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The Rediff Business Special/George Iype

Populist schemes, dwindling revenues push Andhra into debt trap

Part I: Cyber-savvy Andhra Pradesh on verge of bankruptcy

Ever since the Comptroller and Auditor General described the financial situation of Andhra Pradesh as precarious, Chief Minister N Chandrababu Naidu has been conducting workshops for ministers and secretaries to the government on zero-base budgeting.

The state's fiscal deficit is about 3.5 per cent of the gross state domestic product, compared to the Government of India's 6 per cent.

In its report submitted to the government last month, the CAG said: "There was an overall deterioration in the financial condition of the Andhra Pradesh government during 1998-99 because liabilities grew by 21 per cent, assets by 13 per cent, while the deficit on government account grew by 51 per cent."

During 1998-99, the government obtained ways and means advance and overdrafts on 220 days, amounting to Rs 48.97 billion, and repaid Rs 46.77 billion, leaving a balance of Rs 2.19 billion. Interest paid on this account alone was Rs 98.1 million.

There has been a huge mismatch between the receipts and expenditure of the government that the CAG said it "reflects poorly on the financial management of the government".

During 1998-99, the Naidu government borrowed Rs 15.55 billion in the open market at the interest rate of 12.50 per annum. Therefore, the total public debt increased from Rs 177.86 billion during 1997-98 to Rs 213.87 billion during 1998-99.

"The capital expenditure has adverse implications for future as the repayments would account for greater share of government funds," the CAG report stressed.

According to the state's Finance Minister Ramakrishnudu, Andhra Pradesh's overall debt position is like that of any other state, and does not present a picture of a deep debt trap.

"The state has had a deficit on revenue account for many years now. But that has been the pattern for most state governments and the central government also," the finance minister points out.

However, economic experts and opposition politicians allege that Naidu created the fiscal mess during the Telugu Desam Party, or TDP, rule in the last six years. In 1993-94, the Andhra Pradesh government had a surplus of Rs 4.54 billion. By 1997-98, the surplus changed to a deficit of whopping Rs 80.16 billion.

"Which, in other, words means that four years after he came to power, Naidu rendered the state virtually bankrupt," says S K Sudhakar Reddy, a Hyderabad-based economist.

Reddy says the government's populist schemes like the cheap rice and power distribution and the Deepam schemes are to be held responsible for this precarious financial position of the government.

"Andhra Pradesh has the dubious distinction of implementing subsidised schemes that have never met the required targets," he says.

But Reddy says that positive signals indicating the state could improve its economy are emanating from the information technology sector, where Naidu has excelled over most other states. Revenues from the infotech fields posted a net sales turnover of Rs 10.45 billion last year without any government investment.

According to C Hanumantha Rao, a former member of the Planning Commission, Andhra Pradesh is one of the states that are heavily indebted in the country.

"The state pays Rs 40 billion as debt servicing every year because borrowings from international financial institutions has raised the debt from Rs 125 billion in 1994 to Rs 220 billion now," Rao puts in.

Economic experts claim Andhra Pradesh is the biggest victim of populism. While subsidised power costs the state Rs 24 billion this year, cheap rice to the farmers leaves the exchequer poorer by Rs 13 billion.

Therefore, they suggest a tough financial prescription for the state like raising the internal revenues, increasing the growth rate to at least 6.7 per cent and significant investment in infrastructure especially in the rural belt.

Left with no choice, Naidu is these days engaged in chalking out unpleasant tasks on how to raise taxes, mop up more revenue from liquor sales, increase power and transport tariffs and cut subsidies.

In fact, it is not the accruals from information technology, but the increasing revenue from liquor sales that has actually saved state from going broke in the last three years.

Ever since Naidu lifted financially disastrous prohibition in 1997, tax revenue from liquor sales in AP has turned out to be the highest among the four southern Indian states.

According to figures from the state's Excise Department, AP tops in the list of highest liquor sales in south India. For instance, in the last 10 months, the state sold more than 110 million cases of beer.

Naidu is trying to scale down subsidies as the fares of the state transport buses have been recently been hiked by 30-70 per cent. The government will also plan to raise the power tariff by 15 per cent every year over the next three years.

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Andhra Pradesh