Rural India in decline

The urban population actually grew slightly more than the rural population in last
10years, perhaps for the first time in Indian history.
According to 2011 census rate of rural population growth has plummeted in all states
other than Rajasthan, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Madhya Pradesh,
Chhattisgarh and Orissa.
A simple extrapolation from that chart suggests that 27 Indian states polulation begin
seeing shrinking rural populations in this decade, a monumental demographic change.
Four states have actually seen their rural populations decline since 2001: Kerala, Goa,
Nagaland and Sikkim. The rural population of Andhra Pradesh has almost stagnated.
It is growing at a very sluggish rate in at least 10 other states.
Meanwhile, there is a noticeable asymmetry: Nearly half of the total rural population
growth across India is accounted for by two politically important statesUttar
Pradesh and Bihar.

Several large Indian states are seeing a dramatic slowdown in their rural population
growth.
But political power in New Delhi may vest with states that will still have growing
villages. So one set of Indian states may have strong incentives to change public
policy in favour of the cities, while another set of states will have incentives to protect
the status quo. Will this lead to ugly tensions between states, especially given the fact
that there is such a marked difference between the states of the Hindi heartland versus
the states of peninsular India?
Focus on a growing federal paradox: financial power is being concentrated in New
Delhi while political power could get dispersed to the states after 2014.
This fault line could lead to intense bargaining for resources in the Indian political
system, with powerful regional satraps trying to leverage their political clout to
demand funds from the Union government. Nitish Kumar and Mamata Banerjee have
already shown the way.

The diverse demographic dynamics in Indian states could add another layer of
complexity to the federal paradox. This can have implications not only during
elections but also in determining the direction of public policy.
Gandhi vs Ambedkar
Indian public policy suffers from a well-known Gandhian bias, with a pious belief in
rural development even though development patterns the world over show that
countries have emerged out of poverty through urbanization. B.R. Ambedkar, who
had a very direct experience of social oppression, had little patience with the
glorification of village life: The love of the intellectual Indian for the village
community is of course infinite, if not pathetic What is a village but a sink of
localism, a den of ignorance, narrow mindedness and communalism?
But what is less well known is that Ambedkar was a trained economist who argued in
one of his earliest papers, written in 1918, that India needed to help people migrate
from agriculture to industry: A large agricultural population with the lowest
proportion of land in actual cultivation means that a large part of the agricultural
population is superfluous and idlethis labour when productively employed will
cease to live by predation as it does today, and will not only earn its keep but will give
us surplus; and more surplus means more capital. In short, strange as it may seem,
industrialization of India is the soundest remedy for the agricultural problems of
India.
There has been a robust debate in India on the relative merits of the Gandhian versus
Ambedkarite visions on the direction the country should take in the future. The
varying demographic trends in modern Indiaespecially the rapid decline in rural
population growth in some statescould create disagreements in the political system
that in some ways echo the old debates on a rural versus urban future.

The Indian federal paradox

The decline in the fiscal autonomy of states and their growing political clout could
lead to intense political bargaining.
India had a $287 billion economy in 1991, the year of economic crisis followed by big
bang reforms. Maharashtra alone now has a $190 billion economy, according to the
latest data available on state gross domestic product at current prices converted into
dollars. So the largest state economy will soon be as big as the entire Indian economy
was in 1991. Andhra Pradesh, Uttar Pradesh and Tamil Nadu are over $100 billion
while Gujarat and West Bengal are approaching that mark.
A few state economies are now larger than several national economies. Only 60 of the
184 countries featured in data from the International Monetary Fund have economies

