finances of andhra pradesh

8/9/2019 Finances of Andhra Pradesh

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Samala Sudhakar, Professor in Economics. 1

FINANCES OF ANDHRA PRADESH STATE: A COMPARATIVE STUDY

DR. S. SUDHAKAR1

ABSTRACT

The states are expected to play increasing role in India’s economic development in a quasi-

federal framework comprising the Centre, States and Local Self Governments. The states

undertook fiscal reforms in mid-1990s necessitated by states’ fiscal stress followed by the

Centre’s fiscal reforms in the early 1990s. Further, the states’ fiscal reforms were facilitated by

the measures of the Centre, Central Finance Commissions and Reserve Bank of India. In view of

this, a comprehensive study is undertaken in this paper to examine fiscal performance of Andhra

Pradesh, in terms of number of relevant fiscal indicators related to revenue receipts, capital

receipts, revenue expenditure, capital expenditure, revenue deficit, fiscal deficit, primary

deficit/balance and public debt, and compare the same with that of the all the states combined

as a benchmark for the period between 1995-96 and 2008-09. The paper reveals that the fiscal

performance of Andhra Pradesh is far better than that of all states combined as reflected in

many fiscal indicators. However, as is evident from the paper, Andhra Pradesh state has to

undertake number of steps in future for the sustenance of its fiscal empowerment. They are

related to improvement in non-tax revenue by increasing cost recovery rate of the economic

services, reducing fiscal centralization, making the tax system less regressive by increasing the

share of direct taxes like profession tax, property tax and agricultural income tax, reducing the

share of discharge of internal debt in the total borrowing through proper debt management,

reducing loans and advances from the Centre and increasing share in central taxes, increasingsocial sector expenditure and decreasing economic services expenditure, increasing quality of

expenditure by improving delivery mechanism in view of weak link between public expenditure

and Gross State Domestic Product as reveal by simple regression analysis.

This paper is divided into two parts. First part of the paper is published in this issue

consisting of introduction, chronological description of fiscal reforms in Andhra Pradesh during

1995-96 and 2008-09 and measures taken by the Central Government, Central Finance

Commission, and Reserve Bank of India to promote fiscal reforms at the States’ level along with

analysis of the fiscal performance of Andhra Pradesh(AP) and All the States Combined(ASC)

covering only the revenue receipts of the AP and ASC. Second part of the paper is published in

the following issue consisting of analysis of fiscal performance of the AP and ASC pertaining to

capital receipts, revenue expenditure, capital expenditure, revenue deficit, fiscal deficit, primary

deficit/balance and public debt of the AP and ASC along with conclusions.

1 Professor of Economics, Department of Economics, University College for Women, Osmania University,

Koti, Hyderabad-500095, Andhra Pradesh. Email:[email protected]




FINANCES OF ANDHRA PRADESH STATE: A COMPARATIVE STUDY

I. INTRODUCTION

India is a quasi-federal state comprising 28 states, six Union Territories (UTs) and a

National Capital Territory (NCT), Delhi. It has three tier system of government comprising the

Central Government, State Governments and Local Self-Governments2. The three levels of

government have their respective taxing powers and expenditure responsibilities that enable

them to promote socio-economic welfare of the people in their respective administrative

jurisdictions (See Appendix-A). Over the past few decades a clear trend has emerged worldwide

towards fiscal decentralization including India.3

There is no doubt that success of the Eleventh

Five Year Plan of India mostly depends upon the augmentation of resources of by the states4.

More than ever before, the success of the Eleventh Five Year Plan will depend upon the quality

of service delivery by the State Governments5. Thus, the State Governments have greater role in

attaining faster, inclusive6 and sustainable growth in India. Furthermore, the State governments

have a role in macroeconomic stability in view of the higher level of expenditure incurred by

them compared to the Central Government.

Fiscal reforms, undertaken in India in the early 1990s, were a part of the overall

macroeconomic policy framework to bring macroeconomic stability in the Indian economy.

Fiscal reforms in India were initiated in three distinct but interrelated areas: (1) restoration of

fiscal balance; (2) restructuring of public sector; and (3) strengthening of the fiscal-monetary co-

ordination. The strategy for restoring fiscal balance comprised tax and non-tax reforms,

expenditure management and institutional reforms. The issues related to restoration of fiscal

balance in India were (1) size of fiscal adjustment; (2) fiscal adjustment by revenue

augmentation or expenditure cuts; (3) components of revenue and expenditure adjustments; (4)

impact of global economic growth; (5) fiscal consolidation7

reversibility; (6) adverse

macroeconomic impact of fiscal consolidation; (7) accounting standards; (8) relationshipbetween restoration of fiscal balance and federal fiscal structure; (9) discretionary or rule based

restoration of fiscal balance. These are the issues that are to be resolved on a sustainable basis.

Restoration of fiscal balance at the Centre had a definite impact on the finances of the

State Governments pushing them into fiscal stress in mid-1990s. Furthermore, a survey on

worsening State Finances by the RBI (2003) revealed that the following factors were responsible

for the deterioration of the Finances of the States in India: (1) reluctance to raise additional

resources, (2) competitive reduction in taxes by the states; (3) absence of service tax and

agricultural income tax; (4) sluggishness in Central transfers reflecting the deterioration of the

Center’s own finances and (5) inappropriate user charges. On the side of the public expenditure

2Local Self-Governments have got constitutional status in 1992 with 73

rdand 74

thAmendments to the

Indian Constitution.3

The Reserve Bank of India Study on State Finances: A Study of Budgets of 2006-07.4

Eleventh Five Year Plan of India (2007-2012), Vol. I, Chapter-3.5

Ibid. Chapter-1.6

Inclusive growth is a process which yields broad-based benefits and ensures equality of opportunity for

all. (Eleventh Plan, Chapter-1)7

Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation.




of the States, (1) skewed composition of spending towards salaries; (2) a regressive distribution

of benefits; (3) low civil-service productivity; (4) high level of corruption; (5) an ineffective

spread of funds over too many projects and (6) duplication of services provided by the private

sector have undermined the quality of public expenditure at the state level8.

Fiscal reforms in the States were, inter alia, necessitated by: (1) growing fiscal

imbalances; (2) sluggishness in Central transfers resulting from falling tax to GDP ratio; (3)

introduction of reform-linked assistance as a part of Medium-Term Fiscal Reform Program on

the basis of the recommendation of the Eleventh Finance Commission; and (4) adjustment

program undertaken in some of the States which are linked to borrowings from multilateral

agencies. Rule based fiscal policy replaced the discretionary fiscal policy at the Centre in 2003

with passing of the FRBM Act and at the states level in 2005. Fiscal rules have been adopted by

the Centre and the States for (1) ensuring macroeconomic stability; (2) enhancing the credibility

of the government’s fiscal policy and aid in deficit elimination; (3) ensuring long -term

sustainability of fiscal policy; and 4) minimizing negative externalities within a federation. The

FRBM Act stresses on inter-generational equity in fiscal management, long-term

macroeconomic stability and transparency. Fiscal measures initiated by the states may be

broadly grouped under (1) revenue mobilization, (2) expenditure containment andmanagement, (3) public sector restructuring and (4) institutional reforms. Further, the Central

Government, Finance Commissions, Reserve Bank of India strengthened the States efforts in

reforming their finances. A key objective at the state level fiscal reforms was the augmentation

of non-tax revenue by way of enhancement of user charges and returns on Government

investments through restructuring of the State level public sector enterprises.

In view of the above facts, it is felt that there is a need to understand the finances of the

State governments in terms of their fiscal performance which has an impact on efficiency,

equity, stability and growth and development of the Indian economy. Hence, the present paper

attempts to make a study of the fiscal performance of State of Andhra Pradesh (AP) and

compare it with that of the All the States Combined (ASC) between 1995-96 and 2008-09(reform period). In this paper, average fiscal performance of the ASC is taken as a norm against

which the fiscal performance of the AP is compared using relevant indicators of fiscal

performance during the fourteen years reform period i.e. between 1995-96 and 2008-09. It is

also examined whether the fiscal performance of the AP is sustainable in future by looking at

buoyancy of revenue and expenditure during the reform period. If not, what steps are to be

undertaken by the AP Government to improve and sustain the fiscal performance of the AP?

The data sources are government budgets in brief, the RBI studies on State Finances, Central

Statistical Organization, various publications of Directorate of Economics and Statistics of

Government of Andhra Pradesh, Finance Department of Government of Andhra Pradesh. In

addition to the above dimensions of the study, fiscal decentralization issues are also examined.

Quality of fiscal adjustment is also examined. In the present paper, the following questions are

addressed with respect to fiscal reforms in Andhra Pradesh.

1. What steps were taken by Andhra Pradesh Government to improve fiscal performance

through fiscal reforms during 1995-96 and 2008-09?

8 World Bank (2004), India: State Fiscal Reforms in India, Progress and Prospects, Report No. 28849 – IN,

Overview, Washington.




2. What steps were taken by the Central Government, Finance Commissions and the Reserve

Bank of India to improve fiscal performance of the States during 1995-96 and 2008-09?

3. Whether the fiscal performance of Andhra Pradesh State has improved between 1995-96

and 2008-09 due to fiscal reforms?

4. Whether the fiscal performance of Andhra Pradesh state is better than that of the All the

States Combined during the fiscal reform period i.e. 1995-96 and 2008-09?

5. What role has Andhra Pradesh State played in strengthening local self governments during

the fiscal reform period i.e. 1995-96 and 2008-09?

This paper is divided into five sections to address the above five questions. First section

covers the introduction. Second section enumerates fiscal reform measures taken the Andhra

Pradesh Government in the areas of tax, non-tax, expenditure, institutional and debt during the

reform period under study. Third section covers the measures taken by the Central

Government, Finance Commissions and Reserve Bank of India to strengthen the fiscal reforms at

the states’ level. Fourth section focuses on the comparative analysis of fiscal performance of

Andhra Pradesh State and All the States Combined. Final section is devoted for conclusions.




II. FISCAL REFORMS IN ANDHRA PRADESH DURING 1995-96 AND 2008-09

First question is addressed in this second section. Fiscal reforms were undertaken in

Andhra Pradesh and all other states around 1995-96 following the fiscal reforms undertaken at

the Center’s level in the early 1990s9. Government of Andhra Pradesh aimed at implementing

fiscal reforms in the state strategically since mid-1990s10. The agenda of fiscal reforms embarked

upon by Andhra Pradesh Government may be grouped under the following inter-related

components: (1) Tax Reforms; (2) Non-Tax Reforms; (3) Expenditure reforms; (4) Institutional

Reforms; and (5) Debt reforms.

(1) TAX REFORMS: There was a decline in revenue receipts of Andhra Pradesh in 1990s

due to cumbersome and complex tax system, irregularities in the collection of taxes by the

executive government, an inefficient tax administration, proliferation of tax concessions and

widespread evasion of the taxes. These factors have eroded the State’s own tax base.

