Through JR Janumpalli
Since the division, the remaining Andhra Pradesh and Telangana have submitted seven budgets. Budgets are also audited by the CAG until 2019-2020. The final CAG report figures show actual income and expenditure figures and other economic metrics for states. In a state budget, the main financial indicators are revenue, expenditure, revenue deficit / surplus and outstanding loans. The audited accounts of the two states tell two different stories.
Telangana managed to balance its budget with a certain surplus of revenue for the first 4 years, i.e. until 2018-19. In 2019-2020, it posted a revenue deficit of Rs 6,254 (0.65%) of GDP. In contrast, Andhra Pradesh reveals a mismatch between revenue and expenditure. AP started out with a revenue deficit and this continued for years to come. In 2019-2020, it reached up to Rs 26,441 crore. The deficit is expected to increase for both States in 2020-21 and 2021-22 due to insufficient revenue collection due to Covid-19. But AP’s chronic and growing income deficit is something to think about.
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Driven by need
The revenue deficit is the difference between revenue and expenditure. This indicates the money the government needs to borrow to spend on non-capital items. It has several implications. It must be covered by capital revenues, which a government borrows or obtains by selling its existing assets. This reduces assets. If the government uses the capital revenues to cover its consumer spending, it leads to an inflationary situation in the economy. With more and more such loans, as well as interest, the burden of repaying the liabilities also increases and leads to an additional deficit.
The needs of the two states were different. For Telangana, it was about regaining its share of lost resources and rebuilding the new state. For AP, it was about facing the inconvenience of losing Telangana and rebuilding the state. The main resource for both is the state’s own tax revenues (SOTR) and central tax deconcentration and subsidies. At the time of amalgamation in 1956, Andhra State had a revenue deficit and Hyderabad (Telangana) had a surplus.
In the merged state, the Andhra and Telangana regions each contributed about 50% to SOTR. But spending was 35-38% in Telangana and 65-62% in Andhra, making up for the deficit inherited from the Andhra region. There has been no effort to increase revenue in the Andhra region to match its overspending in the merged state and this is being expressed even after the division now.
The growing gap of AP
In 2014-15, the TS budget was in surplus at Rs 369 crore and AP recorded a heavy deficit of around Rs 13,000 crore. This defined the contours of economic planning in both states. TS chose to follow prudential budgeting and implemented a balanced budget after division. In AP, this was not the case. The Center had to bear the deficit the first year. The 14th Finance Commission granted Rs 22,120 crore and the 15th Finance Commission Rs 30,000 crore from 2015-21 to allow the state to balance its budget. The state uses the subsidies but the gap keeps widening.
In the case of central devolution as well, AP got more than TS, due to its larger area and population. AP’s borrowings also exceeded the FRBM limit. Despite the tight financial situation, AP indulged in unlimited spending. In the first term after the division, the TDP government engaged in heavy unproductive spending in the name of world-class capital and administration, borrowing heavily.
The new YSRCP government has also embarked on an extravaganza of its large-scale social assistance program by continuing heavy borrowing. The outstanding liabilities at the end of 2020-2021 have increased to 32.7% of GDP. AP spends 11.3% of its spending on the welfare of SC, ST and OBC, the highest in the country. While the average state spending in economic sectors as a percentage of total spending was 31%, it was 29% for AP and 38% for TS.
AP should have tried from the outset to balance its budget and consolidate the state’s finances. It needed to gradually increase its SOTR and rationalize expenditure with the large deconcentration funds and deficit allocations of the Center. The unwarranted pride of political leaders in playing larger than life has pushed the state into preventable economic hardship. AP’s SOTR is 52%, its central deconcentration and subsidies constitute 48% of its revenues. TS has 72% SOTR and 28% deconcentration and central grants. The top ranked states have an SOTR of around 70%. States need a large SOTR to raise more financial resources for their increased development.
The TS government represented by the TRS stuck to prudential budget management standards. It pursues a mixed set of infrastructure development and social protection programs. And it has achieved higher ranks in many macroeconomic indicators such as GSDP, GSDP per capita, power generation, irrigation potential, and FDI, which justifies its state claims. Although he has borrowed heavily for his infrastructure projects, he spends them on capital intensive projects creating assets and income. Social assistance schemes are mainly supported by SOTR.
The ratio of own taxes to GDP is a measure of a state’s potential to generate taxes on its own from its economy. A higher ratio indicates a better ability to collect taxes on the economic activities of the state. The average ratio of own taxes to state GDP in fiscal years 16 to 21 was 6.3%. For most states, it varied between 5% and 7.5%. AP got 6.4% and TS got 7.5%, among the highest.
Given the situation at the end of 2021-2022, AP must drastically cut its budget and increase its SOTR. TS must also cut its ambitious and expensive programs and rationalize its budget to reduce its growing deficit due to the pandemic.
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