larger than $100 billion. Maharashtra would be the 50th largest economy in the world
if it were a separate country.
However, the growing size of state economies has not necessarily translated into
economic clout because of the way fiscal rights are distributed in India.
The initial constitutional design generally allowed the Union government to collect
taxes on production (taxes on income and corporate profits, for example) while taxes
on distribution were meant to be collected by the states. On the spending side, New
Delhi was to take care of national public goods (defence, foreign policy,
communications) while the states were to provide local public goods (policing,
education, health).
This design has been fundamentally changed in recent decades. Central schemes
funded by New Delhi have grown in number. The proposed goods and services tax
will also reduce the fiscal autonomy of the states. (This column is not an argument
against either central schemes or the new tax, just a statement of facts.)
The decline in the fiscal autonomy of the states has paradoxically been accompanied
by their growing political clout. What has happened in recent months is well known.
Bihar chief minister Nitish Kumar has indicated that he is ready to shift allegiance to
any national coalition that promises to increase central transfers to his state. Tamil
Nadu politicians have managed to arm twist the Indian government into changing its
position on a resolution on Sri Lanka in the United Nations Human Rights Council.
West Bengal chief minister Mamata Banerjee had earlier spiked a deal with
Bangladesh on sharing of the Teesta waters.
A less noticed example was at the national council meeting of the Bharatiya Janata
Party in March. Other than party president Rajnath Singh and senior leader L.K.
Advani, the men who had the most time in front of the mike were the star chief
ministers: Narendra Modi, Raman Singh and Shivraj Singh Chouhan. Two of them
even got more time than Advani. The leaders in New DelhiArun Jaitley, Sushma
Swaraj and Nitin Gadkarigot less than half the time the regional leaders got.
Such is the emerging federal paradox in India: the states are losing financial
autonomy to New Delhi but have growing political clout over the Union government.
Powerful regional satraps are now in a position to leverage their political clout to
demand funds from the Union government. As my colleague Manas Chakravarty
pointed out on Monday, grants from the Union government account for almost a
quarter of Bihars annual budget. In the case of Uttar Pradesh, grants are a sixth of its
budget.
What we saw in the case of Nitish Kumar could thus be repeated in other contexts.
Such political bargaining could exacerbate tensions between states. I have heard
informal stories about how the richer states have tried to come together in National
Development Council meetings to ask why they should be penalized for the
underperformance of some large states. One could compare this with the question
asked in Europe: how long will the Germans agree to underwrite the Greeks?

The tensions are likely to be less acute in India, because ours is a single country rather
than, as is the case with Europe, a transnational federation without a common fiscal
system. Yet, this is a fault line that is not given its due in public discussions.
What happens in the states will matter a lot, for two reasons. First, the political
economy equilibrium in the states is more stable than that in New Delhi, which has
effectively meant that decision making in state capitals in recent years has been
smoother than in the national capital. Second, as World Bank president Jim Yong Kim
said after his recent visit to Uttar Pradesh: The World Bank Groups mission of
eradicating global poverty and boosting shared prosperity cannot be fulfilled if Uttar
Pradesh continues to be home to 66 million of Indias poorthe highest in any state.
Similarly, India cannot win the battle against poverty unless Uttar Pradesh and Bihar
grow rapidly.
The states thus have an important role to play in terms of both economic growth as
well as poverty reduction. It is unrealistic to pin all hopes on New Delhi, especially
given what has happened over the past decade. But the attempts of the states to take
the lead in policy could lead to two sorts of conflict: with the Union government as
well as with other states. The result will likely be messy political bargaining

Why some states are given special status by the Union

government? Examine the criteria stipulated to get the special
status and its benefits. Do you think this mechanism is
antithetical to federalism? Comment (200 Words)
OR
What is special category status?
First lets clear the air between the terms Special Status and Special Category
Status.
Special status is guaranteed by the Constitution of India through an Act passed by the
two-third majority in both houses of the Parliament, as in the case of Jammu and
Kashmir and Special Status empowers legislative and political rights,
Special Category Status is granted by the National Development Council, an
administrative body of the government and Special Category Status deals only with
economic, administrative and financial aspects.

Origin:

The concept of a special category state was first introduced in 1969. The 5th Finance
Commission decided to provide certain disadvantaged states with preferential
treatment in the form of central assistance and tax breaks. Initially three states Assam,
Nagaland and Jammu & Kashmir were granted special status but since then eight
more have been included Arunachal Pradesh, Himachal Pradesh, Manipur,
Meghalaya, Mizoram, Sikkim, Tripura and Uttarakhand.
Who gets to decide to grant the status?
The decision to grant special category status lies with the National Development
Council, composed of the Prime Minister, Union Ministers, Chief Ministers and
members of the Planning Commission, who guide and review the work of the
Planning Commission. Since this has to deal with funds transfer from Centre to state,
the two bodies involved at the core are Planning Commission and Finance
Commission. Below is an interesting split up of their respective roles and brief
calculations that are done by them.
The NDC bestows Special Category Status based on certain parameters such as
1.
2.
3.
4.

