What is the meaning of a special status to an Indian state? What are the criteria to get it, and how does it help a state to grow well?

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In budget 2015 West Bengal and Bihar got special status. What are the benefits these sates going to get and why only these two states are chosen when there are many other states asking for it?
Special category’ status is a classification given by Centre to assist in development of those states that face geographical & socio-economic disadvantages like hilly terrains, strategic international borders, economic & infrastructural backwardness and non-viable state finances.
  • The classification came into existence in 1969 as per the suggestion given by the Fifth Finance Commission, set up to devise a formula for sharing the funds of Central govt. among all states.
What benefits do states having ‘Special Category’ status enjoy?
  • Significant concession in excise & customs duties, income tax and corporate tax
  • 30 percent of planned expenditure (central budget) goes to ‘special category’ states
  • Special Category states are benefited because of Normal Central Assistance which was skewed in favour of these states. These states get more funds in terms of NCAand most part of these funds was in the form of grants rather than loans.
  • Special Central Assistance given to SCS is also an additional amount which can be used by the concerned state for economic development.
  • Centre bears 90% of the state expenditure (given as grant) on all centrally-sponsored schemes and external aid while rest 10% is given as loan to state. For general category, the respective grant to loan ratio is 30:70 where as external aid is passed on in the same ratio as received at the centre.
  • Unspent money does not lapse and gets carry forward.
Hence, special-category status catalyses the inflow of private investments and generates employment and additional revenue to state. Since centre bears 90% of state expenditure on all centrally-sponsored schemes, state can take more welfare-based schemes from the new savings.
Further, more grants from centre helps in building state infrastructure and social sector projects. As a result, special-category state gets to bridge its development deficit.
Who accords the category status to state and how?
Special Category’ status had been granted in the past by the Union government to States having certain characteristics based on the recommendations of the National Development Council.
These include
i) hilly terrain;
ii) low population density and/or sizeable share of tribal population;
iii) strategic location along borders with neighbouring countries;
iv) economic and infrastructure backwardness; and
v) non-viable nature of State finances.
source
Which states held Special category status?
11 states used to have ‘special category’ status, namely, Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Jammu & Kashmir, Himachal Pradesh, and Uttarakhand.
Lacunas in the working of Special Category status
  • Firstly, the way Special Category Status were assigned to a state has been a matter of debate. Various committees used different parameters to classify a state in Special Category status.
  • Some states lobby central government to classify them in special category. This was to be corrected and the consent of majority of state must be taken before granting a special category status to any state.
  • Moreover there should have been a general consensus among states related to principle used for granting the SCS.
  • Secondly, data reveals that even after awarding Special category status not much economic progress has been noticed among states. This may mean that for economic development it’s important to follow sound economic policy. Benefit of SCS may act as a stimulus but rest depends on the individual state policy.
  • Third, the amount of proceeds that states receive has increased after 14th finance commission. So the structure does not seem to have any specific relevance in present context.
Why has the status been removed now?
The Finance Ministry’s reasoning for withdrawing the status is that the higher 42% devolution takes into account all needs of states.
Way ahead?
Following the demand for Special Status by Bihar, a committee was appointed under Dr. Raghuram Rajan in 2013. This committee suggested that States classified as ‘Special Category States’ and those seeking inclusion in that category, would find that their need for funds and special attention more than adequately met by a basic allocation to each State and the categorisation of some as ‘least developed’.
Considering special status to any new State will result in demands from other States and dilute the benefits further. It is also not economically beneficial for States to seek special status as the benefits under the current dispensation are minimal. States facing special problems will be better off seeking a special package.

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