SPECIAL CATEGORY STATUS OF HIMACHAL PRADESH AND ITS IMPACT ON THE FISCAL SUSTAINABILITY OF THE STATE

Abstract

The concept of the Special Category State came into existence when planned economy and normal central assistance was the most dominant method of centre –state funding. Over the years the number of Special Category States has stretched to eleven while their proportion in normal central funds has remained the same. The introduction of economic reforms has transformed the nature of fiscal federalism in India and now states are competing with each other for attracting the investments and industries in their territory. Because of this transformation the reduction in central excise and other tax liabilities has become a very potent mode of attracting industries in the states. Presently, Himachal has gained a lot from the industrial package which gives exemption from central excise taxes and provides capital subsidy to industries investing in Himachal. Creation of NITI AAYOG has ended the old mode of normal central assistance and central assistance for state’s plan. The Finance Commission now is allocating larger devolution of resources to states from the divisible pool of centre’s income allowing them to create their own plans. Himachal has seen a great amount of increase in its finances due to this new allocation by the Finance Commission. The industrial package is more crucial for the prosperity of Himachal’s economy as compared to the funds transferred under the norm of special category state. The Chief Minister of Himachal has requested the Finance Minister of India to extend these tax exemptions at least five years for industries being established in Himachal. The present economic reforms like Goods and Services Tax are pointing towards uniformity of taxation and trade policies and it will demand a great deal of negotiation from the political leadership of Himachal to extend this industrial package.