Special status is accorded to those states which are perceived as having some economic, social or geographical disadvantage, in order to make them eligible for additional central funds to eliminate these disadvantages.
The Gadgil Mukherjee formula for devolution of central assistance to states earmarked 30 percent of the central funds to special category states, i.e. states which intrinsically are hindered from achieving financial viability, or need additional funds because of extrinsic factors, and for the need of achieving regional balance in development.
It proposed the following criteria for special category states - hilly and difficult terrain; low population density; strategic location along international borders; economic backwardness; and non-viable State finances.
The National Development Council accords the special category status to various states. A special category state has the following benefits:
- As against central assistance of 30% grant, and 70% loan, special category states get it as 90% grant, and 10% loan.
- Special category states get favoured treatment from the Finance Commission with respect to devolution of central tax revenues.
But, this formulation is has been criticized as favoring certain states as against the others, and incentivizes poor performance as there is no incentive to shore up the state finances, develop additional sources of revenue or efficient performance.
Recently, the Raghuram Rajan report developed a multidimensional criteria for allocation of these additional resources, which is based on the performance of the states. But that too has come under criticism for being too vague and liable to political manipulation.
Special category status may be granted to the states to attain regional balance in development parameters, but the responsibility should be of the states themselves, with performance linked incentives granted by the centre, in a clear and transparent manner.
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