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AP may be heading into a debt trap

M S Shanker in Hyderabad

Andhra Pradesh Chief Minister Nara Chandrababu Naidu's ability to make the World Bank release a loan of $ 543.50 million (Rs 22 billion) may be laudable. But the fact remains that it is a loan, and a loan has to be repaid too. This was highlighted by the Opposition Congress party, which expressed fears that the state exchequer could land itself in a "debt trap".

Former AP finance minister K Rosaiah was first to press the panic button, saying, "Indiscriminate borrowing by the Naidu government may prove dear to future generations." According to him, "the state's outstanding debt would go up to Rs 204.30 billion as the World Bank has sanctioned a fresh loan of Rs 22 billion. "This figure may increase since aid worth $ 4.6 million (approximately Rs 190 million) from Norway to the AP State Electricity Board is also in the pipeline. It is intended to improve the quality and reach of the power network.

He says the state government provided only Rs 27.22 billion for debt servicing in the current year's budget though borrowings are increasing steeply.

"If this dangerous trend continues, the government will have to earmark more than Rs 40 billion in the next budget, leaving a meagre amount for non-plan expenditure," he cautioned.

The Congress leader also recall how Naidu raised a hue and cry in 1994 when the state's outstanding debt was Rs 125.70 billion and then alleged that the Congress was pushing the state into a debt trap.

"But after taking over the reins, Naidu is always at the World Bank's doorstep, seeking more and more loans. We don't say the government should function under resource constraints. But we are opposed to indiscriminate borrowing," he said.

According to Rosiah, open market loans from the central government and external funding agencies shot up under Naidu's regime. Ever since the TDP regained power, the outstanding public debt has almost doubled from Rs 99.56 billion during 1993-94. Although Naidu may feel elated due to laudatory references by World Bank officials and other funding agencies, the state's financial future looks very gloomy, said a senior finance ministry bureaucrat. "The message appears to be clear -- future generations have to pay the price for the TDP's ills." Naidu, of course, denies this.

"They (the Opposition in general and the Congress in particular) have no foresight. The World Bank aid can help us in the long term. The Opposition parties were unconcerned about the long-term growth of the state. On the contrary, they have concentrated on damaging developmental schemes undertaken by the government," says Naidu.

Brushing aside Opposition fears that debt servicing will shoot up, he says. "Unlike my predecessors, my government is committed to spend each and every rupee for prosperity, following the guidelines set by the World Bank."

Edwin Lim, the World Bank director for India, has praised Naidu, claiming the latter has shown commitment to economic reforms, and taken important decisions to address pressing fiscal and sectoral matters. But the Communist Party of India and the Communist Party of India-Marxist feel this just confirms their view that Naidu is dancing to the World Bank's tune.

There are 25 externally-aided projects under implementation in the state with a loan commitment of Rs 109.26 billion. World Bank loans account for 11 projects totalling Rs 61.29 billion; the Overseas Economic Co-operations Fund, Japan funds four projects worth Rs 41.01 billion. The remaining projects are being funded by the Asian Development Bank, the UK Department of International Development and the government of the Netherlands and Australia.

The state has put more projects, worth Rs 100 billion, before foreign funding agencies.

According to state Congress chief Dr Y Rajasekhara Reddy, the TDP government is desperate, relying more on external aid to bridge the resource gap. During the Ninth Plan (1997 to 2002), the state's approved plan outlay is Rs 251.57 billion. Of this, external aid accounts for Rs 100 billion. And since the money is not in grants, all of it has to be returned.

Against such a backdrop, says Reddy, the onus is being pushed from the current government on to a future one.