Special Category Status of Indian States – Recent Developments

This is a topic on and off the Indian political radar, now particularly as the General Elections are scheduled in the summer of 2014.

Currently, India has 11 ‘special category’ status states. They are Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland, Sikkim, Tripura, Jammu and Kashmir, Himachal Pradesh and Uttarakhand. It is usually given to states which have distinct features like international boundaries, hilly terrains, special environmental issues, different socio-economic patterns and where infrastructural investments or public services are very difficult to be implemented. And most of these states bear a large tribal or economically backward population.

The country’s apex decision making body National Development Council headed by the Prime Minister and all the Chief Ministers and Union Cabinet Ministers on board, is the competent authority to grant ‘special category’ status to a state based on a set of criteria as per the Gadgil formula. This formula was evolved in 1969 by Dr. D. R. Gadgil, the social scientist and first critic of the Indian Planning Commission. Since then, the formula has been applied, modified and re-applied because of various reasons (statistical or changing social indicators, political, financial, etc.) and in various ways.

The states which enjoy the ‘special category’ status are given 90 per cent grant as assistance for externally aided projects. For the general category states, there is usually no grant and resources flow to states as back-to-back loans.

In March-2013, Bihar’s Chief Minister Nitish Kumar had remarked “Whoever empathises with and helps backward states will come to power in Delhi“. In May-2013, the Finance Minister P. Chidambaram said that a high-level sub-committee would be constituted under the then Chief Economic Advisor to Government of India, Raghuram Rajan (now the Governor of Reserve Bank of India) in order to determine the criteria of backwardness of a state. Further, Mr. Chidambaram added “… going by whatever information that I have, Bihar will certainly qualify under the new criteria”. Assuming that the Minister rightfully pre-possessed some good data about Centre’s likely financial assistance, tax-waivers and performance-linked-incentives, I believe it were apt if the statement was made by him with certainty but only after the criteria of backwardness was re-defined. Otherwise, the statement still leaves behind a gap that may rather mean that the criteria be re-set so as to accommodate Bihar in the ‘special category’ status !

Anyhow, this gesture by the Congress-led UPA Government was interpreted as a sign of wooing Mr. Nitish Kumar away from his alliance with the Opposition party, BJP and gaining his party, the JD(U)’s support. From the aamjunta, there was hardly any amount of noticeable discussion on this deal just focussing on Bihar’s genuine needs.

In August-2013, the expert committee under Mr. Raghuram Rajan identified 10 parameters for a new Composite Development Index for the allocation of Central funds to backward states. The new index considers the rating of states on the basis of their distance from the national average on parameters including poverty rate, consumption, education, health, female literacy, urbanization, household amenities, connectivity, financial inclusion and share of SCs/STs (Scheduled Castes /Scheduled Tribes) in total population. Some states like Bihar have also insisted on the inclusion of per capita energy consumption as a measure of development. Overall, if this new index rates Bihar as a backward state, then it will definitely do the same for Odisha and few other states as well.

It has been reported that ‘while Bihar was given Rs 12,500 crore as part of a special development plan, Odisha’s eight Kalahandi-Bolangir-Koraput (KBK) districts, more backward than many of Bihar’s districts, should have received an allocation in the same proportion’. As the discussions and rallies were being held by various groups seeking the ‘special category’ status for Odisha, the Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia cited the state’s stable finances and “sound indicators of fiscal deficit, outstanding liabilities and interest payments” as reasons for non-consideration !!

Being born and brought up in Odisha, I can vouch that while the state is rich in many natural resources and abounds in several industrial potentialities, it is economically backward due to meagre or non-sustained patronage from New Delhi. Odisha dramatically boosts the national treasury through trade in various minerals and industries namely coal, iron-ore, bauxite, manganese, power, steel, railways, shipping, commercial ports, fishery, agriculture, art, craft and tourism. One of the most significant DRDOs of the country – testing of missiles, is based in this state only.