Irregularity in the collection of taxes by the government includes incorrect grant of exemption,

application of incorrect rate of tax, non/short levy of tax, non-levy of penalty and other

irregularities11. The principal objective of any tax reform exercise is to minimize compliance

costs, administrative costs and cost to the economy from the distortions that the tax systemcreates. Rationalization and simplification of the tax system is inevitable for minimizing the

compliance and administrative costs and thereby increasing the efficiency and equity of the tax

system. However, the efficiency of the tax system in India as a whole must be balanced by fiscal

autonomy of the states. Andhra Pradesh Government has taken number of measures to

augment the tax revenue. Some of them are as follows. Profession tax was increased ten fold in

August 1996. Entry tax on motor vehicles purchased from other states was introduced. In 1999-

2000, the state joined with the Union to set uniform rates of sales tax and withdrawal of tax

based incentives. Revenue reforms committee headed by Dr. E.A.S. Sarma was appointed by

the AP government. Luxury tax on cigarettes was increased to 5%. Prohibition that was in

vogue since 1995 was lifted completely in 1999. It introduced a limited form of VAT on 19

commodities in April 1995 by adding a separate Schedule to the Andhra Pradesh General SalesTax Act followed by the introduction of full fledged VAT on 1st April, 2005.

(2) NON-TAX REFORMS: Non-tax reform measures are related to increasing revenue

from dividends and profits of State level public sector enterprises, interest receipts from the

loans given by the state, cost recovery from social services and economic services provided by

the state. Some important measures taken by the state government in respect of non-tax

reforms are as follows. Public Enterprises Management Board was constituted in 1982 (AP

Budget Speech for 1986-87). During 1984-85, public enterprises incurred losses of Rs.47 crore.

They made a profit of Rs.74.44 crore in 1985-86. Rehabilitation and reconstruction of State

Public Enterprises was continued subsequently after 1995. Irrigation rates were raised by five

9 Sarma, J.V.M. (2003), Fiscal Management: A Review, published in Hanumantha Rao, CH. And

Mahendra Dev, S. (ed), Andhra Pradesh Development (Economic Reforms and Challenges Ahead), Centre

for Economic and Social Studies, Nizamiah Observatory Campus, Begumpet, Hyderabad-500 016, India.10 For instance, Andhra Pradesh State published a Vision-2020 document on 26 th January, 1999 aiming at9% to 10% growth rate at the state level. Fiscal reforms strategy paper was released on 29th January, 2002

along with 15 strategy paper for the development of critical sectors in the state.11 Sreedevi, N. (2009), State finances of Andhra Pradesh: An Overview, published in Mahendra Dev et al

(Ed), Human Development in Andhra Pradesh: Experiences, Issues and Challenges, Centre for Economic

and Social Studies, Hyderabad, Andhra Pradesh.




times in 1997-98. Power tariff was hiked by 9% in 1998-99. The government enacted the

Andhra Pradesh Electricity Reform Act 1998 that provided for the creation of an independent

regulatory commission to be called Andhra Pradesh Regulatory Commission. Generation,

transmission and distribution activities have been unbundled and two new corporations have

been brought into existence from 1st February of 1999. Between 1999 and April 2004, Andhra

Pradesh successfully liquidated, privatized or restructured 39 public enterprises, ranging from

operating sugar factories and fertilizer factories, to agro industry and handicraft corporations.

During 1995-2005, MCH was allowed to levy impact fee to capture unearned capital

appreciation on account of public investment in road development. APSRTC was permitted to

raise bus fares, and Water Users’ Associations were permitted to plough back the water rates

for maintenance. User charges were raised.12

The number of loss making enterprises came

down from 24 to 17. As of April 2004, over 22,000 employees have taken voluntary

retirement13

. Public Enterprises Personnel Board was set up to increase the productivity of the

employees of the State Public Enterprises14

.

(3) EXPENDITURE REFORMS: Expenditure reforms include restructuring and managing

the public expenditure. The government of Andhra Pradesh has also taken various steps on the

expenditure side to restore fiscal health. These include rationalization of subsidies,restructuring expenditure, improving expenditure management, inviting private sector

participation in the infrastructure sector and framing growth enhancing policies.15

Thus, Andhra

Pradesh Government has taken number of measures to make public expenditure more

productive and equitable. They are as follows. Civil Service size was reduced by 2.6% by way of

attrition to reduce unproductive public expenditure. The government tried to manage public

expenditure by reducing non-merit subsidies and restructuring state public enterprises,

introducing institutional reforms like Fiscal Responsibility Legislation, increasing budget

transparency. Andhra Pradesh Government claimed to target the subsidies in better manner

(A.P. Budget Speech for 1998-99). The World Bank signed an agreement with the Andhra

Pradesh Government to provide Rs.2173 crore for investment of Rs.3320 crore in the priority

sectors of social and economic infrastructure to crowd in private investment and therebyincrease rate of growth of the economy of the state at the end of 1990s. Watershed

development program and clean and green program were launched. Accident insurance

scheme for the poor people in the name of Apathbandhu was launched on 2nd

October, 1998.

Interest payments were reduced through debt swap scheme16

introduced in 2003-04 by the

Central Government. Efficiency of public delivery mechanism was emphasized. The

contributory pension scheme was introduced for those employees, who are recruited on or

after 1st

September, 2004. Indira Prabha, Indira Kranthi Padham, Rajiv Yuvashakthi, Rajiv

Internet Village, Food Assurance Program and Broad Band Network Programs were introduced

12 White Paper on Fiscal Reforms, 2003, Government of Andhra Pradesh13

Planning Commission (2007), Report of Sub-Group on Resources other than Tax Revenues of States for 11th Plan (2007-2012), Government of India, New Delhi, p.20.14 Andhra Pradesh state had 40 public sector enterprises employing 3.50 lakh people and having over

Rs.4444 crores paid up capital (AP budget speech for 2001-2002).15 Op. cit. (Sreedevi, N., 2009)16 Debt Swap Scheme, introduced by the Centre in 2004-05, is a scheme under which the states swap the

loans given by the Centre bearing interest rates in excess of 13 per cent against small savings proceeds and

open market borrowings. This scheme reduces the burden of interest of the States by changing the

composition of the states’ debt but not the absolute amount.




for poverty alleviation and self-reliance of the poor. Agricultural Extension Service was

strengthened. Reduction of regional imbalances was emphasized. Rajiv Nagar Bata was

launched from 9th

January, 2005 as mass contact program. Rajiv Gruhakalpa for urban housing

development was introduced. National Rural Employment Guarantee Act 2005 was passed in

Parliament in September, 2005. Industrial Investment Promotion Policy 2005-10 was

formulated in June 2005. Indiramma Program for rural housing was launched. Agricultural

Technology Mission was started on 15th January, 2006. Andhra Pradesh Rural Employment

Guarantee Scheme came into existence from 2nd February, 200617. Pavala Vaddi scheme was

introduced to help women self-help groups to empower women. Mass Rapid Transport System

(MRTS) with the cost of Rs.8760 crores was launched. 21st

Century Gurukulams were planned.

Jawahar Knowledge Centres were established to provide training to rural based students.

Arogya Sri Scheme to provide health insurance to the poor people was launched (AP budget

speech for 2007-08.) Special Economic Zones were set up for the development of the most

potential sectors like cement, steel, paper, bulk drugs, pharmaceuticals, textiles etc. Social

Pension Scheme to the aged, orphans and destitute was introduced. Agricultural Insurance

Scheme was introduced. In order to provide food and nutrition security to every family,

government decided to launch Rs.2.00 per kilogram Rice Scheme. This scheme was expected to

help more than 80% of the state population (AP budget speech for 2008-09). Aam Admi BeemaYojana Scheme was introduced to cover 38 lakh landless agricultural labor under which Rs.100

per head premium is paid by the government. Irrigation was given top most priority. The

government spent on irrigation a sum of Rs.37539 crores from 14th

May, 2004 to 31st

December,

2008 compared to Rs.10000 crores in the preceding 10 years. Jawaharlal Nehru Urban Renewal

Mission (JNNURM), Urban Infrastructure Development Scheme for Small and Medium Towns

(UIDSSMT), Basic Services for Urban Poor (BSUP) and Integrated Housing and Slum Development

Program (IHSDP) were undertaken for urban development. Jalayagnam program was

undertaken covering 81 irrigation projects with a capital outlay of Rs.1.76 lakh crore. The

program envisages creation of additional irrigation potential for 100.38 lakh acres besides

stabilizing 21.75 lakh acres.

(4) INSTITUTIONAL REFORMS: Efficiency of the institutions responsible forimplementing government programs is essential for fiscal empowerment of the states. For this

purpose, Andhra Pradesh State has undertaken number of measures. They are as follows.

Multi-year budgeting was introduced. Modernization of tax administration and democratic

decentralization were initiated. Transparency in administration and rationalization of tax

structure, privatization of the power sector were initiated. Andhra Pradesh introduced the

computerization of the process of the registration of documents (CARD system) to minimize the

delays in registration process and in returning documents. AP State Wide Area Network

(APSWAN), Twin Cities’ Information Network System (TWINS) and Computer-aided

Administration of Registration Department (CARD) were introduced. Administrative

decentralization was made by setting up Zilla Parishad and Mandal Praja Parishads. Rs.5 per

capita and Rs.2 per capita was provided to Mandal Parishad and Zilla Parishads respectively.

Changes in the Budget Format were made (AP Budget speech for 1987-88). ZBB was introduced

in 1999. Centre for Good Governance was set up to undertake a state financial accountability

assessment and suggest systemic improvements in early 2000. Panchayat secretary was

appointed to improve the Gram Panchayat Administration since 1st January, 2002. Institution

17 This scheme provides 100 days work every year for those households registered under the Act. If for any

reason, whatsoever, the government is unable to provide work within 15 days from the date of request,

unemployment allowance will be paid.




building through water users associations, state finance commission, holding elections to local

bodies, local mothers committees, anganwadi centres, social audit was initiated. Budget

allocations were made on a half-yearly followed by quarterly basis. Performance budgeting was

introduced. Rythu Bazars were established. District Planning Committees were constituted in

the place of District Development Review Committees. Government of Andhra Pradesh wanted

to strengthen Panchayat Raj Institutions in 2004. Massive computerization in the Commercial

Taxes Department and Stamps and Registration Department was introduced. Rajiv Palle Bata

was launched on 13th June, 2004 as a process of administrative decentralization.

Computerization and Management Information Systems (MIS) were set up in all revenue

earning departments. Fiscal Responsibility and Budget Management (FRBM) Act 2005 was

passed.18

This FRBM Act aimed at fiscal discipline in a credible, predictable and transparent

manner and reducing the scope for discretionary fiscal policy. Cooperative farming was

initiated. The AP State wanted to strengthen local self governments to increase efficiency in

fiscal programs.19

(5) DEBT REFORMS: The AP Government has also undertaken number of measures for

improves debt management at the state level for long-term debt sustainability.20 Some of them

are as follows. To improve the state finances, the AP state set up consolidated sinking fund,guarantee redemption fund, statutory and administrative limits on guarantees and restructuring

of the PSUs followed by the recommendations of the Technical Committee on state government

guarantees appointed in 1999. Sinking Fund was set up in 1999-2000. Debt swapping to the

extent of Rs.3696 crores was undertaken during 2002-03. Government Guarantees were

expected not to exceed 8% of GSDP by 2005-06. As part of the States’ Debt Consolidation and

Relief Facility (DCRF), the state government developed fiscal correction path for 2005-06 to

2009-10. Up to 2007-08, the state government has received a debt relief of Rs.1889 crore and

interest relief of Rs.1574 crore. It should be noted that the Consolidated Sinking Fund will come

to the rescue of the state in increased repayment of debt obligations due to Debt Swap Scheme.

