Special Category Status was introduced in which year?

The Special Category Status was introduced in 1969 on the recommendations of the Fifth Finance Commission.

Special Category Status

Table of Contents

Context: The Government of Odisha has been demanding Special Category Status since several years.

Introduction: The Special Category Status was introduced in 1969 on the recommendations of the Fifth Finance Commission.
Aim: It aims to benefit certain backward states having hilly terrains, strategic international borders, and economic and infrastructural backwardness.
- The rationale for special status is that these States, because of inherent features, have a low resource base and cannot mobilize resources for development.
Granting Authority: Central plan assistance to SCS States has been granted in the past by the erstwhile Planning Commission body, National Development Council (NDC). Now, it is done by the Union Government.
Requirements: The classification of SCS States was based on the Gadgil formula. The parameters are:
- They need to have hilly and difficult terrain.
- They need to have low population density and /or a sizeable share of the tribal population.
- They must be in a strategic location along borders with neighbouring countries.
- They must be economically and infrastructurally backward.
- They must have non-viable nature of state finances.

First SCS States: First SCS was accorded in 1969 to Jammu and Kashmir, Assam and Nagaland.
Current SCS States: Currently, 11 States have the SCS in India: Assam, Nagaland, Himachal Pradesh, Manipur, Meghalaya, Sikkim, Tripura, Arunachal Pradesh, Mizoram, Uttarakhand, and Telangana.
- These States have been accorded the status as they share borders with other countries. Odisha lacks that requirement.
- Telangana, the newest State of India, is accorded the status as it was carved out of another State – Andhra Pradesh, which hit the State’s finances.
States Demanding SCS: Odisha has been demanding Special Category Status for several years now. Andhra Pradesh and Bihar governments have also echoed the demand for this status.
14^th Finance Commission: The 14th Finance Commission did away with the ‘special category status’ for States, except for the North-eastern and three hill states.
- Instead, it suggested that the resource gap of each State be filled through ‘tax devolution’, urging the Union to increase the States’ share of tax revenues from 32% to 42%, which has been implemented since 2015.
- After the Union Government accepted the recommendations of the Fourteenth Finance Commission in 2015, however, the concept of SCS has effectively disappeared.

Financial Assistance: The Union Government pays 90% of the funds required in a centrally-sponsored scheme to SCS States as against 60% in case of normal category States.
- The remaining funds are provided by the State Governments.
Concessions: Significant concessions are provided to these States in excise and customs duties, income tax and corporate tax to attract investment.
Share in Budget: 30% of the Union Government gross budget also goes to special category states.
Debt Swapping: These States can avail the benefit of debt-swapping and debt relief schemes.
Unspent Money: Special category States have the facility that if they have unspent money in a financial year; it does not lapse and gets carry forward for the next financial year.

Constitutional Provisions: The Constitution provides special status through an Act that has to be passed by 2/3rds majority in both the Houses of Parliament.
- The Constitution of India does not include any provision for categorisation of any State in India as a Special Category Status (SCS) State.
- For example, Jammu and Kashmir enjoyed a special status as per Article 370 and also special category status.
- But now that Article 35A has been scrapped and it has become a Union Territory with legislature, special category status doesn’t apply to J&K anymore.
Powers: Special status empowers legislative and political rights while special category status deals only with economic, administrative and financial aspects.

Dependence on Central Funding: 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.
An Inadequate Solution: While the central funds have sustained the State finances, a solution based largely on transfer of central funds is inadequate.
Discretionary Finances: The granting of SCS and liberal central assistance is at the Centre’s discretion rather than based on any strict principle/ criterion.
Political Influence: Allocation of resources by Planning Commission was influenced by political rather than economic considerations.
Cut in Allocation: The difference between funds allotted to SCS and other States have been sizably reduced and the status has remained more of symbol of political mileage.
Misuse of Funds: The generous central assistance, often without proper accountability mechanism, led to misuse and diversion of these easy funds and fed and fuelled corruption.
No Concrete Improvement: The situation of the States having SCS does not show any perceptible improvements in terms of industrialization, aiming which they received tax incentives such as capital investment subsidy, excise duty and income tax exemptions, and transportation cost subsidies.
Intensification of Demand: Granting SCS to more States would lead to intensification of similar demands from States such as Odisha, Bihar, etc.

One way of moving forward may be abolition of “SCS” and introduction of the “least developed states’ category as recommended by Raghuram Rajan committee (2013).
It should be based on the 10 equally weighted indicators for monthly per capita consumption expenditure, education, health, household amenities, poverty rate, female literacy, percentage of the Scheduled Caste, Scheduled Tribe population, urbanisation rate, financial inclusion and physical connectivity.
This would help in better understanding the development needs of individual States.