The UPA-2 government had offered the special category status to Seemandhra as part of the decision to bifurcate Andhra Pradesh between Telangana and Seemandhra (post-bifurcation Andhra Pradesh). The new, Narendra Modi-led government hinted early on that it was going to consider the proposal. But this idea is disastrous, unprecedented and unprincipled. Clearly, this decision is prompted by pure and simple political expediency. This came against the backdrop of states like Bihar, Odisha, West Bengal and even Tamil Nadu’s clamour for special category status.

Historically, the concept of a special category state followed the Fifth Finance Commission’s decision to accord preferential treatment to a few disadvantaged states. Later, in 1969, to recognise the inherent disabilities of some states to mobilise resources for development, certain criteria reflecting these features were laid down. On the basis of these criteria, 10 states – eight northeastern states, Himachal Pradesh and Jammu and Kashmir – were accorded special status. The criteria were:

• Hilly and difficult terrain,
• Low population density or sizeable share of tribal population,
• Strategic location along borders with neighbouring countries,
• Economic and infrastructural backwardness, and
• Non-viable nature of state finances because of low resource base.

In principle, the decision to grant special status rests with the national development council (NDC) which includes the prime minister, some of the union ministers, chief ministers and members of the planning commission, and which is also to guide and review the work of the plan panel. The declaration to grant special status to Seemandhra has not yet received the approval of the NDC and, thus, not formalised. Therefore, the new government should take a fresh view on this tentative decision.

Why is it such a bad idea to accord special status to Seemandhra? First, Seemandhra does not satisfy any of the above, well-thought-out criteria. It is not a hilly state, its population density is not at all low, it is not strategically located, it is a middle-level state in income terms, its infrastructure may not be as good as that of the advanced states but is still better than that of several others. If Seemandhra is still given special status, it would amount to making a mockery of the well-laid-out criteria and opening a Pandora’s box.

Second, if Seemandhra is given special status, several other states that have sought the same cannot be denied their claim on a rational basis. In fact, as mentioned earlier, a few states that are not as well off as Seemandhra are also racing for the special status. If these states’ claim is ignored and Seemandhra is given special status, the very foundation of the Indian federal system would be shaken.

However, it is not to argue that Seemandhra does not require a large fund for building a capital of its own as well as for creating infrastructure comparable to those in Hyderabad that have induced huge private investment. It clearly does. One can, therefore, legitimately argue that Seemandhra should be provided adequate funds by the central government to build its own capital and infrastructure – not only for one year but also for several years.

This leads us to a broader issue. Ever since India has shifted to a market-driven system, the level and quality of social, economic and administrative infrastructure have emerged as the most crucial determinant of private investment in a state. In fact, only five more advanced states together have attracted and absorbed close to two-third (65.5 percent during 2001-05) of the total foreign direct investment, or about three-fourth (74 percent) of the FDI projects. This means that the states with lower level and quality of infrastructure have failed to attract private investment. That has put them at a great disadvantage. Moreover, in the current policy regime there is hardly any instrument to direct private investment to the lagging states. After all, less than 20 percent of the plan investment now takes place in the public sector.

As a result, the disparity in per capita income between states has widened in the market-driven policy regime. For example, in 1991-92 the per capita income in the poorest state, Bihar, was just 36.6 percent of the per capita income of the highest income state among the major states, Maharashtra. Two decades later, in 2011-12, Bihar and Jharkhand together accounted for even less – at only 27 percent of the per capita income of Maharashtra. Similarly, Bihar’s per capita income as proportion of 17 major states’ per capita income slumped from 49 percent in 1991-92 to 35 percent in 2011-12.

Such worsening disparity between states is highly undesirable. In fact, it could be the source of major discontent among states. Though the removal of regional disparity has been one of the major objectives of successive five-year plans from the beginning, regional disparity worsened even in the physical control regime with access to various instruments to direct investment.

In a market-driven system, it is important to provide a level-playing field to the states in terms of the level and quality of infrastructure. But under the current transfer mechanisms, no instrument exists to do so. Therefore, there is a strong case for setting up a large development fund out of which interest-free loan can be provided to states that are lagging behind.

Sarma, a visiting professor at the Institute for Human Development, was a member of the Thirteenth Finance Commission.

This story appeared in the October 16-31, 2014 print issue