18As mandated by the FRBM Act 2005, Government of Andhra Pradesh has to bring the revenue deficit by

0.32% of GSDP and Fiscal Deficit by 0.25% of GSDP each year. Fiscal Responsibility Legislation of

October, 2005 of Andhra Pradesh stipulates GFD at 3% of GSDP and Public Debt at 35% of GSDP byMarch 2010. (Misra, B.M. and Kundrakpam, J.K., 2009).19 His Excellency Sri Surjit Singh Barnala, the Governor of Andhra Pradesh said on 1 st June, 2004 in his

customary address to the 12th Assembly “……for empowering the Panchayat Raj and Local Body

Institutions.” A new government was installed in May 2004 having a national Common MinimumProgram (NCPM) which spelled out its economic objectives, among others, as (1) accelerating fiscal

consolidation and reform; and (2) ensuring higher and more efficient fiscal devolution. (AP Budget Speech

for 2008-09).20 Orthodox stabilization models target primary surpluses to attain sustainable debt levels and thus the level

of interest payments has a crucial bearing on the macro economy. (Economic Survey, 2008-09).




III. MEASURES OF THE CENTRAL GOVERNMENT, CENTRAL FINANCE COMMISSIONS, AND

RESERVE BANK OF INDIA TO PROMOTE FISCAL REFORMS AT THE STATES’ LEVEL

Second question is addressed in this third section.

CENTRAL GOVERNMENT: The Central Government has strengthened the fiscal reforms

of the states by the following measures. The Union Budget for 2002-03 made provisions for

reform-linked assistance of Rs.12300 crores for States under various schemes such as

Accelerated Power Development and Reform Program (APDRP), Accelerated Irrigation Benefit

Program (AIBP), Urban Reforms Incentive Fund (URIF), and Rural Infrastructure Development

fund (RIDF). In pursuance of the recommendations of the Eleventh Finance Commission of

setting up incentive fund, the Central Government drew up a scheme called the States Fiscal

Reform Facility for 2000-01 to 2004-05. The Central Government relinquished its plan loans to

the states since 2005-06 onwards based on the recommendations of the Twelfth Finance

Commission thereby reducing its high cost loans to the states. The Central Government, on its

part, initiated several measures to ease the debt burden of States: (1) the Debt Swap Scheme of

2003-04; (2) Debt Consolidation and Relief Facility (DCRF) (2005-06 to 2009-10). The DCRF

allowed rescheduling of central loans at reduced rate of interest of 7.5% and debt waiversubject to enactment of the FRL and adherence to revenue deficit reduction targets, and (3)

reduction of interest rate on securities issued to NSSF between 1999-2000 and 2001-02 carrying

interest rate of 11.0-13.5 per cent to 10.5% since 2007-08. Further, in accordance with the

decision of the National Development Council, the obligatory share of the states in the NSSF has

been reduced to 80 per cent since 2007-08.

CENTRAL FINANCE COMMISSIONS: The Central Finance Commissions also strengthened

the fiscal reforms of the states by the following measures. Fiscal Reform Facility was suggested

by the Eleventh Finance Commission. The Eleventh Finance Commission had recommended the

establishment of an incentive fund for the purpose of encouraging fiscal reforms in the states on

the basis of a fiscal reform program that could be monitored. Medium Term Fiscal ReformProgram was recommended by the Eleventh Finance Commission to which the Centre’s

assistance to the states was linked. Medium Term Fiscal Reform Program covered fiscal

consolidation, public sector enterprises reforms, power/irrigation sector reforms and fiscal

transparency. Debt restructuring and rescheduling was initiated by the Twelfth Finance

Commission. The Twelfth Finance Commission suggested the states, first, to borrow directly

from the market at the market determined interest rates. Second, transfer of external

assistance by the Centre to the states with full exchange rate risk to be born by the states.

Third, fiscal restructuring plan for the states based on FRL including (1) elimination of revenue

deficit by 2008-09 and (2) containment of GFD to 3% of GSDP to become eligible for debt relief

and debt write-off in respect of central loans. The Twelfth Finance Commission suggested a

uniform fiscal restructuring path for the state governments involving 15 fiscal indicators. 21 Debt

Swap Scheme was introduced and implemented during 2003-04 and 2009-10 based on the

recommendations of the Twelfth Finance Commission. The release of this fund required a five

21 They are (1) states’ own tax revenue; (2) tax revenues; (3) own non-tax revenue; (4) non-tax revenues;

(5) total revenue receipts; (6) interest payments; (7) total revenue expenditure; (8) capital expenditure; (9)

total expenditure; (10) primary expenditure; (11) revenue deficit; (12) fiscal deficit; (13) primary deficit;

(14) interest payments/revenue receipts; (15) debt. (Source: B.M. Misra and J.K. Khundrakpam, 2008,

Fiscal Consolidation by Central and State Governments: The Medium Term Outlook, RBI Staff Studies).




percentage point reduction in the revenue deficit as a proportion to the State’s total revenue

receipts (TRR) in each year till 2004-05. As per this scheme, the States drew up a Medium Term

Fiscal Framework (MTFF) by setting targets for broad fiscal indicators in the medium term

covering various aspects such as fiscal consolidation, public sector enterprises reform, power

sector reforms and fiscal transparency. A fiscal correction path was developed by the Twelfth

Finance Commission giving outcome indicators with target dates of implementation during

2004-05 to 2009-10 based on fiscal targets set in the Fiscal Responsibility and Budget

Management (FRBM) Act of 2005 of Andhra Pradesh.

RESERVE BANK OF INDIA: The RBI played its role in improving state finances by

preparing model fiscal responsibility legislation, study of state finances, among others.22

The RBI

initiatives include placing limits on government guarantees in 1999, encouraging open market

borrowings by the States through auction mechanism, advising the states in cash management,

funds management and reforms in budgetary practices, setting up consolidated sinking fund in

1999-2000 and contribution of 3% of outstanding market loans to the fund, examining the fiscal

risks in state government guarantees.

22 Op.Cit, Shymala Gopinath (2009).




IV. ANALYSIS OF FISCAL PERFORMANCE OF ANDHRA PRADESH AND ALL THE STATES

COMBINED

The third, fourth and fifth questions are addressed in this fourth section. The analysis is

divided into five sections. They are (1) Revenue Receipts; (2) Capital Receipts; (3) Revenue

Expenditure; (4) Capital Expenditure; and (5) Revenue Deficit, Fiscal Deficit, Primary

Deficit/Balance and Public Debt.

1. REVENUE RECEIPTS

Seventeen indicators are used, covering different components of the revenue receipts,

to judge the revenue performance of the AP and the ASC as shown in Table-1. First of them is

total revenue receipts (TRR)23

that indicate the income of government that determines the

amount of consumption expenditure of it and also its savings. TRR/GSDP (Gross State Domestic

Product at current prices) is used to measure the revenue performance of Andhra Pradesh (AP)

and TRR/GDP (Gross Domestic Product at current prices) is used to measure the revenue

performance of all the States Combined (ASC).

Table-1 reveals that the revenue performance of the AP has improved from 12.96% in

1995-96 to 18.78% in 2008-09 i.e. by 5.82% while that of the ASC has improved from 12.67% to14.43% i.e. by 1.76% during the same period. It should be noted that the revenue performance

of the AP was more by 0.29% in 1995-96 compared to the ASC while the same was 4.35% more

for AP compared to the ASC in 2008-09. Table-2 reveals that the buoyancy24

of the TRR of the

AP with respect to its GSDP is 1.30 between 1995-96 and 2008-09 while that of the ASC with

respect to GDP is 1.09 during the same period. The revenue performance of the AP and the ASC

has improved during the reform period. However, the revenue performance of the AP is far

better than that of the ASC during the reform period. The revenue performance of the AP is

also going to be better than that of the ASC in future as reflected in the buoyancy of the TRR for

the AP and the ASC.

Table-1 shows the tax effort, defined as the TR

25

/ (GSDP/GDP), of the AP and the ASCduring the reform period. The tax effort of the AP has increased from 9.13% in 1995-96 to

13.18% in 2008-09 i.e. by 4.05% while that of the ASC has increased from 8.61% to 10.22% i.e.

by 1.61% during the same period. Thus, the tax effort of the AP was 0.52% more than that of

the ASC in 1995-96 whereas the same was higher by 2.96% than that of the ASC in 2008-09. The

TR/TRR, a measure of performance of tax revenue, of the AP has increased from 56.63% in

1995-96 to 70.18% in 2008-09 while the same has increased from 68.01% in 1995-96 to 70.84%

in 2008-09. Thus, TR is the highest source of revenue to the AP and the ASC. The buoyancy of

the TR in the AP, as Table-2 shows, was 1.46 while that of the ASC was 1.12 during the reform

period. Thus, the tax effort of the AP is not only better than that of the ASC during the reform

period but also going to be better in future also compared to the ASC. The improved tax

revenue performance of the AP is due to increase in tax rates, expansion of tax base,

introduction of VAT, lifting prohibition, better income and expenditure tax performance, and

effective tax administration as narrated earlier in section-II of the paper.

23 TRR consist of Tax Revenue (TR), Non-Tax Revenue (NTR) and Grants from the Centre (GC).24 Buoyancy of TRR is defined as the ratio of percentage change in TRR to the percentage change in

GSDP/GDP. CARG method is used to estimate the buoyancy.25 Tax Revenue (TR) consists of Own Tax Revenue (OTR) and Share in Central Taxes (SCT).




