The plea from Bihar to be designated a special category state has been gaining ground over the last year. In April, Anil Pathak, the general secretary of the Bihar State Citizens’ Council, marked the start of the fiscal year by saying the Centre should end its discriminatory policy towards Bihar and accord it special category status.
The special category was so nominated at the time of the Gadgil formula in 1969, as a group of states with the distinct problems of hilly terrain and turbulent international borders — and poor infrastructure as a result. Three states were named initially: Assam, Nagaland, and Jammu and Kashmir. There are now 11, with new states contiguous to the initial threesome added on, as a result of state partitioning and conversion of former Union Territories to states.
The Bihar claim seems to draw sustenance from the contiguity criterion, from its international border with Nepal, and from the fact that it is poorer in per capita gross state domestic product (GSDP) than many states within the special category. There is also anger over the share of Bihar in central taxes having fallen from 11.028 per cent as prescribed by the 12th Finance Commission, to 10.917 per cent by the 13th Finance Commission.
Statutory flows from the national government in any federation are designed to compensate for variations in fiscal capacity across sub-national states. Typically, a uniform tax effort is (implicitly) applied to the estimated fiscal capacity of each state. A particular state may choose a level of taxation at a level below (or above) that of others. This does not affect the basis of the transfer, which is what they could potentially collect in taxes at uniform effort.
Poverty translates into low fiscal capacity, which is routinely taken care of by the formulae used for state shares in statutory transfers. The fact of Bihar being poor is indeed why they get a higher share in both statutory and Plan transfers than their share in population.
What justifies the separate consideration given to special category states is their hilly terrain, which imparts a cost disability in public service provision. For example, if the construction cost of a district road is Rs 15 lakh per kilometre in flat terrain, rising to Rs 30 lakh per kilometre in hilly terrain, and if two habitations separated by one kilometre on a two-dimensional map require two kilometres of connecting road length in hilly terrain, then both together will make a road link between two habitations, separated by one kilometre as the crow flies, higher in hilly terrain by a factor of four.
In the Canadian federation, the principles governing fiscal transfers from the national government to sub-national provinces are constitutionally enshrined, but all areas north of 60 degrees latitude are territories directly administered by the national government and therefore outside the scope of the formulae governing transfers. These constitute a contiguous arc across the north of Canada, and clearly carry cost disabilities defined by their location and consequent extreme climatic conditions.
The special category states likewise define an arc across the north and northeast of India, separate from the mainland by virtue of both a more difficult terrain, and/or difficult climatic conditions. But there may now be a case to re-examine the routine inclusion in the group of the residual state of Assam which, after the partitioning out of Meghalaya and Mizoram, is not substantially different in terrain or climate from general category states.
So why did Bihar’s share of central taxes fall somewhat with the 13th Finance Commission? Finance Commissions up to the 12th Commission assessed the fiscal capacity of states with reference to per capita GSDP alone. The 13th Finance Commission for the first time took formal cognisance of the fact that the special category states, in addition to their expenditure disability, suffered also from a revealed revenue disability. The average ratio of tax revenue to GSDP for special category states is lower than the average for general category states. So it adjusted for this.
As a result, special category states got a higher share of central taxes from the 13th Commission, with a corresponding reduction in the share of all other states, not just Bihar. But the 12th and all earlier Finance Commissions gave special category states an additional ad hoc statutory grant anyway, beyond their tax share, to cover routine expenditures. So the move to the new procedure was a more objective and transparent way of dealing with the greater fiscal difficulty of special category states. When aggregated across tax shares and grants, the share of general category states in total statutory transfers did not fall by as much as their decline in tax share alone.
The low income and social indicators of Bihar give the state high entitlements not just in statutory Finance Commission flows, but also in Plan flows through central schemes like the Sarva Shiksha Abhiyan, but do not justify special category status. The international border is no justification either, since Rajasthan and Gujarat are border states too.
One reason for the variation across states in the tax to GSDP ratio could be differences in the sectoral composition of GSDP, since sectors are not uniform in their taxability. Even after adjusting for varying sectoral composition, however, the tax effort of the special category states is low (as estimated in a study I did with Rajan Goyal, published in a 2012 memorial volume for Raja Chelliah). Bihar gets a score of 0.81 out of a maximum of one, well above the 0.20-0.67 range in which the special category states lie. The low tax effort of special category states is clearly a matter of concern, but can only be addressed in conjunction with the law and order problem many of them face, whereby residents are compelled to pay into parallel revenue streams collected by insurgents.
Bihar should view it as a matter of pride not to be in need of special fiscal accommodation.
The author is Honorary Visiting Professor, Indian Statistical Institute, Delhi