Mint Explainer: What is special category status and what does it mean for the new govt?

Narendra Modi’s third term as prime minister marks a return to coalition politics as the BJP failed to win the 272 seats needed to form a government on its own. 

The party won 240 seats, leaving it dependent on two key allies, N Chandrababu Naidu’s Telugu Desam Party and Nitish Kumar’s Janata Dal (United). These parties have a common agenda — special status for their states, Andhra Pradesh and Bihar — which they will push for while in government. 

It will be hard for the NDA government to ignore their demands, given that TDP won 16 seats and JD(U) won 12. The TDP had quit the NDA in 2018 over this very issue, and it is likely to bring it back to the table.

What is special category status?

Special category status is a classification for regions or states by the central government that entitles them to financial support and tax benefits for development. It was first introduced in 1969, based on the recommendations of the 5th Finance Commission. Article 275 of the Indian Constitution allows the central government to give extra money to any state if needed, but does not say anything about granting special category status to states.

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In August 2014 the Planning Commission was replaced with Niti Aayog, and in April 2015 the 14th Finance Commission removed special category status as a classification for states while increasing the tax devolution to states from 32% to 42%. States that already had special category status would retain it, but no new states would be added to the list. 

What’s the government’s stand on this?

The union government has repeatedly said it won’t consider demands for special category status for any new state. Referring to the 14th Finance Commission, finance minister Nirmala Sitharaman reiterated last year that no additional states would be granted this status. 

How many states have special category status?

Currently, 12 states in India have this status, and five more wish to have it.

In 1969, three states – Jammu & Kashmir (now a Union Territory after Article 370 was revoked in 2019), Assam and Nagaland — were granted special category status. During the 4th Five-Year Plan from 1969 to 1974 these states received 9.26% of the total assistance.

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From 1974 to 1978, five more states – Himachal Pradesh, Manipur, Meghalaya, Sikkim and Tripura – were added to the list. Arunachal Pradesh and Mizoram were granted special category status in 1990, Uttarakhand in 2000, and Telangana in 2014. 

The five additional states that want this status are Andhra Pradesh, Bihar, Odisha, Rajasthan and Goa.

What were the criteria for receiving special category status?

To be accorded special status, a state needed to have a shortage of resources, low per-capita income, and signs of economic and structural underdevelopment. Its finances would have to be unviable – meaning it was unable to manage its budget and financial needs effectively. It would also need to have a sizeable tribal population in a strategic border region, and be sparsely populated.

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The National Development Council, which made these decisions, included the prime minister, union ministers, chief ministers, and members of the erstwhile Planning Commission.

What are the benefits?

Special category status accords significant financial help to states. Such states receive grants which, based on the Gadgil-Mukherjee formula, made up about 30% of total central assistance.

They also benefit from a favourable funding ratio on centrally sponsored schemes, for which the union government covers 90% of the costs and the state only needs to cover 10%. By contrast, states in the general category have to bear 20-40% of the costs.

Special category states also receive additional incentives such as lower customs and excise duties and reduced income and corporate tax rates to attract more investment.

Why does Bihar want special status?

Bihar is seeking special category status due to persistent poverty and underdevelopment, exacerbated by the division of the state in 2000, which left it with limited natural resources. The state faces unreliable water supply for irrigation, frequent floods in the north, and severe droughts in the south. Bihar’s per-capita GDP is around ₹54,000, among the lowest in India.

Why does Andhra Pradesh want special status?

Andhra Pradesh has been demanding special category status since 2014, owing to significant revenue loss after Hyderabad, a major economic hub, was transferred to Telangana.