Why do Andhra Pradesh and Bihar deserve special economic packages?

UP, Chhattisgarh, Jharkhand, Odisha, Rajasthan and hilly states including northeastern region also suit some of those criteria

When Andhra Pradesh was divided in 2014, leading to the creation of Telangana, it was promised “special category” status by the United Progressive Alliance (UPA) government of the time. Bihar wanted this status in 2000, when it was split to create Jharkhand.

The demands of the two states have gained added weight with N Chandrababu Naidu’s Telugu Desam Party and Nitish Kumar’s Janata Dal (United) emerging as crucial allies of the new coalition government at the Centre led by the Bharatiya Janata Party. Naidu is the chief minister of Andhra and Kumar of Bihar. The special-category status had earlier been accorded to the northeastern states and three hilly states: Uttarakhand, Himachal Pradesh, and Jammu & Kashmir. However, the 14th Finance Commission, whose recommendations were implemented from financial year 2015-16 (FY16) to FY20, suggested scrapping the system.

States with this tag used to receive 90 per cent of funds from the Union government for centrally sponsored schemes, compared to 60 per cent for other states, along with other fiscal benefits. Additionally, unspent funds did not lapse at the end of the financial year.

The Andhra Pradesh Reorganisation Act of 2014 provides for special financial support to develop essential facilities in Andhra's new capital and offers fiscal measures such as tax incentives to promote industrialisation. Support for backward areas, including physical and social infrastructure, is also included. At a pre-Budget interaction with Union Finance Minister Nirmala Sitharaman on Saturday, Andhra Pradesh Finance Minister Payyavula Kesavis appealed to the Centre to fulfil the assurances under the Reorganisation Act and demanded a special grant of Rs 15,000 crore for development of the state's new capital at Amaravati. Do the economic conditions of Andhra and Bihar justify a special package?

Case for Bihar

Bihar's Nitish Kumar Cabinet passed a resolution seeking special category status after last year's caste-based survey revealed that 9.4 million families in the state, constituting 34.1 per cent of the total, lived in poverty, earning less than Rs 6,000 a month. The NITI Aayog's multidimensional poverty report buttressed this, showing 33.76 per cent of Bihar's population was multidimensionally poor during 2019-21, though this decreased from 51.89 per cent in FY16. The national multidimensional poverty rate for these years was 14.96 per cent and 24.85 per cent, respectively.

Bihar has the lowest per capita income in the country. It was Rs 54,111 in FY23, just 32 per cent of the national average. The state resorts to huge borrowings to fund its expenditure; its sovereign debt was 39 per cent of its economy in FY23, the second highest in the country.  Unemployment rate in the state has been consistently higher than the national average, although the gap has slightly narrowed in recent years.

Case for Andhra

In contrast, Andhra has a higher per capita income than the national average and a lower proportion of people in multidimensional poverty. Its projected per capita income for FY24 was Rs 242,479, about 32 per cent higher than the national average. Only 6.06 per cent of its population was in multidimensional poverty during FY21. However, the state's sovereign debt has been more than 30 per cent of its economy for the five years to FY24, and its unemployment rate, at 4.1 per cent, higher than the national average — and higher than Bihar’s.

Other ‘separated’ states Jharkhand, carved out of Bihar, has a per capita income that is 54 per cent of the national average. Its debt has been more than 30 per cent of its economy for the five years to FY24, and 28.81 per cent of its population was in multidimensional poverty during 2019-21, nearly double the national average. However, its unemployment rate has been lower than the national average. 

Telangana, carved out of Andhra Pradesh, fares well on all these parameters.

Uttar Pradesh and Madhya Pradesh, the two other states divided in 2000, have lower per capita incomes than the national average. UP's debt has been around 30 per cent or more of its gross state domestic product (GSDP) for the last 10 years.

MP's debt is slightly lower, but still on the high side. Both states have higher percentages of people in multidimensional poverty than the national average. Chhattisgarh, carved out of MP, has a lower per capita income than the national average. It is significantly higher for Uttarakhand, carved out of UP.

However, Uttarakhand has a higher unemployment rate than the national average, while Chhattisgarh has a higher proportion of its population in multidimensional poverty.  Neither state has significant fiscal stress.

Other states 

Among states not divided since 2000, three (excluding the northeast and hilly ones) — Odisha, Rajasthan and West Bengal — have lower per capita incomes than the national average. West Bengal has a high debt-to-GSDP ratio, and Odisha has a higher proportion of people in multidimensional poverty. Rajasthan faces challenges in both these areas.

Besides West Bengal, Punjab and Kerala have high fiscal stress, as seen in the high debt-to GSDP ratios. All three had demanded special debt relief packages from the UPA government when Pranab Mukherjee was the finance minister. 

But Mukherjee, who represented Jangipur, West Bengal, in the Lok Sabha, rejected the demand. Later, a panel headed by then finance secretary Sushma Nath said debt relief to these states would encourage fiscal mismanagement. Would that hold true even now?

Pandora’s box?

Asked whether a financial package to Andhra will open a Pandora's box at a time when the Centre seeks fiscal consolidation, Saibabu Yella, former chairman of the 20-point committee in the state (2014-19), says it would not, since the demand is based on the provisions of the Andhra Pradesh Reorganisation Act.  He says salaries, interest payments, and repayment commitments leave little for capital expenditure in the state. Capital outlay, part of the expenditure used for generating assets, is low in Andhra, even when compared to Bihar. 

D M Diwakar, former director at the Patna-based A N Sinha Institute of Social Studies, points out that Bihar is not the only backward state in the country; Jharkhand, Odisha, UP, and MP are laggards as well. 

"If the Indian economy has to grow sustainably, it needs a better development process in these backward states," he says.