Extra cash can’t help Andhra or Bihar

TDP supremo Chandrababu Naidu met Modi in Delhi yesterday, seeking enhanced assistance for Andhra Pradesh. Last week, Nitish Kumar’s JDU passed a resolution demanding special category status for Bihar.With the two NDA allies vital to Modi govt’s continuance, special status/assistance is being spoken of as the only way forward for Bihar and Andhra Pradesh. But is it? Fact is the states lack the institutional capacity to even spend the money they have. In Bihar’s case, there is the additional problem of misgovernance. With 10 bridges collapsing in the last two weeks, lack of funds certainly can’t be blamed for the state’s bottom ranking in India’s development charts.The ‘special category’ debate has had a past. In 2015, with demanding states drawing a blank, then FM Arun Jaitley said, “After the 14th finance commission recommendations, the era of special category status to states has ended.” In keeping with that, govt has been loath to even use the term ‘special category’. It simply refers to the “eight Northeast and three Himalayan states” (J&K, now a UT, besides Himachal and Uttarakhand) that receive such funds.These states, located remotely along India’s international borders, had inherited a legacy of neglect and economic backwardness, lack of infra and shortage of capital and resources. Special status gave them access to liberal financing by Centre through Plan assistance. Of total Plan funds, 30% was earmarked for these states under the Gadgil formula.No questions asked | Some of these states could use the resources to their advantage and prospered. Others lacked the capacity to use up funds productively. They additionally suffered from protracted insurgency that impeded development. But funding continued, unconditionally. There were no expectations of accountability or performance from these states. What did change gradually was the scale of funding, owing to proliferation of centrally sponsored schemes (CSS) and direct off-budget transfers.Post-2014 changes | Post 2014, CSS were restructured and off-budget transfers abolished. Planning Commission itself was disbanded in 2014. The Planning era ended in 2017 and Gadgil formula became history.Restricted to CSS only, these states now got 90% as grants and 10% as loans from Centre. Income tax holidays and excise duty concessions were granted to companies that set up new industrial units there, besides certain subsidies. However, in absence of market and infra, these incentives proved inadequate to attract industry or generate employment.Funds not the answer | If the status is now given to Bihar and Andhra, they will receive some additional central grants and loans. But these won’t solve their problems.The two states have different problems. Andhra was made to sacrifice two of its most prosperous districts and major revenue earners, Hyderabad and Ranga Reddy, to Telangana in 2014. With revenue of only about ₹12k cr and expenditure over ₹60k cr, it inherited a huge liability of ₹90k cr.To placate it, Congress govt promised the state special category status. But it was ejected from office. Many other promises were made to it, and most remain unfulfilled. Andhra today faces serious resource crunch and a huge debt burden. As for Bihar, its problems arise from governance issues and lack of industry and infra. Missing capacity | Both states also suffer from serious lack of institutional capacity to spend funds. As CAG’s appropriation accounts show, Bihar is unable to spend a significant part of its budgetary allocations. In FY2023, as much as ₹51,722cr of revenue expenditure (22% of revenue budget) and ₹14,786cr of capex (24% of capital budget) remained unspent and had to be surrendered. Unspent funds during fiscal 2020, 2021 and 2022 were ₹78,122cr, ₹75,926cr and ₹70,083cr, respectively.Total unspent fund amounting to ₹66,508cr (FY2023) is much more than total benefits Bihar would get from special category status. When departments are unable to utilise resources at their disposal, it also means a heavier tax or debt burden on people than actually required.Bihar’s problems stem from lack of institutional capacity, infra, market, entrepreneurial skills, and proper industrial climate. These issues are not addressable in the short term.Unused moneys | Andhra’s story is not much different – in FY2023, it failed to spend as much as ₹92,567cr, or 21% of its budget allocations, covering sectors like medical and health (₹6,576cr unspent in revenue and capex), urban development (₹4,655cr), social welfare (₹5,254cr), welfare of backward classes (₹16,360cr), and irrigation (₹9,034cr).If these states focused on strengthening capacity for utilisation of funds already available, they wouldn’t need special category status. And till that happens, even additional funds would simply remain unutilised.The writer is former DG, CAG & author of ‘Special Category States of India’.