AP state stares at debt trap

AP state stares at debt trap
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Highlights

In any family if we have a surplus, we invest it in assets. If the surplus is sufficient to buy an asset like a house, we go to a bank and take a loan and invest in that asset.  

Running finances of the government is something like running finances of the family. Just like in family on a monthly basis we get income and incur expenditure, similarly the income earned and expenditure that is incurred for running the government is known as the “Revenue Account.” If there is surplus in this account State finances are considered to be healthy; if on a yearly basis the income the government gets is less than the expenditure it incurs on recurring items like salaries, pension, interest payments, then the government is in revenue deficit.

In any family if we have a surplus, we invest it in assets. If the surplus is sufficient to buy an asset like a house, we go to a bank and take a loan and invest in that asset. Similarly, the government to improve the overall functioning of economy and the well-being of population creates assets and if this asset creation cannot be fully financed by revenue surplus (Income minus expenditure), the government also takes loan in addition to any surplus they get on the revenue side and invest in that asset.

This loan taken to invest in that asset minus the revenue surplus is what is known as the fiscal deficit. Such a situation is considered healthy as asset creation is financed by your own money partly. If there is a revenue deficit, the loan is taken not only for asset building but also to cover revenue deficit. This type of fiscal deficit is not a healthy sign as you are borrowing to spend on daily expenses. In such a situation, the government is taking a loan and spending part of it for day-to-day expenses instead of utilising it for asset building.

In essence, running of the government is akin to managing household and if people realise this simple truth, then we also become aware that freebies the politicians are promising do not come from leader's pocket but it is either in terms of taking our own resources through taxes or building up a liability in terms of loan repayment by us or future generations that is our sons, daughters, grandsons and granddaughters.

Viewed in this context, one has to examine the repeated claims the Government of Andhra Pradesh is making that it has inherited a big deficit on bifurcation and that they are doing a lot for the people in spite of deficit. This is one of the myths that is being spread by the government, especially in the absence of somebody countering it with facts and figures.

It is true that a major portion of revenue source was lost after the division of State of Andhra Pradesh as Hyderabad happened to be a major contributor of resources to United State of Andhra Pradesh. Out of the revenue generated within the State in 2012-13, Telangana inclusive of Hyderabad had a share of 69%, whereas rest of Andhra had a share of 31%.

In terms of population, the share of Telangana is 42% and bifurcated Andhra Pradesh is 58%. Hence the State started with a major handicap in terms of smaller resource base with a higher population ratio. Any sensible government dealing with this type of financial position should have been very careful and calculated in its spending and should have adopted a path of fiscal prudence.

As per the AP Re-organization Act 2014, under the Section 54, all the liabilities on account of debt outstanding before the Appointed Day shall be apportioned on the basis of population between the States. The same was done and an amount of Rs 96,000 crore was apportioned to AP as its share in the cumulative debt of the united state.

Hence when we talk of starting with the huge debt on the date of bifurcation, it is not the cumulative debt of previous years (which any case is divided between two States on population ratio), we are talking of loss of revenue base since Hyderabad has gone to Telangana and to that extent this revenue is not available to us from the Appointed Day, June 2nd 2014.

The Re-organization Act also U/s 46 provides for the President to make a reference to the 14th Finance Commission to take into account the resources available to the successor States, make separate Awards for each of the States. As per this section, President made a reference to the Finance Commission and the Finance Commission has taken into account the resource base of both Andhra Pradesh and Telangana and gave its recommendations. In fact, the tenure of the Commission was extended till 31st December 2014 to facilitate these additional Terms of Reference to be examined and give its recommendations.

Based on their analysis and appreciation of the revenue position of both the states of Telangana and Andhra Pradesh, they came to a conclusion that the State of Telangana is revenue surplus and Andhra Pradesh is revenue deficit during the period of Award and accordingly recommended revenue deficit grants to the State of Andhra Pradesh to tune of Rs 22,113 crore for the total five-year period starting with Rs 6,609 crore for 2014-15 and getting reduced over a period and reach a figure of Rs 2,499 crore for 2019-20.

Since Telangana State is assessed as revenue surplus, no revenue deficit grants were recommended to Telangana. Hence, it would not be correct to state that there is huge revenue deficit to the State of Andhra Pradesh consequent of bifurcation as substantial part of this deficit is taken care of up to 2020 by the Finance Commission. It is for any prudent government to take advantage of this liberal dispensation of the 14th Finance Commission and build healthy State finances with proper budget management and implementation of programs to build up surplus over a five-year period to make the budgets and expenditures sustainable in the long run.

The fiscal 2014-15 was not covered by the Award of the Finance Commission since its award relates to the period 2015-20 and the deficit for this year needs to be made good by Government of India and it is here that the State government went to the Government of India with a revenue deficit request of Rs 16,000 crore. Out of this, so far the Government of India (GoI) has examined the claims of the State government and reimbursed Rs 3,980 crore.

If our request was to make good the loss in revenue due to loss of Hyderabad to the State of Andhra Pradesh, it cannot be more than Rs 6,900 crore which the Finance Commission has recommended for the year 2015-16. Instead of that we incurred a revenue deficit of Rs 24,194 crores as compiled by CAG and asked for reimbursement of a revenue deficit of Rs 16,000 crore after having incurred it with a fond hope of getting reimbursed from GoI without any questions asked.

This huge revenue deficit for 2014-15 includes expenditure on a number of schemes which the government has announced post bifurcation in terms of Chandranna Kanukas, debt relief to farmers and a number of populist schemes which have nothing to do with loss of resources consequent on bifurcation and these questions have been asked by the GoI which has so far reimbursed only Rs 3980 crore and have informed that the other schemes expenditure reimbursement is under examination.

Even after what happened in 2014-15 in terms of reimbursement of revenue deficit from the GoI, the State government has not learnt any lessons and expenditure is going uncontrolled, unlimited as if there is no limit to our finances. The details of the revenue and the fiscal deficit for subsequent years as per CAG report are presented in the table.

The debt that was apportioned to Andhra Pradesh on bifurcation was Rs 96,000 crore. This is the accumulated debt for a period of 57 years from the AP state formation in 1956 till the bifurcation in2014. As against this, for a short period of three-and-half-a-years, AP incurred a debt of Rs 1,20,434 crore and still wants to blame the legacy of the state division for the debt problems of the state.

Another strange argument advanced by the state government is that since the figures of revenue deficit are certified by CAG, the GOI should reimburse it. CAG factually compiles the figures, which does not mean they become eligible for reimbursement consequent on CAG compilation.

As mentioned in the 1st paragraph, managing State finances is like managing the household finances. If we spend more than what we earn and take loans irresponsibly we will be committing our future generations to a large debt liability.

If it is taken for productive investment which can get good returns in future one will have the capacity to repay the loans, but if it is taken to meet the present-day needs of any number of Thofas, Grants etc., to appease the electorate, no positive assets would get built and we will not have the required surplus to pay back the loan at a later date.

People seem to be blissfully unaware of this situation and the State is fast getting into a “Debt Trap,” coming out of which is going to be just “impossible.” (Writer is Former Chief Secretary, Government of Andhra Pradesh)

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