Table-1 shows the performance of the AP and the ASC in mobilizing the resources from

the Non-Tax Revenue (NTR)26

sources during the reform period. The NTR performance is

defined as the NTR/TRR. The State’s own NTR performance of the AP has deteriorated from

15.52% in 1995-96 to 12.05% in 2008-09 i.e. by -3.47% while that of the ASC has deteriorated

from 16.68% to 9.28% i.e. by -7.40% during the same period. Further, the State’s own NTR

performance in the AP was less by 1.16% than that of the ASC in 1995-96 whereas the same was

more by 2.77% in the AP than that of the ASC in 2008-09. Thus, the NTR performance of the AP

has deteriorated less fast than that of the ASC during the reform period. One of the main

factors for the deterioration of the NTR performance in both the AP and the ASC during the

reform period is declining cost recovery rate of the Economic Services (ES) provided by the

States in India. The cost recovery rate in Andhra Pradesh for social services has increased from

2.40% in 1993-94 to 2.43% in 2003-04 whereas the same for economic services has come down

from 20.72% in 1993-94 to 16.51% in 2003-04. Similarly, the recovery rate for all the States

Combined (ASC) for social services has increased from 2.34% in 1993-94 to 2.74% in 2003-04

whereas the same for economic services has come down from 21.71% in 1993-94 to 19.53% in

2003-0427. The cost recovery rate, during the pre-reform period i.e. before 1995-96, for social

service in the AP has come down from 1.98% in 1990-91 to 1.22% in 1998-99 whereas the same

for economic services has increased from 12.60% to 15.47% during the same period. The costrecovery rate for social services in the ASC has come down from 2.10% in 1990-91 to 1.93% in

1998-99 whereas the same for economic services has increased from 20.59% to 23.43% during

the same period28

. However, as Table-2 shows, the buoyancy of the NTR in the AP is 1.12

whereas that of the ASC is 0.69 during the reform period. So, the NTR performance of the AP is

going to improve faster than that of the ASC in future. Nonetheless, the AP and the ASC have to

put in lot of efforts in improving the NTR performance in the days to come particularly by

increasing the recovery rate of economic services provided by state governments. Another

legitimate reason why recovery rate is to be increased in the case of economic services is that, in

Andhra Pradesh, nearly 85% of the ES expenditure is benefiting the non-poor and the remaining

15% is benefiting the poor whereas 45% of the SCS expenditure is benefiting the non-poor and

the remaining 55% of it is benefiting the poor in 1998-999

29

. Furthermore, it is expected thatthe share of NTR is to be increased while that of the TR is to be reduced from the point of view

of increasing efficiency in the allocation of resources of the economy. It is to be noted that

despite the increase in irrigation rates, power tariff rates and other user charges in the AP

during the reform period, the NTR performance has deteriorated in the AP. This is really

paradoxical situation that is to be investigated further elsewhere. Really the NTR is very

fluctuating source of revenue in the AP.

26Non-Tax Revenue (NTR) consists of only State’s Own Non-Tax Revenue (i.e. interest receipts,

dividends and profits, receipts from general services, social services, economic services and fiscal services,royalties etc). This is because Grants from the Centre (GC) are discussed separately in this paper.27

Purohit, Mahesh C (2006), Mobilizing Resources through Reform of State Non-Tax Sources for Planned

Development, Foundation for Public Economics and Policy Research, Delhi. A Report prepared for the

Planning Commission, SER Unit.28 Sudhakar, S (2001), Cost Recovery of Government Budgetary Services: A Study of Andhra Pradesh

State, Asian Economic Review, Vol.43, No. 1, April. Pp. 62-94.29 Ibid.




Table-1 reveals that Grants from the Centre (GC)30

received by the AP as a percent of its

TRR have increased from 15.58% in 1995-96 to 17.76% in 2008-09 i.e. by 2.18% whereas the

same for the ASC have increased significantly from 15.30% in 1995-96 to 19.87% i.e. by 4.57% in

2008-09. The GC/TRR was more by 0.28% for the AP than that of the ASC in 1995-96 while the

same was less by 2.11% for the AP than that of the ASC in 2008-09. Perhaps, the AP is not

rewarded well for its fiscal performance during the reform period by the Centre in transferring

its resources. Thus, the Central Finance Commission, Planning Commission, and the Central

Government have given more weight to the equity aspect of transferring the resources from the

Centre to the states than efficiency aspect.31 This may undermine the efficiency of the States in

allocating resources in the future. Anyhow, there is a need to balance efficiency and equity

aspects by the Finance Commission in the future. Plan grants from the Centre have increased

while the non-plan grants from the centre have come down during the reform period. This will

result in the neglect of maintenance of assets by the states created under the plan schemes.

Maintenance of the assets is as important as the creation of assets to increase or maintain the

productive of the assets and thereby increasing the growth of the economy. Thus non-plan

expenditure in a way is as important as plan expenditure for the development of the economy.

There is a wrong impression that non-plan expenditure is equivalent to non-development

expenditure which is to be erased from the minds of the policymakers, the public and theacademicians. As Table-2 shows, the buoyancy of the GC in AP was 0.98 whereas the same for

the ASC was 1.28 between 1995-96 and 2008-09. It demonstrates that fast growing states may

loose and less growing states may gain in terms of grants from the Centre. This may perhaps

create moral hazard problem undermining the efficiency in allocating resources by the states in

future. The XIII-Central Finance Commission must take into account this aspect in its

recommendations about the transfer of resources from the Centre to the States.

Table-1 shows own tax effort, defined as the OTR32

/ (GSDP/GDP), of the AP and the ASC

during the reform period. The own tax effort of the AP has increased from 6.04% in 1995-96 to

9.63% i.e. by 3.59% in 2008-09 while that of the ASC has increased from 5.91% in 1995-96 to

6.75% i.e. by 0.84% in 2008-09. The own tax effort was 0.13% more in the AP than that of the

ASC in 1995-96 whereas the same was 2.88% in the AP than that of the ASC in 2008-09. TheOTR/TR, another measure of performance of own tax revenue, of the AP has increased from

66.07% in 1995-96 to 73.07% i.e. by 7% in 2008-09 while that of the ASC has decreased from

68.61% in 199-96 to 66.04% i.e. by 2.57% in 2008-09. Further, OTR/TR of the AP was less by

2.54% than that of the ASC in 1995-96 while the same was more by 7.03% than that of the ASC

in 2008-09. It is clear from the above that the own tax effort of the AP and the ASC has

increased during the reform period. But the increase in the own tax effort of the AP is far

exceeding that of the ASC during the reform period. This indicates that the initiation of the tax

reforms is not only important but also the way they are carried out is also important in getting

the intended results. In this case, the AP state is to be made a model for most of the other

states as far as the way the tax reforms are carried out in the AP. The satisfactory tax

performance of the AP is because of improved revenue from the commodity taxes [i.e. Sales

tax/VAT, State Excise Tax (SET) and Motor Vehicle tax (MVT)] besides taxes on income and

30 Grants from the Centre (GC) consist of state plan grants, central plan grants, centrally sponsored scheme

grants, special plan scheme grants, non-plan grants such as statutory grants and grants on account of naturalcalamities.31 See the Report of the Twelfth Finance Commission (2004), Government of India, New Delhi32 Own Tax Revenue (OTR) consists of Taxes on Income and Expenditure (TIE) (i.e. agricultural income

tax and taxes on professions, trades, callings and employment), Taxes on Property (TP) (i.e. Land Revenue,

Stamps and Registration Fees, and urban immovable property tax), and Taxes on Commodities (TC).




expenditure (TIE) as is evident from the analysis below. This reflects the success of tax reforms

in the AP between 1995-96 and 2008-09. The buoyancy of the OTR in the AP, as Table-2 reveals,

was 1.34 during 1995-96 and 2008-09 while that of the ASC was 1.09 during the same period.

So, the OTR performance in the AP is going to be better than that of the ASC in future.

As Table-1 shows, the SCT/(GSDP/GDP) of the AP has increased from 3.10% in 1995-96

to 3.55% i.e. by 0.45% in 2008-09 while that of the ASC has increased from 2.70% to 3.47% i.e.

by 0.77% during the same period. The SCT/(GSDP/GDP) was 0.40% more in the AP than that of

the ASC in 1995-96 while same was 0.08% more than that of the ASC in 2008-09. The SCT/TR,

another measure of the degree of transfer of resources from the Centre, has decreased from

33.92% in 1995-96 to 26.92% i.e. by 7% in 2008-09 while that of the ASC has increased from

31.38% to 33.95% i.e. by 2.57% during the same period. The SCT\TR was 2.54% more in the AP

than that of the ASC in 1995-96 and the same was 7.03% less in the AP than that of the ASC in

2008-09. Thus, the transfer of resources from the Centre in the form of SCT for the AP has

deteriorated in 2008-09 compared to 1995-96 as is evident from the awards of the X, XI and XII

Central Finance Commissions in terms of the AP’s share in total transfers from the Centre33.

Perhaps, this is because of the more weight given to equity by the Central Finance Commissions

in devolving tax resources from the Centre to the States. As Table-2 shows, the buoyancy of the

SCT in AP was 1.99 during 1995-96 and 2008-09 while that of the ASC was 1.17 during the sameperiod giving an impression that the transfer of resources from the Centre to the AP may

improve in the days to come.

Own Tax Revenue (OTR) consists of three components which are TIE, TP and TC. As

Table-1 shows, TC claims around 89% of the OTR in the AP in 2008-09 while that of the ASC is

84% in 2008-09. Thus the states depend on indirect taxes for their OTR which are generally

regressive or pro-rich. As Table-1 reveals, the TIE/OTR has increased from 0.82% in 1995-96 to

1.09% i.e. by 0.27% in 2008-09 while that of the ASC has come down from 1.56% to 1.00% i.e. by

0.56 during the same period. The TIE/OTR was 0.74 less in the AP than that of the ASC in 1995-

96 and the same was 0.09% more in the AP than that of the ASC in 2008-09. The improved

performance of the AP in the case of the TIE is mainly because of the significant increase in theprofession tax rates in 1996 as already mentioned in section-II of the paper. Still there is a lot of

potential to increase the revenue from the TIE in all the states including the AP by bringing

unorganized self-employed persons under the profession tax net. So, the States have to put in

lot of effort to increase the revenue under the TIE in the future. The buoyancy of the TIE in the

AP, as Table-2 reveals, was 1.60 during 1995-96 and 2008-09 while that of the ASC was 0.91

during the same period. Profession tax collections are weak from self-employed persons.34

As Table-1 reveals, the TP/OTR has come down from 11.50% in 1995-96 to 10.30% i.e.

by -1.20% in 2008-09 while that of the ASC has increased from 11.36% in 1995-96 to 14.64% i.e.

by 3.28% in 2008-09. The TP/OTR was 0.14% more in the AP than that of the ASC in 1995-96

and the same was -4.34 less in the AP than that of the ASC in 2008-09. The AP performed poorly

as far as the TP is concerned. The AP has to put in lot of effort in raising the TP revenue in the

days to come at least equivalent to the ASC ratio of 14.64% in 2008-09. Perhaps, the decline in

the TP/OTR in the AP in 2008-09 is due to global economic recession that affected the real

33 For evidence see Thirteenth Finance Commission Report for 2010-2015, Vol. I, December 2009,

Chapter-3, page-28.34 Sreedevi, N. (2009), State Finances of Andhra Pradesh: An Overview, published in Mahendra Dev et al

(ed), Human development in Andhra Pradesh: Experiences, Issues and Challenges, Centre for Economic

and Social Studies, Hyderabad, Andhra Pradesh.




estate business adversely in Andhra Pradesh as elsewhere. However, the AP has to increase the

TP/OTR by 4.34 percentage points (i.e. Rs.1551 crore in 2008-09) compared to the ASC TP/OTR

of 14.64% in 2008-09. For instance, the rate of stamp duty in Andhra Pradesh is 5% of the

market value of property sold. The same is 8.4% in Bihar, 13% in Tamil Nadu, 10% in Rajasthan,

10% in Gujarat. Thus the rate of stamp duty is one of the lowest in India.35 The share of direct

taxes (TIE and TP in the OTR in AP is to be increased while that of the taxes on commodities (TC)

is to be decreased to make the AP tax system less regressive. The share of direct taxes (TIE and

TPP) in the OTR of the AP is 11.39% in 2008-09 while that of the ASC is 15.64% in 2008-09

indicating the less regressive tax system of the ASC than that of the AP. The share of indirect

taxes (TC) in the OTR of the AP is 88.60% in 2008-09 while that of the ASC is 84.37% in 2008-09.

