Fiscal positions of Andhra & Telangana: Who needs central funds more & why

Topics Andhra Pradesh

TDP MP protest at Parliament House demanding special status for Andhra Pradesh during the second phase of the budget session in New Delhi
The demand by Chief Minister Chandrababu Naidu on special status for Andhra Pradesh (AP) might have created fissures in the ruling National Democratic Alliance. A Business Standard analysis of the fiscal positions of AP and Telangana, which was carved out of it in 2014, throws up four salient points:


First, in the years since its bifurcation, AP’s tax collection has grown at a much slower pace compared to Telangana. Second, it relies on transfers from the Centre to fund its expenditures to a much greater extent than Telangana. Third, Andhra’s debt dynamics are far worse than Telangana, leaving very little fiscal headroom. Fourth, while tax concessions for promoting industry form an integral part of the demand for special status, the Andhra Pradesh reorganisation plan did in fact provide for concessions to industry for backward areas in both states.


At the aggregate level, AP’s tax revenues increased from 6.4 per cent of gross state domestic product (GSDP) in 2015-16 to 7 per cent in 2017-18 (Budget Estimates). By comparison, Telangana’s tax revenue has shot up from 7 per cent of GSDP in FY16 to 8.4 per cent in FY18 (Budget Estimates). 


Telangana government officials said much of this growing divergence in tax trends was because of Hyderabad. The technology hub is the capital of Telangana, and AP has lost revenues due to the absence of comparable economic activity. 


Consequently, AP’s reliance on central transfers, which includes its share of taxes and grants, increased from 7 per cent of GSDP in FY16 to 9.7 per cent in FY18 (BE). Telangana’s increased from 3.8 per cent of GSDP in FY16 to 5.8 per cent in FY18 (BE).


One reason is AP’s greater weightage in central taxes. It had a weight of 4.305 among states subsequent to the 14th Finance Commission. By comparison, Telangana has a weight of 2.437. Under the 13th Finance Commission, undivided Andhra Pradesh had a weight of 6.937, third-highest among 28 states, after Uttar Pradesh and West Bengal.


The state also gets revenue deficit grants, which the 14th Finance Commission estimated at Rs 221 billion between 2015 and 2020.


AP is also the recipient of more grants for rural and urban local bodies. It is pegged to get Rs 122 billion (both basic and performance grants) between 2015 and 2020. By comparison, Telangana is projected to receive Rs 87 billion.


But, AP’s debts are also higher. The state’s debt to GSDP ratio stands at 28.1 per cent in FY18, compared to 18.6 per cent for Telangana. Its debt burden is higher than what was projected in the 14th Finance Commission, which had pegged it at 25.1 per cent of GSDP in FY18.


Its debt is higher than many other states as well. The Reserve Bank of India (RBI) had pegged aggregate debt to GSDP ratio for all states at 23.9 per cent in FY17.


Besides more central grants for centrally sponsored schemes, special category states are also allowed certain tax breaks and concessions to attract industry. This is an important motivation for demanding the status.


The AP bifurcation plan already had such concessions. To boost industrial units, the Union Budget for FY16 allowed additional investment equal to 15 per cent of the cost of the new asset acquired or installed. This was for any manufacturing enterprise set up on or after April 1, 2015, and new assets acquired between FY16 and FY20, in any backward area of AP and Telangana. A higher additional depreciation of 35 per cent of actual cost of new machinery was also allowed.


Economists said these provisions could boost new investment in areas such as Sri City. Data from the Department of Industrial Policy and Promotion (DIPP) seems to attest this. Total investment implemented through industrial entrepreneurs’ memorandum in the state is estimated at Rs 207 billion from 2015 to 2018. By comparison, for Telangana it is Rs 72 billion.

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