low resource base,

hilly and difficult terrain,
low population density or sizeable share of tribal population and
strategic (hostile) location

Considering above parameters neither Seemandhra nor Telangana qualifies. The

Odisha State assembly has passed a resolution requesting special category status.
Bihars repeated plea for Special Category Status on the ground of backwardness
was rejected. The business community seems to be accepting the status as it would
empower the State to get central aid up to 90 per cent.
Role of Planning Commission
The Planning Commission allocates funds to states through central assistance for state
plans. Central assistance can be broadly split into three components:
1. Normal Central Assistance (NCA)
2. Additional Central Assistance (ACA)
3. Special Central Assistance
NCA, the main assistance for state plans, is split to favour special category states: the
11 states get 30% of the total assistance while the other states share the remaining
70%. The 12th Finance Commission recommended that the Centre give only grants,
and leave it to the states to raise loans as they wanted. Since then, the 90% grants:
10% loans formula for special-category states is restricted to centrally-sponsored
schemes and external aid. For general category states, external aid is passed on in the
exact mixture of loan and grants in which it is received at the Centre. And for them, in

the case of centrally-sponsored schemes, only 70% of the central funding is given as
grant.
Allocation between non special category states is determined by the GadgilMukherjee formula which was finally revised in 2000. Gadgil formula was formulated
with the formulation of the fourth five-year plan for the distribution of plan transfers
amongst the states. It was named after the then (1969) deputy chairman of the
Planning Commission Dr. D R Gadgil. The central assistance provided for in the first
three plans and annual plans of 1966-1969 lacked objectivity in its formulation and
did not lead to equal and balanced growth in the states. The National Development
Council (NDC) meeting held in October 11, 1990; discussed and approved a New
Revised formula. This formula came to be popularly known as Gadgil-Mukherjee
formula after the name of the then (1990) deputy chairman of Planning commission
Dr. Pranab Mukherjee for determining the allocation of central assistance for state
plans in India.The new revised formula as approved by NDC is given in the following
table. Criteria for inter-state allocation of Plan Assistance
Criteria
Weight (%)
Population
60
Per Capita Income 25
Fiscal Management 7.5
Special Problems 7.5
Total
100
Special category states also receive specific assistance addressing features like hill
areas, tribal sub-plans and border areas. Beyond additional plan resources, special
category states can enjoy concessions in excise and customs duties, income tax rates
and corporate tax rates as determined by the government. The Planning Commission
also allocates funds for ACA (assistance for externally aided projects and other
specific project) and funds for Centrally Sponsored Schemes (CSS). State-wise
allocation of both ACA and CSS funds are prescribed by the centre.
The Finance Commission
The Planning Commission allocations can be important for states, especially for the
functioning of certain schemes, but the most significant Centre-state transfer is the
distribution of central tax revenues among states and this is done by the Finance
Commission. Functions of the Finance Commission can be explicitly stated as:
Distribution of net proceeds of taxes between Centre and the States, to be divided as
per their respective contributions to the taxes. The Finance Commission decides the
actual distribution and the current Finance Commission have set aside 32.5% of
central tax revenue for states. In addition, it recommends the principles governing
non-plan grants and loans to states. Examples of grants would include funds for
disaster relief, maintenance of roads and other state-specific requests. Unlike the

Planning Commission, the Finance Commission does not distinguish between special
and non special category states in its allocation.
What benefits does a state enjoy on getting the special status?
As per Gadgil formula, a special category state gets:
- Preferential treatment in federal assistance and tax breaks
- Significant excise duty concessions
- Thus, these states attract large number of industrial units to establish manufacturing
facilities within their territory leading to their economy flourishing
- The special category states do not have a hard budget constraint as the central
transfer is high
- These states avail themselves of the benefit of debt swapping and debt relief schemes
(through the enactment of Fiscal Responsibility and Budget Management Act) which
facilitate reduction of average annual rate of interest
- Significant 30% of the Centres gross budget goes to the Special category states
- In centrally sponsored schemes and external aid special category states get it in the
ratio of 90% grants and 10% loans. For the rest of the states as per the
recommendations of the 12th Finance Commission, in case of centrally sponsored
schemes only 70% central funding is there in the form of grant. The rest of the states
receive external aid in the exact ratio (of grants and loans) in which it is received by
the Center.