Demonetisation may deal a blow to AP/TS economies

According to the 14th Finance Commission and the FRBM (Fiscal Responsibility and Budget Management) Act, States have to maintain a fiscal deficit at 3% of their GSDP (gross state domestic product) and eliminate revenue deficit.

It suggested the fiscal deficit limit be relaxed to a maximum of 3.5%, if States were able to contain their debt and interest payments to specified levels.

Fiscal deficit for the State governments in India rose from 2.2 per cent of GDP in 2013-14 to 2.9 per cent in 2014-15. In 2015-16, it missed the budgeted figure for fiscal deficit (of 2.4 per cent of GDP) to report a higher fiscal deficit of 3.2 per cent, according to an RBI report.

An analysis of fiscal deficits for both Telugu States reveals that two States have managed to keep fiscal deficit under 3% of GDP on an average. The fiscals deficit of Andhra Pradesh and Telangana are estimated at (-)2.6% and (-)0.8% respectively.

As of now, the public debt of Andhra Pradesh has reached an alarming level and is likely to deprive the cash-strapped State of any additional funds from the Centre.

According to the Centre, the FRBM limit from 3% to 3.5% will not be extended to AP State, while Telangana has already obtained the permission.

According to the Socio-Economic Survey 2015-16, its GSDP is estimated at Rs 6.83 lakh crore while debts stood at Rs 1.90 lakh crore, accounting for 27.88 per cent of GSDP.

Though the Central taxes devolution, grants and market borrowings are of similar magnitude for both AP and Telangana, AP has lost ‘significant’ portion of her resource base after the division.

With the increase in FRBM limit from 3 per cent to 3.5 per cent, Telangana can avail of Rs 3,000 crore additional borrowings from financial institutions.

Telangana GSDP is estimated to grow 11.7% in 2015-16 at current prices despite a negative growth in the agriculture and allied sector. The growth is more than the national average of 8.6%.

The Centre recently approved the recommendations on fiscal deficit targets and additional fiscal deficit to States during the term of the 14th Finance Commission for the period 2015-20.

Since 2015-16 financial year is already over, the States will not get any benefit of additional borrowings for the period. However, they can use the additional leeway for the remaining period.

Due to demonetisation effect, both States are reeling under cash crunch. This may pull down AP’s economy by 30% in just two months, though the State has seen 12.7% growth in first half of fiscal year and everything went down post-demonetisation move.

The AP government is looking forward to push urbanisation, services sector, tourism and IT with a view to achieving the target of 15% growth rate. However, it is not just Andhra Pradesh, all states across the country are suffering a major dip in economy.

However, Telangana has sought additional fiscal support from the Centre to tide over the revenue loss emanating from the demonetisation, apart from moratorium of existing loans and relaxations to debt limits to raise fresh loans.

Seeking help from the Centre in the form of a ‘revolving fund’ to help the States, the State has urged the Union government to increase the FRBM limits by 50-100 basis points to enable increased borrowings.

Demonetisation has adversely impacted the sectors like poultry, real estate, diary and fisheries that were dominated by cash transactions.

Telangana sought moratorium on loans availed by such sectors. Over all, both Telugu States may not meet the target of keeping fiscal deficit target below 3% percent, in view of demonetisation of higher currency notes.

Since 2014, both States on an average spent over 15% of their total receipts (excluding borrowings) on debt servicing.

Approximately 60% of this amount was towards interest payments, and the remaining 40% was spent on principal repayment. Andhra Pradesh spent the highest proportion of its receipts on debt servicing at 19% as against Telangana’s 12%

Based on revenue expenditure, capital expenditure and loan repayments, a comparison for two states reveals that Andhra Pradesh is expected to spend 4% of its total expenditure on loan repayment, while Telangana is expected to spend 1%.

A higher proportion of a state’s expenditure on the repayment of loans may indicate that lesser funds are being spent on creating infrastructure such as schools, hospitals, roads, and bridges.

Both States have committed to spending more on education and welfare of SCs, STs, OBCs in 2016-17.