There are at least 32 primitive tribal groups (the state has 22.8% tribal population, higher than the 8.6% national average) and according to the Planning Commission, about 155 lakh people in the state are suffering from acute poverty. The literacy rate is low and infant mortality rate high. Health and sanitation issues have just started getting mobilized towards a better future. Only then, would come the next arduous task of strengthening the education sector.

It is a fact that Odisha does not have an international border but some analysts are of the opinion that the 480 km coastal line can be treated as a substitute. This gets pronounced considering massive environmental factors like the Paradip cyclone, 1999 and the recent Phailin cyclone, 2013 hitting the state from across the vast Bay of Bengal, the waters of which are known to whirl some of the most dreadful tropical storms and cyclones ! This coastal line, if not guarded properly, is also vulnerable to illegal trades and anti-social activities, including infiltration.

Though the present BJD government led by Chief Minister Mr. Naveen Pattnaik has taken good measures towards developing some areas of the state, much of the state funds are spent either in administration or repayment of huge Central loans; therefore, it is not adequate in helping all the economically affected people and developing remote areas. Inadequate solutions and non-uniform development of a region, both are largely detrimental to the inclusive concept of growth. A sustained development model, as also envisaged by world-bodies, can gradually come into the picture only at a later stage.

The demand for ‘special category’ status for Odisha was first raised in 1979, but successive governments at the Centre have not paid heed. On one occasion, Mr. Naveen Patnaik has led a 30-member delegation comprising Odisha ministers, BJD MPs and MLAs to President Mr. Pranab Mukherjee. They have submitted a memorandum and one crore signatures collected from the state voicing their concerns and demands. But any noticeable step is yet to be taken by the Central government.

Last week, the state of Seemandhra (earlier part of high-ranked Andhra Pradesh) has been granted ‘special category’ status by the Centre, as quickly as it was curved out. Whereas states like Odisha and Bihar, whose demands have been far more justifiable and long-standing, still continue to be ignored. These type of callous decisions quite seem to be linked to political bias, appeasement tactics and ploys for vote-banks. Ultimately, the citizens suffer ! One better ranked region steadily rises up the development ladder; whereas other regions, in actual needs, may still continue to falter, under-perform and remain almost stagnant for years. This undoubtedly leads to  undesirable issues of inter-state migration or over-populated urban areas where people from low-ranked states flock in search of employment and social upliftment !! Thus, it is negatively cumulative in effect.

So, when is any Central government going to think cogently and channelize the available resources in a proper direction for the long-neglected states ? In fact, not only should it provide the necessary financial grants to economically backward states but also assist them with proper and timely guidance through various advisory bodies or committees working successfully in various parts of the country. This shall expedite development in these low-ranked states and be one of the ways to compensate faster for all the years of neglected work. No Central Government should ever make the blunder of political discrimination (for vote-banks, rivalry, etc.) among states because that will create a huge social mess in the long run !

Aamjunta – What do you say ?

Similar article by aamjunta – Odisha Assam mein hai na!

Chit Funds or Cheat Funds – the Recent Saga of India’s Investors

The recent Chit Fund fiasco in West Bengal has not only pushed the panic button for the Indian Investors, but also opened the Pandora’s box of our corrupt system and the state of awareness of the aamjunta. This is a case in which all the three parties are to be blamed equally – the Investors, the System or the Government and the investment Agencies. Though the issue of cheating and fraud came to light because of Saradha fiasco in West Bengal, Odisha is not far behind in any sense. More than 85 companies are operating in Odisha with a turnover of roughly Rs. 20,000 crore, and there are more than 100 Chit Fund companies (mostly Ponzi Schemes) operating in West Bengal alone with a turnover of roughly Rs. 75,000 crore.

With CB-CID investigations, the list and the amount of fraud and cheating is bound to increase in both the states. Interestingly, some of the Schemes /Companies are old, operating in multiple states, run by well known politicians or their relatives, with a huge capital investment. Coming to Investors – most of them are poor rural people, unaware of the Ponzi Schemes, and are lured mostly by the young unemployed Agents. On the contrary and surprisingly, a good percentage of the Investors are also well-educated, well-aware about the recent happenings or uncertainties. They too could not resist the temptation of becoming rich or richer over-night… and lost their money in the process. In many places, there are numerous reports of suicides both by the Agents and the Investors.

