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Mounting public debt -- AP heading into financial crisis

V. Rishi Kumar

WITH the Andhra Pradesh public debt gradually creeping up to about Rs 27,000 crore and projected to cross Rs 34,000 crore this fiscal, the State Government needs to address this thorny issue to bring down debt exposure and extricate itself from drifting into a financial crisis. Debt-servicing is a major cause for concern accounting for about Rs 4,000 crore this fiscal.

The State Government's public debt has increased from Rs 7,173 crore in 1991-92 to Rs 13,565 crore in 1995-96 and zoomed to Rs 26,762 crore in 1999-2000 as per revised estimates. As per the projected budgetary estimates, this is set to touch Rs 34,117 cr ore in 2000-2001.

For this fiscal, the open market loans are projected at Rs 9,436 crore, loans from the Centre at Rs 19,896 crore and the loans from autonomous bodies at Rs 4,785 crore.

The State Government is receiving Central assistance for financing the expenditure -- both on Plan and non-Plan schemes and Centrally-sponsored schemes. As on 1991-92, the outstanding loans from the Centre amounted to Rs 4,368 crore. Thi s figure soared to Rs 9,675 crore in 1995-96 and to Rs 16,901 crore as per revised estimates for 1999-2000. It is projected to go up to Rs 19,896 crore this fiscal.

According to the Chief Minister, Mr N. Chandrababu Naidu, ``the States are under increasing pressure to invest in improvement and maintenance of infrastructure, human resource development and promotion of agricultural production and productivity. The bur den of developing backward areas, local self-government and safety nets has fallen almost exclusively on the states.''

``On the other hand, declining Central fiscal transfers, limited opportunities to raise capital finance and an ever-increasing cost of debt have brought the State finances under severe strain. This calls for serious review of the institutions and instrum ents of fiscal federalism.''

One major cause of fiscal discomfort, according to the Government, is the marked deceleration in the transfers from the Centre. The States have been articulating the need for an alternative devolution scheme as only the first step towards the ultimate go al of scaling up their share to 50 per cent of the Centre's gross tax revenues.

In this backdrop, the AP Government adopted a zero-based budget as an important initiative to bring in fiscal discipline in all departments. While this may bring in the necessary changes in the functioning of departments and remove ad hoc expenditures, i t remains to be seen if this helps bring down the debt exposure.

The Centre is a major source of State's public debt. The State's debt servicing as a percentage of gross loans from the Centre has gone up from 65.5 per cent in 1990-91 to 79.9 per cent in 1998-99. Though the Tenth Finance Commission had recommended a sc heme of marginal debt relief to States linked to fiscal performance and disinvestment in public sector undertakings, this did not happen.

Broadly, the AP Government has identified certain causes for the present fiscal crisis. These include over-estimation of resources, under-estimation of commitments, demand for additional resources mainly due to previous commitments, better performance of ongoing programmes, new programmes, and contingent and unforeseen liabilities.

What is the problem in AP? It has accorded multiple `highest' priorities in the face of limited financial flexibility mainly due to the additional burden this fiscal caused by the pay commission burden, interest payments and debt servicing, and, more imp ortant, contingent liabilities from AP Transco, Hudco, and allocations for VRS schemes and the outgo for tackling extremism.

What are its pluses? It has shown a steady increase in revenues, has been accorded high credit rating, has tied up external funding for several projects, initiated multi-sectoral reform process and, more important, taken the reform route for better admin istration and transparency. It remains to be seen if all this will pay off.

The Government sees certain challenges for its fiscal management strategy. They include the need to augment internal resources, leverage outside funds, take up serious prioritisation, live within means, improve economy and efficiency -- both manpower a nd finances -- and also take up evaluation against performance targets. This it expects to address through the zero-based budget adopted this year.

According to the latest Economic Survey, the Gross State Domestic Product (GSDP) at current prices rose from Rs 58,227 crore in 1993-94 to Rs 1,14,154 crore in 1998-99 -- that is a compound growth rate of 13.60 per cent. On the other hand, at constant prices, the GSDP of the State increased from Rs 58,227 crore in 1993-94 to Rs 75,530 crore in 1998-99, indicating a compound growth rate of 4.8 per cent.

As per advanced estimates of 1999-2000 at constant prices, the GSDP is estimated at Rs 79,268 crore against the estimated Rs 75,530 crore in 1998-99, registering a growth of 4.95 per cent. The primary sector declined by 4.95 per cent, but secondary and t ertiary sectors grew 10.03 per cent and 9.09 per cent respectively.

The percentage share of AP's GSDP in the all-India GDP is 6.9 as per 1999-2000 advanced estimates. The annual average growth rate of Andhra Pradesh is always less than that of the all-India figure except in 1998-99.

The Eleventh Finance Commission (2000-2005), in its recommendations on debt of States, for the first time made a reference to long-term sustainability of debt for both the Centre and States. This was taken as a critical factor in the context of restructu ring of public finances and a few correctives suggested.

The Commission observed that accumulation of debt reflects the outcome of the fiscal operations of Centre/States on the revenue and expenditure sides of their budgets. If expenditure, committed or discretionary, exceeds revenues, tax and non-tax, the exc ess can only be financed through fresh borrowings.

If the mismatch in the growth of revenues and expenditure is of a temporary nature, borrowings provide a mechanism by which the adjustment is smoothened out. However, if the mismatch persists over a long period and grows in volume, debt tends to become u nsustainable, and one has to look at the structural cures of persistent and growing fiscal deficits, that is, requirement of fresh borrowings.

The Eleventh Finance Commission (2000-2005), in its recommendations on debt of States, made certain suggestions to initiate correctives to bring down the existing debt burden. This, it felt, was mainly dependent on the ability of the States to service th eir debt including the interest burden, which depends upon the ability to raise revenue receipts to meet the incremental expenditure on interest payments and the primary expenditure.

Some steps suggested include: The incremental revenue receipts should meet the incremental interest burden and the incremental primary expenditure. A surplus may be generated on revenue account to meet future repayment obligation. This surplus should be credited in a sinking fund for this purpose. Further, the State should have and maintain a balance in its revenue.

A major problem identified by the EFC for deterioration of revenue growth was the recessionary phase in the economy. It observed ``It is relevant to note that the revenue growth had decelerated in the 1990s even before the onset of the recessionary phase of the economy. The tax-GDP ratios had slumped even earlier. The buoyancy of tax revenue of both the Centre and states which had been declining in the 1980s, as compared to the earlier two decades, went down further in the 1990s.''

The Commission made it clear that both the Centre and the States have been resorting to borrowings over the last two decades to finance even a part of their current expenditure. The Government's debt levels went up significantly and stood at a little ove r 65 per cent of GDP in 1999-2000. It cautioned the Government against this trend. Further, to tackle this debt problem, it suggested creation of a sinking fund in each State for the amortisation of debt.