The buoyancy of TP in AP, as Table-2 reveals, was 1.44 during 1995-96 and 2008-09 while that of

the ASC was 1.27 during the same period.

As Table-1 shows, the TC36

/OTR of the AP has increased from 87.70% in 1995-96 to

88.60% i.e. by 0.90% in 2008-09 while that of the ASC has come down from 87.07% in 1995-96

to 84.37% i.e. by -2.70% in 2008-09. The TC/OTR was 0.63% more in the AP than that of the ASC

in 1995-96 and the same was 4.23% more in the AP than that of the ASC in 2008-09. This

confirms the more regressive pattern of the AP tax system than that of the ASC. The AP has to

focus its attention to reduce the regressive pattern of its tax system in the days to come. Theinequalities in terms of the Gini-Coefficient of consumption expenditure have increased in the

AP37

. The tax system of the AP might have contributed its might in increasing the inequalities of

income and consumption during the post reform period. The buoyancy of the TC in AP, as

Table-2 reveals, was 1.37 between 1995-96 and 2008-09 while that of the ASC was 1.07 during

the same period. It should be noted that theoretically, commodity taxes are believed to be

regressive (pro-rich) because the proportion of income devoted to consumption decreases as

income increases resulting in higher proportion of tax to income ratio at the bottom of the

income scale.38

As Table-1 reveals, the (ST/VAT)/OTR of the AP has come down in AP from 72.12% in

1995-96 to 68.64% i.e. by -3.48% in 2008-09 while that of the ASC has increased from 55.40% in

1995-96 to 60.46% i.e. by 5.06% in 2008-09. The (ST/VAT)/OTR was 16.72% more in the AP thanthat of the ASC in 1995-96 and the same was 8.18% more in the AP than that of the ASC in 2008-

09. The decrease in ST/OTR in AP is mainly because of the prohibition policy of the AP

government in 1995-96. The prohibition was introduced by the AP government in 1995-96 and

relaxed in 1997-97 and eventually the prohibition was lifted in 1999. Since the time of lifting

prohibition in the AP, revenue from the State Excise Tax (SET) has increased significantly

reducing the (ST/VAT)/OTR in 2008-09. The buoyancy of ST/VAT in AP was 1.31 during 1995-96

and 2008-09 while that of the ASC was 1.15 during the same period. It is to be noted that sales

35Sarma, J.V.M. (?), An Overview of state tax system in India (other than Sales Taxation). It is a report

prepared for the Asian Development Bank. P.16.36

Taxes on Commodities (TC) consist of Sales Tax/Value Added Tax (ST/VAT) (i.e. state sales tax, stateVAT, central sales tax, sales tax on motor spirit and lubricants, surcharge on sales tax, turnover tax etc.),

State Excise tax (SET), Motor Vehicle Tax (MVT) and other commodity taxes (i.e. taxes on goods and

passengers, taxes and duties on electricity, entertainment tax etc.).37 The Gini Ratio of Consumption Expenditure of Andhra Pradesh has increased from 28.93 for rural and32.31 for urban in 1993-94 to 29.40 for rural and 37.43 for urban in 2004-05. (Source: Human

Development Report of Andhra Pradesh, 2007, Centre for Economic and Social Studies, Hyderabad,

Chapter-4, p.42.)38 Musgrave, Richard A. and Musgrave, Peggy B (1989), Public Finance in Theory and Practice, Fifth

Edition, Tata McGraw-Hill Publishing Company Ltd., New Delhi.




tax reform was started in the AP in the mid-1980s39

. However, comprehensive tax reforms were

initiated in the AP more intensively and systematically since 1995-96.

As Table-1 shows, the SET/OTR of the AP has increased from 1.90% in 1995-96 to

13.43% i.e. by 11.53% in 2008-09 while that of the ASC has decreased from 13.30% in 1995-96

to 11.72% i.e. by -1.58% in 2008-09. The SET/OTR was -11.40 less in the AP than that of the ASC

in 1995-96 and the same was 1.71% more in the AP than that of the ASC in 2008-09. Prohibition

was relaxed in AP in 1997-98 and was lifted completely in 1999. At present, the state is

depending more and more on the SET. This is to be reconsidered given that the SET is regressive

tax since 80% of the SET comes from the poor. Furthermore, prohibition is an anti-poverty

measure in as much as 85 per cent of the revenue used to come from the poor people.40

As

Table-2 shows, the buoyancy of the SET in AP was 2.91 during 1995-96 and 2008-09 while that

of the ASC was 1.00 during the same period.

As Table-1 shows, the MVT/OTR of the AP has decreased from 9.44% in 1995-96 to

5.39% i.e. by -4.05% in 2008-09 while that of the ASC has decreased marginally from 5.82% in

1995-96 to 5.32% i.e. by -0.50% in 2008-09. The MVT/OTR was 3.62% more in the AP than that

of the ASC in 1995-96 and the same was 0.07% more in the AP than that of the ASC in 2008-09.

It is to be noted that the MVT and TP are progressive taxes. Hence, the MVT/OTR is to be

increased in AP as well as in other states to make the state tax system less regressive in future.As Table-2 shows, the buoyancy of MVT in AP was 1.06 during 1995-96 and 2008-09 while that

of the ASC was 1.00 during the same period.

As Table-1 shows, the (OTR+NTR)/TRE, a measure of fiscal empowerment, of the AP has

increased from 60.36% in 1995-96 to 64.91% in 2008-09 while that of the ASC has come down

from 59.95% to 58.38% during the same period. It demonstrates that the ability of the AP

government to spend more on current expenditure from its own sources of revenue has

increased while that of the ASC has come down. Thus, the fiscal empowerment of the AP

government has improved while that of the ASC has deteriorated during the reform period. [To

be continued in the following issue]

39The per capita sales tax was Rs.74.81 for Andhra Pradesh which was less than that of Kerala (Rs.107.86),

Tamilnadu (Rs.139.76). The Ordinance issued on 8th July, 1983 envisages increase in the rates of Sales

Tax on 99 commodities. The increase ranges from 1% to 7% as indicated below. The general rate of SalesTax has been increased by 1% i.e., from 4% to 5%. The existing rate of 4% was fixed in 1974 and there

has been no increase for the last nine years. Extent of enhancement in the number of items was: the rate of

tax 1% and below – 41 commodities; 2% - 23 commodities; 3% - 29 commodities; 4% to 7% - 6

commodities. Essential commodities were exempted and the tax rates on luxury items were kept high. TheMVT is increased by 15% on some classes of motor vehicles. Government has launched a scheme to sell

rice at Rs.2 per kg. to the weaker sections form the Ugadi day this year (w.e.f. April, 1983). Under this

scheme, every family having an annual income up to Rs.6000 will get 25 kgs of rice per month. (AP

Budget speech for 1983-84, Shri N. Bhaskar Rao).40 See AP budget speech for 1995-96, N. Chandrababu Naidu.




2. CAPITAL RECEIPTS

As Table-3 reveals, the ID41

/TCR42

of AP has increased from 15.01% in 1995-96 to 66.35%

in 2008-09 while that of the ASC has increased from 17.98% in 1995-96 to 64.11% in 2008-09.

Thus, the share of internal borrowing of the AP and the ASC in TCR has increased significantly

during the reform period.

The LAC43/TCR of AP has come down from 36.53% in 1995-96 to 12.09% in 2008-09

while that of the ASC has come down from 44.92% in 1995-96 to 6.36% in 2008-09. Thus, both

the AP and the ASC dependence on the Central loans have come down. But, the LAC of the AP is

higher than that of the ASC. The RLA44

/TCR of the AP has come down from 36.03% in 1995-96 to

1.68% in 2008-09 while that of the ASC has come down from 8.02% in 1995-96 to 4.10% in 2008-

09. Thus, the AP could not recover properly the loans given by it to other public sector

undertakings particularly. RLA must be improved by the AP in view of its high LAC. The SS45/TCR

of AP has increased from 5.97% in 1995-96 to 10.38% in 2008-09 while that of the ASC has

increased from 12.23% in 1995-96 to 16.39% in 2008-09. However, the AP is depending less on

SS than the ASC for its capital receipts.The RF46/TCR of AP has increased from 6.46% in 1995-96 to 36.47% in 2008-09 while

that of the ASC has increased from 4.81% in 1995-96 to 9.05 in 2008-09. Thus the AP is

depending more and more on the RF for mobilization capital receipts for capital expenditure

during the post-reform period. The AP is depending mostly in internal borrowing followed by

reserve funds. The AP is depending less on SS than the ASC for mobilization of capital resources.

The TCR/GSDP of AP has increased from 5.39% in 1995-96 to 5.73% in 2008-09 while that of the

ASC has come down from 4.03% in 1995-96 to 3.51% in 2008-09. The AP has increased its

capital expenditure and capital outlay, as is evident from Table-6, by mobilizing more capital

resources compared to the ASC during the post reform period.

41Internal Debt (ID) consists of market loans, loans from the Life Insurance Corporation of India, loans

from State Bank of India and other banks, loans from National Bank for Agriculture and Rural

Development, loans from National Cooperative Development Corporation, Special securities issues to National Small Savings Fund and others.42 Total Capital Receipts (TCR) consist of external debt, internal debt (ID), loans and advances from the

Centre (LAC), recovery of loans and advances (RLA), small savings and provident funds etc. (SS), reserve

funds (RF), etc.43 Loans and Advances from the Centre (LAC) taken by a state include loan against state plan schemes,

central plan schemes, centrally sponsored schemes, non-plan loans (i.e., share of small savings, natural

calamities), ways and means advances from the Centre, loans for special schemes etc.44

Recovery of Loans and Advances (RLA) by a state include housing, urban development, crop

husbandry, food storage and warehousing, cooperation, minor irrigation, power projects, village and smallindustries, industries and minerals, road transport, government servants etc.45 Small Savings (SS) include state provident funds, etc.46

Reserve Funds (RF) include depreciation/ renewal reserve funds, sinking funds, famine relief fund etc

and deposits and advances.




3. REVENUE EXPENDITURE

As Table-4 (row 13) reveals, the TE47

/(GSDP/GDP) of AP has increased from 16.10% in

1995-96 to 22.01% i.e. by 5.91% in 2008-09 while that of the ASC increased from 15.09% in

1995-96 to 16.77% i.e. by 1.68% in 2008-09. The TE/ (GSDP/GDP) was 1.01% more in the AP

than that of the ASC in 1995-96 and the same was 5.24% more in the AP than that of the ASC in

2008-09. A significant increase in the size of public expenditure in the AP has taken place

despite the liberalization, privatization and globalization policy of India during the reform

period. Rather, the role of the state has been redefined rather than reducing its role during the

reform period in AP as well as in ASC. It appears higher role is assigned to the states than the

centre in India during the reform period. The Central Government Total Expenditure (Revenue

and capital expenditure combined) as per cent of GDP was 14.2% in 1997-98 and 14.3% in 2008-

09 (BE).48

Thus, it appears that the role of the States has been increasing while that of the

Centre has remained almost the same during the reform period i.e. between 1995-96 and 2008-

09. This is perhaps because of the fiscal decentralization process that has begun in India since

1992 onwards. However, state level benefit incidence studies are to be undertaken to examine

the equity aspect of public expenditure.49 There is also general consensus in India that outputand outcome of public expenditure are to be improved in India.

