That there was need for better formulation of plans and better processes is undeniable. Pronab Sen (2017) stressing the need for strategic planning underlines three aspects that need to be taken into account—and were not appreciated enough—while designing an appropriate process of strategic planning and implementation in India. These are the processes of consultation, decentralisation and feedback (as distinct from monitoring and auditing) considered essential for states to take ownership of the plans, for optimal use of information flows and for accountability in the system. As Adolph Lowe wrote a good plan not only derives paths to achieve the desired target but also establishes behavioural patterns that can lead the system to the set target (Lowe, 1965). The Indian planning largely confined its attention to the first task and has not paid very serious attention to the second.
Where conditions existed, the SCS and sustained central transfers enabled the states to perform well. The schooling revolution in Himachal Pradesh, and much more that followed from it, would be unimaginable without adequate public expenditure supported through central transfers. Where there were distortions in utilisation of funds—like the evidence from Nagaland presented in the book—it may be argued that it was due to the local structures and was not necessarily policy induced.
Actually, the principles of fiscal federalism were denied in a more fundamental sense than the Planning Commission versus Finance Commission conundrum or simply better accountability mechanisms in the instrumental sense that the author highlights. Centre determined the development trajectory of these regions in essential ways. Sanjib Baruah’s analysis of northeastern states notes that the goal of nationalising a frontier space has been the major thrust of Indian policy (Baruah, 2005). National security driven process led to creating small and financially dependent states that in a formal sense are autonomous units of India’s federal policy; in terms of power vis-à-vis the central government, however, the form of federalism is little more than cosmetic. The imperative to nationalise space has determined the choices made in every other area, such as the unique environment, the respect for the autonomy of sub-national governments enshrined in India’s federal Constitution, the rights of tribal people and so on. An altogether different approach and development paradigm was needed.
Economic Growth, the Fiscal Responsibility and Budget Management (FRBM) and Special Category States
The eighth and ninth chapter bring together the socio-economic status and public finance performance of the special category states in a comparative exercise. The data points are 2001 and 2011, a decade which saw high GDP growth as well as a move towards formal fiscal rules. All states had to adopt the FRBM Act restricting their deficits and public debt.
Overall, the period saw more central transfers to special category states compared to the earlier periods. Yet GSDP growth of these states was lower. The author pulls up the lack of productive use of funds as the main culprit (p. 401). The macroeconomic logic is overlooked. Ever since the FRBM Act was passed, it has pushed most states to limit public expenditure and generate revenue surplus. By 2010–2011, except Mizoram and Himachal Pradesh, all other states had become revenue surplus. Central transfers unless converted into expenditures will not have the required multiplier effects. A major part of GSDP of these states comprises government expenditures. Unless public sector is crowding out the private sector, which has not been case, a smaller size of public sector would mean lower economic growth.
The same macroeconomic logic accounts for the lack of correlation of fiscal performance variable and socio-economic performance across the special category states. It is not incidental that Assam and Arunachal Pradesh performed well in terms of public finance management but have low ranking in terms of socio-economic performance, with the opposite holding true for Mizoram and Himachal Pradesh. It is welcome to see the author while congratulating the FRBM for taming the fiscal horse, also suggesting a state specific review of the fiscal limits.
An Important Book
The book is recommended on several counts. It is a comprehensive take on special category states of India. By bringing together history, politics and economics, the book presents a comprehensive view of the complex process of development of these states. The case for more substantive asymmetric federalism is convincingly argued. The author notes quite correctly
The rest of India often assumes a condescending attitude towards these states since they have to be given special assistance… But it is only due to the special nature of the problems that they were accorded this status, by giving which the Centre was not really obliging these states in any way. (p. 379)
For readers interested in public finance, it is a good take on contemporary public finance concepts and issues, although the perspectives at times come too close to the current ‘sarkari’ (official) positions.