Breaking down Andhra's Budget: Why the state needs Centre’s assistance

On March 8, 2018, amidst the sour confrontations with the Union of India, Yanamala Ramakrishnudu, the Finance Minister of Andhra Pradesh has tabled the Budget 2018–19 of size Rs 1.91 lakh crore, a 21.7% increase from the previous year.

This budget proposes a revenue surplus of Rs 4,018 crore and a fiscal deficit of Rs 27,603.27 crore (3.48% of GSDP) subject to the release of all pending funds from the Union of India as per the Andhra Pradesh Reorganisation Act, 2014. This budget reflects a weak revenue base, a larger focus on the next year’s election as well as an emphasis on the infrastructure for the agrarian and industrial activities to strengthen the economy.

In his Budget Speech, the Finance Minister was critical of the lack of support from the Union Government. In his own words:

We could have achieved much better results but for the indifference of the Central Government. We continue our struggle to ensure that all assurances are fulfilled and the State of Andhra Pradesh comes on a level playing field with its neighbouring States.

The trajectory of the relationship between the State and Union governments will determine the success of the budget. The Government of Andhra Pradesh (GoAP) estimates Rs 94,117.15 crore of transfers from Union that includes Rs 43,422.15 crore as tax devolution and Rs 50,695 crore as Grants-in-Aid. The growth of State’s own revenues is steady, and the total Union transfers constitutes over 50% of the State’s total revenues reflecting a weak revenue base of the State. The 14th Finance Commission has recommended Rs 22, 113 crore during 2015–20, to compensate for revenue deficit, and this component in the Grant-in-Aid will end in 2020. The Union’s transfers are likely to reduce from 2020, and the state finances will be under severe stress unless the state pays attention to improve its own revenues.

Percentage share of total revenues of Andhra Pradesh

Nominal Revenues of Andhra Pradesh

The current budget estimates to spend Rs 1,91,063.61 crore, a 21.69% increase from previous year. This constitutes a revenue expenditure of Rs 39,047.26 crore and Rs 56970.88 crore on general and social services respectively, and Rs 29,847.46 crore on economic services. The capital expenditure is Rs 19,327.34 (excluding Rs 9,351.15 of public debt servicing). Clearly, the government is spending higher on welfare than on economic activities. However, within this capital expenditure, a major portion is allocated to strengthen agricultural and industrial sectors. 

To create the infrastructure for agricultural activities: Rs 500 crore has been allocated to improve access to irrigation water and improve livelihoods of the dependent, and Rs 250 crore has been allocated for the farm mechanisation to increase farm productivity. Incentives worth Rs 300 crore are allocated for food processing industries to augment the agrarian sector. And Rs 9,000 crore are allocated to speed up the completion of Polavaram Project.

Several initiatives were taken to improve the infrastructure and human resources for industrial sector. Rs 1,168.58 crore for Visakhapatnam-Chennai Industrial Corridor Development, Rs 200 crore for the industrial infrastructure development & MSMEs, Rs 270 crore on Medical Tech Zone, Rs 100 crore assistance to Startups, and Rs 300.35 crore for skill development programmes. The digital connectivity is expected to improve with allocation of Rs 600 crore on fiber grid connectivity, and Rs 90 crore broadband connectivity in Tribal areas. To develop connectivity across the state, Rs 341 crore will be spent on major district roads, and Rs 100 crore will be spent as a share of the state on construction of new railway lines.

In the past few years, the State has overspent for creating economic activities, and the current commitments are expected to be met. However, it is unclear how much of this expenditure on agricultural and industrial sectors will create short-term revenues. The excessive focus on welfare over developing the revenue base will continue to strain state finances. As the recent history suggests, the State has revenue and fiscal deficit of 2.5% and 4.5% of GSDP in FY2016–17 (from actual accounts), and in FY2018–19, achieving a revenues surplus and fiscal deficit of 0.6% and 2.8% of GSDP looks a paramount task.

At the end, this budget is a few steps forward on aspects of welfare expenditure to improve the social and health indicators of the vulnerable communities, accelerate the agrarian and industrial sectors.

Andhra Pradesh lags on the industrialisation and urbanisation — hampering revenue generation — when compared to neighbouring states. The state is far away from achieving a level playing field with the neighbours, and the emerging political dynamics will increase welfare expenditure, and the requirements for economic growth are likely to take a back seat.

Unless the concerted efforts are taken by the state and immediately assisted by the Union, the revenues will not improve, and the dependency on the Union will continue.

Note: Specific expenditures from the budget documents relevant to create agriculture and industrial economic activities were mentioned in the article, and others were omitted. The views expressed are the personal opinions of the author.