As is evident from Table-4, TRE50

/ (GSDP/GDP) has increased from 13.17% in 1995-96 to

18.32% i.e. by 5.15% in 2008-09 in AP while that of the ASC has increased from 13.39% to

13.86% i.e. by 0.47% during the same period. The TRE/ (GSDP/GDP) was 0.22 less in the AP

than that of the ASC in 1995-96 and the same was 4.46% more in the AP than that of the ASC in

2008-09. The buoyancy of the TRE was 1.23 during 1995-96 and 2008-09 while that of the ASC

was 1.02 between 1995-96 and 2008-09 (Table-5). There is appreciable increase in the public

expenditure in the AP during the reform period. But, what is the quality of it? It is examined

below. As is evident from the regression coefficients estimated by simple linear regression

method (using Excel program) between the public expenditure (TE, TRE and CO) (independentvariables) and the GSDP/GDP (dependent variable) given in Table-8, the responsiveness of the

GSDP to public expenditure of the AP is less than that of the ASC raising doubts about the

quality of the public expenditure in the AP during the reform period. It may be noted that the

CARG (%) of the TE is 14.93% for the AP that is higher than that of the ASC i.e. 13.38% during the

reform period. Whereas the CARG of the GSDP for AP is 12.24% that is lower than that of the

ASC i.e. 12.46%. Thus, CARG of TE is higher and the CARG of GSDP is lower for the AP than that

of the ASC. It also raises doubts about the quality of the public expenditure in Andhra Pradesh

during the reform period under study despite the expenditure and institutional reforms

undertaken by the AP as narrated in section-II of the paper. The Andhra Pradesh Government

has to focus its attention on increasing the quality of its expenditure in the days to come so that

47Total Expenditure (TE) consists of Total Revenue Expenditure (TRE) and Capital Outlay (CO).

48Economic surveys, 2002-03 and 2008-09, Ministry of Finance, Government of India.

49Reddy, K.N. and Sudhakar, S (1989), Incidence of Public Expenditure in India: A Case Study of Andhra

Pradesh, Commonwealth Publishers, New Delhi.50

Total Revenue Expenditure (TRE) consists of Development Expenditure, Non-Development Expenditure,

Grants-in-aid and Contributions (GCS), Compensation and Assignments to Local Bodies and Panchayat Raj

Institutions (GCS) and Reserve with Finance Department of the Government.




GSDP growth rate would increase further through increasing productivity of the public

expenditure.

As Table-4 shows, the DE51

/TRE in AP has increased from 67.50% in 1995-96 to 70.21%

i.e. by 2.71% in 2008-09 while that of the ASC has decreased from 61.57% in 1995-96 to 58.26%

i.e. by 3.31% in 2008-09. The DE/TRE was 5.93% more in the AP than that of the ASC in 1995-96

and the same was 11.95% more in the AP than that of the ASC in 2008-09. This seems to be in

conformity with the expenditure reforms in the AP as narrated in section-II. The AP government

attempted to reduce general services expenditure during the reform period. So, the significant

increase in TRE/GSDP in AP is mainly because of the significant increase in DE/TRE during the

reform period. Thus, the increase in the TRE in AP is moving in the right direction contributing

to the development of the state contrary to the TRE of the ASC of which DE/TRE is decreasing

undermining the development of the ASC during the reform period. The buoyancy of the DE, as

is evident from Table-5, with respect to the GSDP in AP was 1.25 during 1995-96 and 2008-09

while that of the ASC was 0.99 between 1995-96 and 2008-09.

As Table-4 reveals, the NDE52/TRE in AP has come down from 31.78% in 1995-96 to

29.25% i.e. by 2.53% in 2008-09 while that of the ASC has increased from 37.38% in 1995-96 to

38.86% i.e. by 1.48% in 2008-09. The NDE/TRE was 5.6 less in the AP than that of the ASC in1995-96 and the same was 9.61% less in the AP than that of the ASC in 2008-09. Thus the

allocation of TRE of AP is in the desired direction contributing to the development of the state of

AP contrary to the ASC the development of which is undermined because of the increase in the

NDE during the reform period. The buoyancy of the NDE, as is evident from Table-5, with

respect to the GSDP/GDP in AP was 1.19 between 1995-96 and 2008-09 while that of the ASC

was 1.05 during the same period.

Grants-in-aid and Contributions by States (GCS) include grants, compensation and

assignments to local bodies and Panchayati Raj Institutions (PRI) provided by a state. It gives an

idea about the transfer of resources from the State to the local self governments highlighting

the degree of fiscal decentralization from the state to the local self governments. This ismandated under the 73rd and 74th Amendments of the Indian Constitution in 1992 by giving

constitutional status to the local self governments and assigning fiscal powers to them. The

states have a constitutional obligation to strengthen the local self governments by transferring

more resources to them through the state budgets. Table-4 shows that the GCS/TRR of AP has

come down from 0.78% in 1995-96 to 0.53% i.e. by 0.25% in 2008-09 while that of the ASC has

increased from 1.12% in 1995-96 to 2.77% i.e. by 1.65% in 2008-09. The GCS/TRR was 0.34 less

in the AP than that of the ASC in 1995-96 and the same was 2.24% less in the AP than that of the

ASC in 2008-09. Fiscal centralization is taking place in AP contrary to the spirit of the 73rd

and

74th

Amendments to the Indian Constitution in 1992 which obligates the states to decentralize

the fiscal powers and responsibilities to the local self governments. However, there is fiscal

decentralization trend in the ASC during the reform period. Hence, the AP has to focus its

attention on speeding up fiscal decentralization in the days to come to improve the efficiency in

the allocation of resources by providing the public goods according to the preferences of the

51Development Expenditure (DE) includes expenditure on Social Services (SCS) and Economic Services

(ES).52

Non-Development Expenditure (NDE) includes expenditure on organs of state, fiscal services, interest

payments (IP) and servicing of debt, administrative services (AS), pensions, miscellaneous general

services.




local people. Furthermore, there is a lot of under spending in the Urban Local Bodies of the AP

in providing local facilities to the local people53

. Delivery mechanism of government programs

can be strengthened by strengthening the local self governments. The Eleventh Plan can be

implemented successfully only by improving the quality of the government services that is

possible only when the local self governments are strengthened. Inclusive and sustainable

growth is possible only when local self governments are strengthened. In this aspect, the State

governments have a greater role. The buoyancy of the GC, as is evident from Table-5, was 1.03

during 1995-96 and 2008-09 while that of the ASC was 1.75 during the same period indicating

potential increase in centralization of fiscal power in the AP in future.

As Table-4 reveals, the SCS54

/TRE has decreased from 44.95% in 1995-96 to 41.54% i.e.

by 3.41% in 2008-09 while that of the ASC has decreased from 36.97% in 1995-96 to 36.62% i.e.

by 0.35% in 2008-09. The SCS/TRE was 7.98% more in the AP than that of the ASC in 1995-96

and the same was 4.92% more in the AP than that of the ASC in 2008-09. There is a significant

decrease in the SCS/TRE in AP during the reform period while it remained almost the same in

ASC during the same period. However, the SCS/TRE is very much higher in AP than in the ASC

during the reform period which is to be appreciated. But, the decrease in the SCS/TRE in the AP

and ASC goes against the government policy priority to the social sector the development of

which is essential from the point of view of human development and equity. It is to be notedthat nearly 55% of the benefits of the SCS go to the poor while the remaining 45% of the

benefits go to the non-poor in AP.55

Furthermore, the benefits of the SCS accrue to the society

as whole possess public goods character. So, the State has to provide the SCS services. The

buoyancy of the SCS, as is evident from Table-5, in AP with respect to the GSDP was 1.20 during

1995-96 and 2008-09 while that of the ASC was 1.02 during the same period. As Table-4 (row-8)

reveals, Social Expenditure (SE) is the sum of SCS and (Rural Development) RD. The SE/TRE in AP

has come down from 50.30% in 1995-96 to 47.26% i.e. by 3.04% in 2008-09 while that of the

ASC has come down from 41.50% in 1995-96 to 40.92% i.e. by 0.58% in 2008-09. The SE/TRE

was 8.80% more in the AP than that of the ASC in 1995-96 and the same was 6.34% more in the

AP than that of the ASC in 2008-09. Hence, the AP has to increase its public expenditure on the

social sector in the days to come.As Table-4 shows, the ES56/TRE of AP has increased from 22.55% in 1995-96 to 28.83%

i.e. by 6.28% in 2008-09 while that of the ASC has come down further from 24.60% in 1995-96 to

21.64% i.e. by 2.96% in 2008-09. The ES/TRE was 2.05 less in the AP than that of the ASC in

1995-96 and the same was 7.19% more in the AP than that of the ASC in 2008-09. The benefits

of the ES provided by the state go to the extent of 85% to the non-poor and the remaining 15%

53See Sudhakar, S. (2008), Fiscal Performance of Urban Local Bodies in Andhra Pradesh: An Assessment,

Urban India, Vol. XXVIII, January-December, No. 1 and 2, A Journal of the National Institute of Urban

Affairs, New Delhi, pp. 49-82.54

Social Services (SCS) expenditure includes expenditure on education, sports, art and culture, medical

and public health, family welfare, water supply and sanitation, housing, urban development, welfare of

SCs, STs, and BCs, labor and labor welfare, nutrition, relief on account of natural calamities and others.55

Op.Cit. Sudhakar, S. (2001).56

Economic Services (ES) expenditure includes expenditure on agriculture and allied activities (i.e., crop

husbandry, soil and water conservation, animal husbandry, dairy development fisheries, forestry and wild

life, plantations, food storage and warehousing, agricultural research and education, agricultural finance

institutions, cooperation and other agriculture programs), rural development (RD), special area programs,

irrigation and flood control (IE), energy, industry and minerals, transport and communications, science,

technology and environment, general economic services (i.e., tourism, civil supplies, secretariat etc.)




go to the poor57

. Furthermore, most of the benefits of the ES are of private type which can be

provided by the private sector by creating markets or complementing the markets. So, most of

the ES can be provided by the market. Thus, the State should assume more responsibility in the

case of SCS than the ES. The Expenditure on ES is to be decreased and that on SCS is to be

increased from the point of view of both efficiency and equity. So, the AP and the ASC have to

increase the SCS/TRE and decrease the ES/TRE over time in the future encouraging private

sector participation in providing economic services. As Table-5 shows, the buoyancy of the ES

with respect to the GSDP in AP was 1.35 during 1995-96 and 2008-09 while that of the ASC was

0.94 during the same period.

As Table-4 shows, the (interest payments) IP/TRE in AP has come down from 14.25% in

1995-96 to 12.88% i.e. by 1.37% in 2008-09 while that of the ASC has increased from 15.13% in

1995-96 to 16.66% i.e. by 1.53% in 2008-09. The IP/TRE was 0.88% less in the AP than that of

the ASC in 1995-96 and the same was 3.78% less in the AP than that of the ASC in 2008-09.

