Imbalance in finances of Andhra Pradesh

The strength in the finances of any government is revealed through the revenue receipts, i.e., the income generating capacity of the State. The surprising fact is that the new government is projecting almost the same volume of receipts under this account, even after bifurcation.

While the total revenue receipts of the combined State stood at Rs 80,996 crore for 2010-11, the same was projected to be Rs 1,09,300 crore for 2016-17 – a quantum jump in the revenue-generating capacity of the State.

However, in relative terms, the share of own tax revenue has fallen sharply from the undivided position of 55.73 per cent to 47.87 per cent.

Quite surprisingly, the share of State excise also has gone down substantially from 10.20 per cent to 5.27 per cent, in spite of the all-out effort of the government to increase revenue from Abkari and liberal licensing to bar and restaurants.

Another case for observation that could be made from the trends is that the grant-in-aid from the Central government is forming about one-fourth.

In the context of reducing share of taxes from the divisible pool to the Central government by virtue of significant rise from 32 to 42 per cent and reduction in the number of centrally-sponsored schemes, it is highly precarious to depend on the Central assistance (by way of Grant-in-Aid ) any longer.

It had been the experience of many a State government that they suffer from huge deficits under this account. In view of the fixed commitments towards running the government, their administrative expenditure would outweigh the income generated. Hence, they would be suffering from the huge revenue deficit.

An analysis of the trend in the revenue expenditure of the State of Andhra Pradesh would reveal many interesting aspects. First, there was no revenue deficit in the undivided State of Andhra Pradesh.

Either due to increase in the receipts (more than expected) or due to cut in the allocated expenditure to various departments, the erstwhile government appears to have taken adequate care to see that the finances of the State did not land in deficit.

It is only after the new government (after bifurcation) assuming office in June 2014, one could find a large volume of deficit of Rs 24,315 crore;

which is in fact the contentious issue now between the Centre and the State government. The State has been arguing that the Centre has promised to reimburse the entire revenue deficit for the year 2014-15, in view of the fact that the new State was unfavourably placed in terms of the infrastructure and revenue-generating capacity.

Second, there was huge revenue expenditure in the very first year of the new government. Viewed otherwise, the revenue had fallen down by about Rs 20,000 crore over the previous, resulting in huge deficit. The expenditure towards social services covering education, health, family welfare, water supply, sanitation, housing, urban development and nutrition had been significant at above 40 per cent always, except in the year 2014-15.

This was followed by expenditure on General Services including the maintenance of the State departments, fiscal services and pensions. The most significant of this is the servicing of the debt and interest payments, always accounting for more than Rs 10,000 crore. Interest payments were projected to be the highest at Rs 12,853 crore during 2016-17.

Next in the series of expenditure was towards economic services consisting of agriculture and allied activities, rural development, irrigation and flood control, energy, industry and minerals, transport, science, technology and environment. It is evident from the pattern of expenditure that there had been a substantial shift in the priorities of the new government.

While the previous government in the undivided State had focused much on the irrigation and flood control during the years 2010-14, by allocating between Rs 6,500-8,900 crore, the new government has reduced this expenditure to just Rs 600 crore. In contrast, the new government’s allocations towards rural development and agriculture remained substantial.

It would be relevant in the present context to juxtapose the estimates of Fourteenth Finance Commission (FFC) with the actual situation available, so as to gain reasonable understanding of the finances of the new State. The Commission has made an objective assessment of the finances of both Andhra Pradesh and Telangana, basing on the data of the years 2004-05 to 2012-13.

Basing its estimates on this, the Commission made a projection as to the strength of the finances of both the States on Revenue Account for a period of five years from 2015-16 to 2019-20.

As per the projections of the Commission, the new State of Andhra Pradesh would suffer from revenue deficit all through the five year period, totalling about Rs 1,92,798 crore. In contrast, it is projected that the Telangana would end up with a surplus for all the five years, amounting to about Rs 21,972 crore.

A comparison of the estimates of the FFC and the State Budget reveals many interesting aspects. First, the FFC estimated that the State’s own revenue would be about Rs 58,624 crore for 2015-16 and Rs 68,332 crore for 2016-17; however, the Budget documents projected that it would be Rs 71,659 crore and Rs 82,451 crore respectively.

Based on its estimates, the FFC projected the pre-devolution deficit to be around Rs 31,646 crore and Rs 33,823 crore for the two years respectively.

Second, the State expected that the Central government would extend a grant-in-aid of Rs 17,722 crore for 2015-16 and Rs 26,849 crore for 2016-17.

By virtue of the increased revenue, the State itself is projecting the revenue deficit at very low levels of Rs 4,140 crore for 2015-16 and Rs 4,868 crore only for 2016-17. These estimates are significantly lower than those of the FFC.

If the State sticks to its own estimates and that the same are proving to be true, there is no case for much worry on account of the revenue and the fiscal deficits.

But the reality does not appear to be supporting these estimates. Going by the all-out efforts of the State of Andhra Pradesh for raising resources through market borrowings and other sources of public and private debt, one naturally doubts about the genuineness of these estimates. (The writer is a former Vice-Chancellor, Acharya Nagarjuna University)

By:K Viyyanna Rao