The Chit Fund empire is so complex and so big that it has forced the Government to consider scrapping the Chit Fund Act of 1962 in entirety. Though the pressure is mounting on the Government to order a CBI inquiry of the entire process, in my opinion, CBI inquiry may not be useful as the CBI’s reputation is also at stake in the wake of recent developments; some of their own Officers have been accused and sent to CBI custody for allegedly taking a bribe from a businessman regarding settlement of a land dispute case. In fact, one of these Officers was heading the Coalgate scam probe !

Moreover, why do we have the “reactive” mentality to each and every problem ? Can’t we adapt the “proactive” mentality ? Let’s check where exactly the problem is ? Is there any remedy for these in future ?

As pointed out before, there are three broad parties associated in any kind of investment. They are:

1. The Investment Agency

As per the law of the land, the investment Agencies are supposed to be operating under RBI’s guidelines and State /Centre’s special Acts or Amendments. But in most of the cases, the Agencies are not even registered to offer the Schemes, which they simply roll out in the market. Apart from this, most of the Agencies are either owned by a family or a group of relatives or politicians. Sometimes the companies are created to transform the black money into white, without paying any heed to national economy or security. The investment Agencies select their Directors in such a way, that it becomes easy for them to hide the crucial facts to the people; most of the time the Directors of such Agencies are none other than their drivers, cooks, house-maids, and the like, even without their knowledge !

While India is struggling with unemployment, getting Agents at a low salary is not difficult. Hiring Agents is also tricky; first enrol them as Investors and then lure them with perks, AC train-tickets, gifts and sometimes air-tickets for holiday trips to work as Agents set with achieving a certain amount of “target” i.e., number of Investors and Investment.

I remember, some of my friends who were hired by a similar Agency in 2009 were taken to Malaysia and Singapore (with their family) for a free holiday trip. Not just that; some Agents were gifted with Maruti-800 cars by their Chairman !! Tempting ! Seeing them  make good money in a short span of time, other Investors get attracted and deposit their savings with them, without casting any doubt.

In the initial days, the Agents never fail giving back the monthly interest to the Investors; the payments are always in time and sometimes, even in advance. The one in advance is mostly to give an impression (false) to the Investors that their business has been doing extremely well or performing above expectations ! Surprisingly, the interest rates are almost 24 – 36% per annum; whereas the Post Offices, Life Insurance Policies, and other well-known deposit Schemes give interests not more than 8-10% per annum.  The greed of easy money and becoming rich / richer overnight are the prime factors for both the category of Investors.

Other than giving direct interests to the Investors, companies like Hi-tech in Odisha and Rose Valley in West Bengal later started providing lands/plots in the prime localities of Bhubaneshwar, Cuttack, Kolkata, etc., based on small monthly instalments. The Schemes are so attractive and the Agents are so adept in opening heart-to-heart conversations with the Investors, that no one ever has an iota of doubt while investing. And that too, even in obtaining a plot in the capital cities at a cheaper rate. Surprisingly, in the last raid on Hi-tech in December-2012, it was found that in Bhagya Nagar (outskirts in the city of Bhubaneshwar, Odisha) alone, Hi-tech had promised to give plots of 484 hectares while they actually owned only 4 hectares of land. They are not the only ones doing such business in the market !!

Other well-known companies like Rich Mind, Saradha, Artha Tatwa, Seashore, Safex Infra, Ashore, and many others – almost 200+ odd Agencies have been active in the states of West Bengal and Odisha. Their main target is always the border districts of Odisha, West Bengal, Chattisgarh, Assam, Jharkhand and Andhra Pradesh. As it happened in Saradha’s case of quick closure and disappearance, most of the other companies also simply shut down their entire operation over-night and disappear with the entire money, leaving behind many Investors and Agents on the cross-roads to awfully suffer at various personal levels, to bear public wrath, face legal charges, police harassment, etc.