Same is the case with IP/TRR as is evident from Table-4. The AP performance in the case of

interest payments is far better than that of the ASC resulting in the reduction of the NDE/TRE in

AP. The Debt Swap Scheme of the Centre is the main reason why the interest payments have

come down in AP because of effective use of the Debt Swap Scheme benefits from the Centre.

The buoyancy of the IP with respect to the GSDP in AP was 1.21 during 1995-96 and 2008-09while that of the ASC was 1.09 during the same period. Interest payments at the States’ level

have come down because of the Debt Swap Scheme and Debt Consolidation and Relief Facility

as recommended by the Twelfth Finance Commission. There is still much scope at the AP level

to reduce interest payments by reducing LAC.

As Table-4 shows, the (administrative services) AS/TRE in AP has come down further

from 7.49% in 1995-96 to 5.72% i.e. by 1.77% in 2008-09 while that of the ASC has come down

from 9.23% in 1995-96 to 9.10% i.e. by -0.13% in 2008-09. The AS/TRE was 1.74 less in the AP

than that of the ASC in 1995-96 and the same was 3.38% less in the AP than that of the ASC in

2008-09. There is a significant decrease in the AS/TRE in AP compared to the ASC. This is

another reason why NDE/TRE has come down during the reform period in AP. The buoyancy of

the AS, as evident from Table-5, with respect to the GSDP in AP was 1.12 during 1995-96 and2008-09 while that of the ASC was 1.01 during the same period. However, it may be noted that

the AS/(GSDP/GDP) has increased from 0.98% in 1995-96 in AP to 1.04% i.e. by 0.06% in 2008-09

while that of the ASC has increased from 1.23% to 1.26% i.e. by 0.03% during the same period.

It may mean productivity of government services has come down during the reform period if

government services are regarded as input in increasing GSDP/GDP. It is a subject to be debated

and studied further. Table-4 (row 12) shows that the (irrigation expenditure) IE/TRE of the AP

has increased from 7.71% in 1995-96 to 9.10% i.e. by 1.39% in 2008-09 while that of the ASC has

decreased from 4.93% in 1995-96 to 2.87% i.e. by 2.06% in 2008-09. A through study is needed

to know the impact of irrigation expenditure on agricultural growth in the AP.

57Op. Cit. Sudhakar, S. (2001).




4. CAPITAL EXPENDITURE

As Table-6 reveals, the TCE58

/ (GSDP/GDP) in AP has increased from 4.46% in 1995-96 to

5.21% in 2008-09 while that of the ASC has increased from 3.01% in 1995-96 to 4.04% in 2008-

09. The total capital expenditure is higher in the AP than in the ASC during the reform period.

Capital Outlay59 (CO) as a per cent of TCE in AP has increased from 65.69% in 1995-96 to 70.80%

in 2008-09 while that of the ASC has increased from 56.77% to 61.09% during the same period.

CO/TCE is higher in the AP than in the ASC during the reform period. This indicates creation of

more new assets owned by the state of AP than that of the ASC during the reform period. The

DID60

/TCE in the AP has increased from 2.96% in 1995-96 to 36.35% in 2008-09 while that of the

ASC has increased from 3.24% in 1995-96 to 28.60% in 2008-09. The repayment of debt is

higher in AP than that of the ASC because of higher internal borrowing by the AP during the

reform period.

The RLC/TCE in AP has come down from 7.97% in 1995-96 to 4.14% in 2008-09 while

that of the ASC has come down from 14.73 in 1995-96 to 3.54% in 2008-09. The decrease in

RLC/TCE in both the AP and ASC is because of the sates resorting to market borrowing instead of

borrowing from the Centre during the reform period due to the Debt Swap Scheme. TheLAS/TCE in AP has increased from 23.38% in 1995-96 to 25.18% in 2008-09 while that of the ASC

has come down from 25.26% to 6.77% during the same period. It should be noted that RLA/TCR

has come down in the AP while that of the LAS61

/TCE has increased reflecting poor recovery of

loans in the AP. This may add to fiscal crisis in future in the AP. Poor recovery of loans forces

the AP state to borrow more increasing the debt burden and threatening the debt sustainability

in the long run. DE/CO has come down from 99.34% in 1995-96 to 98.47% in 2008-09 while that

of the ASC has come down from 96.45% to 95.77% during the same period. This also creates

fiscal problem because decrease in development expenditure undermines the development of

the economy. The NDE/CO in AP has increased from 0.66% in 1995-96 to 1.53% in 2008-09

while that of the ASC has increased from 3.55% to 4.23% during the same period. The DID/TCR,

DID/ID, (DID+RLC)/ (ID+LAC), and (DID+RLC)/ (ID+LAC+SS) demonstrate the ability of the State tocreate new assets. Increase in these ratios indicates the deterioration in the ability of the state

to create new assets in the public sector and vice-versa. The DID/TCR, DID/ID, (DID+RLC)/

(ID+LAC), and (DID+RLC)/ (ID+LAC+SS) have increased in AP from 2.44%, 16.29%, 17.54%, and

15.72% in 1995-96 to 3.30%, 49.88%, 46.99%,41.50% in 2008-09 respectively while that of the

ASC also has increased from 2.41%, 13.44%, 21.32% and 18.09% to 3.87%, 43.60%, 44.57% and

36.16% respectively during the reform period. It reveals the decreasing ability of the AP and the

ASC in creating new assets that increase the productivity in the public sector and thereby

increase GSDP/GDP.

58Total Capital Expenditure (TCE) consists of Capital Outlay (CO), Discharge of Internal Debt (DID),

Repayment of Loans to the Centre (RLC) and Loans and Advances by the State (LAS).59

Capital Outlay (CO) is divided into Development Expenditure (i.e. expenditure on SCS and ES) and Non-

Development Expenditure (i.e. expenditure on general services).60

Discharge of Internal Debt (DID) includes repayment of loans by a state against market loans, loans

from the LIC, loans from the NABARD, etc.61

Loans and Advances by the State (LAS) include developmental loans and non-developmental loans

provided by a state.




6. REVENUE DEFICIT, FISCAL DEFICIT, PRIMARY DEFICIT/BALANCE AND PUBLIC DEBT

As Table-7 shows, the (Gross Fiscal Deficit) GFD/GSDP of AP has come down from 2.92%

in 1995-96 to 2.81% i.e. by 0.11% in 2008-09 while that of the ASC has come down from 2.90%

to 2.26% i.e. by 0.64% during the same period. The GFD is still higher in the AP than that of the

ASC in 2008-09. The GFD was 0.02% more in the AP than that of the ASC in 1995-96 and the

same was 0.55% more in the AP than that of the ASC in 2008-09. So, the AP state has to put in

effort to reduce the GFD by 0.55% if GFD of the ASC is taken as norm. This is to be done by

increasing RLA and undertaking self-liquidating capital projects in the AP. The (Revenue Deficit)

RD/GSDP in AP has come down from 0.89% in 1995-96 to -0.19% (surplus) in 2008-09 while that

of the ASC has come down from 0.76% to -0.57% during the same period. The revenue surplus

is less in AP than that of the ASC in 2008-09. The (primary deficit) PD/GSDP of AP has come

down from 1.07% in 1995-96 to -0.56% (surplus) in 2008-09 while that of the ASC has come

down from 0.88% to -0.05% during the same period. The primary surplus is more in the AP than

that of the ASC enabling the AP government to spend more on creation of capital assets for

promoting growth of the AP. So, the fiscal performance of the present government is better

than the past government in AP compared to the ASC in 2008-09 as is evident from higher

primary surplus in the AP than that of the ASC.The PUD/(GSDP/GDP in AP has increased from 18.34% in 1995-96 to 24.92% i.e. by

6.58% in 2008-09 while that of the ASC has increased from 19.59% to 29.08% i.e. by 9.49%

during the same period. The PUD/GSDP in the AP is already in conformity with the

recommendation of the XIII-Central Finance Commission of India.62

The PUD/(GSDP/GDP) was

1.25% less in the AP than that of the ASC in 1995-96 and the same was 4.16% less in the AP than

that of the ASC in 2008-09. The IP/PUD, a measure of average interest cost of the public debt, in

the AP has come down from 10.24% in 1995-96 to 9.47% in 2008-09 while that of the ASC has

come down from 10.33% to 7.94% during the same period. The cost of public debt of AP is

higher than that of the ASC in 2008-09. The nominal GSDP annual growth rate in AP was 13.17%

in 2008-09 which is higher than the IP/PUD i.e. 9.47%. Similarly, the nominal GDP of India was

15.48% in 2008-09 which is higher than the IP/PUD of the ASC i.e. 7.94%. So, the public debt issustainable in both the AP and ASC during the 2008-09 in the long run since GSDP growth rate is

higher than the average interest rate on the public debt.

62See the Report of the XIII-Finance Commission of India for 2010-2015, Chapter-1, p.4, (December,

2009).




V. CONCLUSION:

India is a quasi-federal country having three levels of government i.e. the Centre, States

and Local Self-Governments. The States are expected play an increasing role in attaining the

objectives of Indian planning including targeted inclusive growth. The States encountered the

fiscal stress following the Center’s fiscal reforms undertaken in the beginning of the 1990s. As a

result, the most of the States undertook fiscal reforms in the mid-1990s including the State of

Andhra Pradesh. The states’ level fiscal reforms were facilitated by the Centre, Finance

Commissions and Reserve Bank of India through number of steps like Fiscal Reform Facility, Debt

Swap Scheme etc. In view of this, the present paper examined the fiscal performance of the

Andhra Pradesh State during the period between 1995-96 and 2008-09 and compared the same

with the fiscal performance of the All States Combined as a benchmark. The paper reveals that

the Andhra Pradesh fiscal performance is far better than that of the All the States Combined in

terms of many fiscal indicators confirming the success of the fiscal reforms undertaken in the AP

state. Tax reforms in the AP have been more successful than that of the ASC. The AP is fiscally

more empowered than the ASC as reflected in OTR/TR. The AP debt is more sustainable than

the ASC. Revenue Deficit and Primary Deficit have improved more in the AP than in the ASC butnot the Gross Fiscal Deficit. However, the fiscal situation may deteriorate in future in the AP

unless the following steps are taken by the AP state. They are: (1) Non-tax revenue is to be

increased by improving cost recovery rate of economic services particularly; (2) recovery of

loans and advances is to be improved in view of increasing loans and advances by the state and

decreasing recovery of loans and advances by the state in the AP; (3) Property Tax revenue is to

be improved by increasing property tax rates in the AP since the rates are one of the lowest in

the state compared to some of the other states in India; (4) MVT revenue is to be increased by

increasing rates of MVT; (5) quality of public expenditure is to be improved by better targeting

the expenditure programs and improving the public delivery system; (6) CO is to be increased to

create more new assets since increasing amount of the borrowed funds is spent for the

repayment of the public debt; (7) Debt cost is to be reduced; (8) fiscal centralization is to bereduced by devolving more funds to the local self-governments by the AP state; (9) the AP state

tax system is to be made less regressive by increasing the share of direct taxes such as

profession tax, property tax and agricultural income tax; (10) share in central taxes is to be

increased while the high cost loans and advances from the Centre are to reduced; (11) social

sector expenditure is to be increased while the expenditure on economic services is to be

decreased through increasing private sector participation; (12) DID/ID is to be decreased to

enable the AP state to create more new productive assets by proper debt management.




