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Thursday, May 19, 2022

Andhra Pradesh government seeks more fiscal elbow room

The existing FRBM laws cap annual borrowings — that is, the gross fiscal deficit — to a maximum of 3 per cent of any state’s GDP.

Written by Shaji Vikraman , Harish Damodaran | Mumbai/ New Delhi |
Updated: December 1, 2014 9:52:31 am
Naidu with Jaitley.(File) N Chandrababu Naidu with Arun Jaitley. (File)

Andhra Pradesh Chief Minister N Chandrababu Naidu’s government has sought the Centre’s permission to enable the residuary state to borrow up to 7 per cent of its GDP for the next five years, indicative of the potentially huge fiscal costs arising from the creation of Telangana. The TDP government’s borrowing proposal is way over the mandated borrowing limits for states.

Naidu’s government has justified the demand — requiring an amendment to the AP Fiscal Responsibility and Budget Management Act (FRBM) — mainly on grounds of having to finance the building of a new state capital to make up for the loss of Hyderabad to Telangana, besides infrastructure for the new state.

The existing FRBM laws cap annual borrowings — that is, the gross fiscal deficit — to a maximum of 3 per cent of any state’s GDP.

AP Chief Secretary I Y R Krishna Rao confirmed that the state had sought relaxation in its FRBM law to run a fiscal deficit up to 7 per cent. “We need to borrow more for building a new capital and infrastructure creation. Given our weak manufacturing and services base, especially after loss of Hyderabad, we are left with very little resource-raising options today,” he told The Indian Express.

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Although the residuary state does have a relatively prosperous farm economy, much of the incomes from it aren’t taxable, Rao added.

Interestingly, the Telangana government under K Chandrashekar Rao — whose Telangana Rashtra Samithi is not part of the ruling BJP-led alliance at the Centre, unlike Naidu’s Telugu Desam Party — has also pitched for relaxation of FRBM targets to help secure more borrowings.

The Centre, for now, isn’t receptive to either of the states’ demands — coming as they do on top of farm loan waiver schemes announced by both governments that the Reserve Bank of India (RBI), for one, hasn’t taken kindly to.
Deviating from FRBM targets normally attracts penalties in the form of the errant states being denied the facility of concessional rates on loans from the National Small Savings Fund. Besides, there is the danger of markets punishing states viewed as profligate. West Bengal and Punjab, for instance, have had to borrow at higher rates than other states in recent government loan auctions.

Former RBI Governor C Rangarajan, who also headed the 12th Finance Commission, said that allowing any state to contract excess borrowings for five-year periods would push up its interest burden — both on account of addition to overall debt as well as the markets demanding higher rates in auctions.

Rangarajan suggested that a preferable alternative would be to provide a one-time financial package from the Centre to Andhra Pradesh and Telangana in the post-bifurcation scenario. Such a package — as opposed to blanket permission for ramping up borrowings — is what the 14th Finance Commission is expected to recommend.

The Commission, headed by former RBI Governor Y V Reddy, is slated to submit its report sometime in December.

The united Andhra Pradesh recorded a fiscal deficit at 2.32 per cent of GDP in 2012-13 and 2.86 per cent in 2013-14 — well below the FRBM limit of 3 per cent. For the current financial year, too, the residuary state has projected a deficit of 2.3 per cent.

Telangana, however, has budgeted a fiscal deficit of Rs 17,399 crore or 4.8 per cent of its estimated GDP. It is currently awaiting the Centre’s nod to borrow the extra Rs 6,500 crore outside of the 3 per cent FRBM-stipulated limit.

Yashwant Sinha, who was the Union Finance Minister during the previous BJP-led dispensation that presided over the creation of three new states in November 2000, claimed that the division of Andhra Pradesh was a classic example of how not to create a new state.

“The UPA messed it up. Financially, administratively or whichever way, it is a bad start for the two states,” said Sinha, adding this was not the case when Chhattisgarh, Jharkhand and Uttarakhand were carved out of Madhya Pradesh, Bihar and Uttar Pradesh respectively.

It helped then, of course, that the India had an economic boom within a couple of years following the formation of the three new states. This resulted in revenue buoyancy, benefitting state finances in general. Things may be somewhat less benign today.

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