2. The Investors

It is obvious that the high rate of interests in the range of 24-36% per annum offered by the Agencies are tempting to invest in such Schemes. In addition, more than 95% of the Investors deposit their savings on the face value of the Agents working with those Companies, without checking a single document. ‘You know he is like my cousin… he has ensured the amount and promised me by the name of God that his Company is genuine, and they have their local branch here in my town, where my niece is a clerk. Where will they go ? We will get the money without any problem, and everybody is investing… so what is the big thing here to check ?’ – is the usual reaction, if you ask the Investors at the time of making their investments, whether they have checked the credentials of the Company or the Agent !

No one checks the credentials even though all the documents can be apparently verified by a couple of mouse-clicks in this age of Internet. What surprises more is the mode of transaction ! Most of the times, the entire transaction is by cash only, without any proper receipts or deposit certificates. As long as the Investors get their returns, no one bothers (including Media and the Regulator bodies) to check the validity of the Schemes, the mode of incomes, the mode of operations, etc. Rather, Investors bring in more Investors, hoping that the company will flourish and will give more and more returns, gifts, free tours to Singapore or Switzerland, etc.

Only when the problem starts and Investors complain, the Media becomes active with their ‘24/7 breaking news‘, demands of CBI investigation starts with public strikes, dharnas, attempts of suicides, etc. With such an ignorance, greed and attitude, do you think any fool-proof solution can at all be provided to the Investors ? I doubt…

3. The Regulators

India of course has many Rules, Articles, legal Sections, Court rulings in place to handle these kind of problems. However, the implementation of such Rules is the key. As per the Government, Chit Funds are a traditional business, strongly regulated by the State Governments and Central Government, Security and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). If that is so, then why have so many issues cropped up, whether out of the blue or not ? There are definitely many disorganised, unregulated Companies operating right under the nose of the Regulator bodies. They mostly operate Ponzi Schemes or Chain Investment Schemes, and take deposits promising unrealistic rates of return- double return in 2.5 years, prime land or flat in a posh locality at a cheap rate.

As per an RBI study, Co-operative banks are more suitable and bankable for the poor. If that is so, tailor made Schemes should be implemented in the rural areas under the supervision of RBI, not the Ponzi Schemes. There should be a blanket ban on Schemes promising unrealistic returns. This can be done by the Regulators, and the Investors should inform the Regulators without any delay or fear, when they are approached with Ponzi Schemes or the like.

The other important point RBI, SEBI and other Institutions of the State and Centre should consider is the amount of moveable and immoveable property of the Companies operating in rural areas. If these Companies are merely collecting money and promising lands/plots or flats on the Investment, then they should have enough assets to honour those promises. Government should ensure that this provision is satisfied at all the times. But that does not happen, and most of the claims made by Saradha, Seashore, Ashore, Hi-tech, Artha Tatwa, and many others are simply a sham without any real assets. They just create an illusion, which the finance watch-dogs should have sensed in time. And now, the poor aamjunta (Investors and Agents) is suffering and repenting to the core !

The most surprising post-reaction came from West Bengal on Saradha fiasco when the CM wanted to levy more tax on Cigarettes and distribute the extra money thus raised, among the Saradha Investors. I do not observe any logic in it at all… Instead of curbing the cheat Chit Funds / Ponzi Schemes and forcing all the associated Companies to return the money to the Investors, if the authority takes a short-cut perhaps for sake of retaining or reinforcing vote-banks, then no doubt aamjunta will again suffer eventually. Vote politics does not work all the time. If Investors money is compensated in this way, then in crude terms it just means- someone (a duped Investor) is going to be paid from his own pockets and other’s also who are not involved in any way !!!!

Aamjunta…what do you say ? Planning to invest ? I strongly suggest- say no to Chit Funds unless they are properly regulated through transparent policies. In general, regarding any Scheme, be very careful and keep your eyes and ears open all the time.

Jai Hind.

%d bloggers like this: