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Andhra in high fiscal stress zone

Sunil Jain in New Delhi | November 28, 2003 09:33 IST

On November 16, Andhra Pradesh went into overdraft -- its expenses exceeded balances -- with the Reserve Bank of India for the first time this fiscal, compared with five times in 2002-03.

A clear sign of the improvement as well as the precariousness of the state's finances. While its fiscal deficit rose to Rs 7,499 crore (Rs 74.99 billion) in 2002-03 after declining in the previous year -- at 4.7 per cent of the gross state domestic product in 2002-03, it is sharply higher than 2.5 per cent in 1997-98 -- Andhra Pradesh requested the Centre to release Rs 173 crore (Rs 1.73 billion) to help it meet its fiscal correction targets under the Medium Term Fiscal Reforms Programme.

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And yet, the state's debt-to-revenue receipts ratio has climbed from 273 in 1999-00 to 294.31 in 2002-03. A ratio above 300 indicates that a state is highly debt-stressed.

After falling steadily, several vital parameters of Andhra Pradesh's fiscal health are slowly getting back to the comfortable 1990 levels.

The state's tax-to-GDP ratio, for instance, fell from 7.9 in 1989-90 to 5.2 in 1995-96, before recovering to 7.7 in 2002-03. The non-tax to GDP ratio fell from 2.4 per cent in 1989-90 to 1.6 in 1998-99, before going up to 2.13 last year.

Between 1996-97 and 2002-03, Andhra Pradesh's tax collection rose 2.8 times, a feat unmatched by any other southern state.

Its revenue deficit-to-revenue receipts ratio fell from 28.6 per cent to 9.7 per cent during this period, while the other states saw the ratio go up several times.

But a very high interest burden saw the fiscal deficit climbing 2.7 times. However, as per the Tenth Plan calculations, based on current growth projections, Andhra Pradesh is among the country's least fiscally sustainable states.

The state is credited with being first off the block with major reforms. Chief Minister N Chandrababu Naidu introduced power reforms in 1998 and made the formation of water users associations mandatory for irrigation in 1997, paving the way for three hikes in water tariffs.

This, combined with extreme populism, is the reason why Naidu is acclaimed as a big reformer, but is also in deep fiscal trouble.

Splitting the state electricity board into separate distribution and generation companies with an independent regulator, for instance, was in keeping with World Bank suggestions.

Yet, the board's losses climbed to Rs 2,300 crore (Rs 23 billion) in 1999-00 from a profit of Rs 79 crore (Rs 790 million) in 1990-91. These losses account for a third to half of the state's fiscal deficit.

Similarly, Naidu reduced government staff ruthlessly to curb expenses. Compared with 3.4 per cent in the pre-1996-97 decade, the growth in government staff fell to under 1 per cent. As a result, the salary component of government expenses fell from 43 per cent in 1994-95 to 35 per cent in 2000-01.

Yet, by extending the pension scheme to employees of local bodies and aided institutions, the state's pension costs jumped from 9 per cent of its expenses in 1994-95 to 30 per cent in 2000-01.

Naidu has been an aggressive public sector reformer, privatising and closing 12 each of the 128 state public sector units. The privatisation process for 79 more units has started, making it the country's most successful divestment programme among states.

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