TEXT TABLES

TABLE-1: REVENUE RECEIPTS OF ANDHRA PRADESH AND ALL THE STATES (PERCENTAGES)

1995-96 2008-09

Andhra All the Andhra All the

Fiscal Indicator Pradesh States Pradesh States1 2 3 4

1. TRR/(GSDP/GDP) 12.96 12.67 18.78 14.43

2. TR/(GSDP/GDP) 9.13 8.61 13.18 10.22

3.TR/TRR 56.63 68.01 70.18 70.84

4. NTR/(GSDP/GDP) 1.91 2.11 2.26 1.34

5. NTR/TRR 15.52 16.68 12.05 9.28

6. GC/TRR 15.58 15.30 17.76 19.87

7. OTR/(GSDP/GDP) 6.04 5.91 9.63 6.75

8. OTR/TR 66.07 68.61 73.07 66.04

9. SCT/(GSDP/GDP) 3.10 2.70 3.55 3.47

10. SCT/TR 33.92 31.38 26.92 33.95

11. TIE/OTR 0.82 1.56 1.09 1.00

12. TP/OTR 11.50 11.36 10.30 14.64

13. TC/OTR 87.70 87.07 88.60 84.37

14. (ST/VAT)/OTR 72.12 55.40 68.64 60.46

15. SET/OTR 1.90 13.30 13.43 11.72

16. MVT/OTR 9.44 5.82 5.39 5.32

17. (OTR+NTR)/TRE 60.36 59.95 64.91 58.38

18. (GSDP/GDP)growth (%)current prices 15.77 17.08 15.33 15.48

Source: 1. Various Issues of Budgets in Brief, Government of

Andhra Pradesh, 2. Various Issues of State Finances:

A Study of Bdugets, RBI. 3. Andhra Pradesh Statistical

Abstracts, Directorate of Economics and Statistics,

Government of Andhra Pradesh, Hyderabad.

Note: TRR:Total Revenue Receipts; TR: Tax Revenue

NTR: Non-Tax Revenue; OTR: Own Tax Revenue

SCT: Share in Central Taxes; TIE: Taxes on Income and

Expenditure; TP: Taxes on Property; TC: Taxes on Commodities

ST: Sales Tax; VAT: Value Added Tax; SET: State Excise Tax

GC: Grants-in-aid and Contributions from the Centre.

MVT: Motor Vehicle Tax; GSDP: Gross State Domestic

Product; GDP: Gross Domestic Product (India)




TABLE-4: REVENUE EXPENDITURE OF ANDHRA PRADESH AND ALL THE STATES

(PERCENTAGES)

1995-96 2008-09

Andhra All the Andhra All theFiscal Indicator Pradesh States Pradesh States

1 2 3 4

1. TRE/(GSDP/GDP) 13.17 13.39 18.32 13.86

2. DE/TRE 67.5 61.57 70.21 58.26

3. NDE/TRE 31.78 37.38 29.25 38.86

4. GCS/TRR 0.78 1.12 0.53 2.77

5. SCS/TRE 44.95 36.97 41.54 36.62

6. ES/TRE 22.55 24.60 28.83 21.64

7. RD/TRE 5.35 4.53 5.72 4.30

8. SE/TRE 50.30 41.50 47.26 40.92

9. IP/TRE 14.25 15.13 12.88 16.66

10. IP/TRR 15.25 15.98 11.95 16.00

11. AS/TRE 7.49 9.23 5.72 9.10

12. IE/TRE 7.71 4.93 9.10 2.87

13. TE/(GSDP/GDP) 16.10 15.09 22.01 16.77

14. AS/(GSDP/GDP) 0.98 1.23 1.04 1.26

Source: As for Table-1

Note: TRE: Total Revenue Expenditure; TE: Total Expenditure (TRE+CO)

DE: Development Expenditure; NDE: Non-Development Expenditure

GCS: Grants-in-aid and Contributions by the State;

IP: Interest Payments; SCS: Social and Community ServicesES: Economic Services; RD: Rural Development; AS: Administrative Services

IE: Irrigation Expenditure; SE: Social Expenditure




TABLE-5: BUOYANCY OF REVENUE EXPENDITURE OF ANDHRA PRADESH AND

ALL THE STATES

1995-96 to 2008-09

Andhra All thePradesh States

1 2

1. Total Revenue Expenditure (TRE) 1.23 1.02

2. Development Expenditure (DE) 1.25 0.99

3. Non-Development Expenditure (NDE) 1.19 1.05

4. Grants-in-aid & Contributions by State (GCS) 1.03 1.75

5. Social and Community Services (SCS) 1.20 1.02

6. Economic Services (ES) 1.35 0.94

7. Interest Payments (IP) 1.21 1.09

8. Administrative Services (AS) 1.12 1.01

9. (GSDP/GDP) CARG (%) current prices 12.24 12.46


Note: CARG method is used for Buoyancy estimation.

TABLE-6: CAPITAL EXPENDITURE OF ANDHRA PRADESH AND ALL THE STATES

(PERCENTAGES)

1995-96 2008-09

Andhra All the Andhra All the

Fiscal Indicator Pradesh States Pradesh States

1 2 3 41. TCE/(GSDP/GDP) 4.46 3.01 5.21 4.04

2. CO/TCE 65.69 56.77 70.80 61.09

3. DID/TCE 2.96 3.24 36.35 28.60

4. RLC/TCE 7.97 14.73 4.14 3.54

5. LAS/TCE 23.38 25.26 25.18 6.77

6. DE/C0 99.34 96.45 98.47 95.77

7. NDE/CO 0.66 3.55 1.53 4.23

8. DID/TCR 2.44 2.41 3.30 3.87

9. DID/ID 16.29 13.44 49.88 43.60

10. (DID+RLC)/(ID+LAC) 17.54 21.32 46.99 44.57

11. (DID+RLC)/(ID+LAC+SS) 15.72 18.09 41.50 36.16


Note: TCE: Total Capital Expenditure; CO: Capital Outlay;

DID: Discharge of Internal Debt; RLC: Repayment of Loans to the Centre

LAS: Loans and Advances by the States; DE: Development Expenditure

NDE: Non-Development Expenditure




TABLE-7: GROSS FISCAL DEFICIT, REVENUE DEFICIT PRIMARY DEFICIT AND PUBLIC

DEBT OF ANDHRA PRADESH AND ALL THE STATES (PERCENTAGES)

1995-96 2008-09Andhra All the Andhra All the

Fiscal Indicator Pradesh States Pradesh States

1 2 3 4

1. GFD/(GSDP/GDP) 2.92 2.90 2.81 2.26

2. RD/(GSDP/GDP) 0.89 0.76 -0.19 -0.57

3. PD/(GSDP/GDP) 1.07 0.88 -0.56 -0.05

4. PUD/(GSDP/GDP) 18.34 19.59 24.92 29.08

5. IP/PUD 10.24 10.33 9.47 7.94

6. (GSDP/GDP) Annual Growth (current prices) 15.77 17.08 15.43 15.48


Note: GFD: Gross Fiscal Deficit; RD: Revenue Deficit; PD: Primary Deficit

PUD: Public Debt; IP: Interest Payments; GSDP: Gross State Domestic Product

GDP: Gross Domestic Product.

(+) indicates deficit; (-) indicates surplus

TABLE-8:RELATIONSHIP BETWEEN GOVERNMENT EXPENDITURE

AND GDP/GSDP DURING 1995-96 AND 2008-09 IN ANDHRA PRADESH

AND ALL THE STATES COMBINED (ASC) (RS. IN CRORES)

TRE CO TE GSDP/GDPAndhra All the Andhra All the Andhra All the Andhra All the

YEAR Pradesh States Pradesh States Pradesh States Pradesh States

1 2 3 4 5 6 7 8

CARG (%) 15.08 12.76 14.25 17.17 14.93 13.38 12.24 12.46

correlation 0.9907 0.99343 0.977 0.9857 0.9936 0.9959

slope 5.4452 7.21003 19.89 27.928 4.3258 5.7773

intercept 26550 -46564 85983 960672 37585 140896

Source: Author’s calculations.




APPENDIX-A

The Indian Constitution under the Seventh Schedule (Article 246) lays down the

respective functions and financial resources of the Government at the Union and state level and

contains three lists as set out below:

List I – Union List (97 Items)

Functions: Defense, atomic Energy and Mineral Resources, Foreign Affairs, diplomatic

Relations, Railways, Airways, Posts and Telegraph, Public Debt of the Union, Currency

and Coinage, RBI, Banking, Insurance, Stock Exchanges, etc.

Sources: taxes on Income (other than Agricultural Income), Customs Duties, Excise

Duties on manufactured goods, corporation tax, service Tax, etc.

List II – State List (66 Items)

Functions: Public order, Police, Local Government, Public Health and Sanitation,

Hospitals and dispensaries, Agriculture, water, Fisheries, Public Debt of State, etc.

Sources: Taxes on Agricultural Income, Taxes on Lands and Buildings, taxes on Mineral

Rights, Excise Duties, Entry Tax, Taxes on Electricity, taxes on the Sale or Purchase of

Goods (VAT), taxes on Vehicles, Tolls, taxes on Profession, Trades, Entertainment Taxes,

Stamp Duties, etc.

List III – Concurrent List (47 Items)

Criminal Law, Criminal Procedure, Administration of India, social Security, Employment

and Unemployment, Labor Welfare, Education, including technical education, medical

education and universities, Price Control, Factories, electricity, etc.

Source: RBI study on State Finances: A study of Budgets of 2007-08, p.114.

FUNCTIONS OF RURAL LOCAL BODIES: The Indian Constitution under the eleventh

Schedule (article 243G) lays down the functions of the rural self-governments that are as

follows: agriculture, including agriculture extension, land improvement, implementation of land

reforms, land consolidation and soil conservation, minor irrigation, water management andwatershed development, animal husbandry, dairying and poultry, fisheries, social forestry and

farm forestry, minor forest produce, small scale industries including food-processing industries,

khadi, village and cottage industries, rural housing, drinking water, fuel and fodder, roads,

culverts, bridges, ferries, waterways and other means of communication, rural electrification,

including distribution of electricity, non-conventional energy sources, poverty alleviation

program, education including primary and secondary schools, technical training and vocational

education, adult and non-formal education, libraries, cultural activities, markets and fairs, health

and sanitation, including hospitals, primary health centers and dispensaries, family welfare,

women and child development, social welfare including welfare of the handicapped and

mentally retarded, welfare of the weaker sections, and in particular of the scheduled Castes and

the Scheduled Tribes, public distribution system, and maintenance of community assets.

(Source: Directorate of Economics and Statistics, Gram Panchayats in Andhra Pradesh, Economic

Classification of Finances, 2003-04 and 2004-05, Government of Andhra Pradesh, Hyderabad).

For the functions of the Urban Local Bodies, See, Sudhakar, S. (2008), Fiscal

Performance of Urban Local Bodies in Andhra Pradesh: An Assessment, Urban India, Vol. XXVIII,

January – December, No. 1 & 2, p.69.National Institute of Urban Affairs, New Delhi.




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