Finances of Andhra Pradesh

FINANCES OF ANDHRA PRADESH STATE: A COMPARATIVE STUDY
DR. S. SUDHAKAR1
ABSTRACT
The states are expected to play increasing role in India’s economic development in a quasi-
federal framework comprising the Centre, States and Local Self Governments. The states
undertook fiscal reforms in mid-1990s necessitated by states’ fiscal stress followed by the
Centre’s fiscal reforms in the early 1990s. Further, the states’ fiscal reforms were facilitated by
the measures of the Centre, Central Finance Commissions and Reserve Bank of India. In view of
this, a comprehensive study is undertaken in this paper to examine fiscal performance of Andhra
Pradesh, in terms of number of relevant fiscal indicators related to revenue receipts, capital
receipts, revenue expenditure, capital expenditure, revenue deficit, fiscal deficit, primary
deficit/balance and public debt, and compare the same with that of the all the states combined
as a benchmark for the period between 1995-96 and 2008-09. The paper reveals that the fiscal
performance of Andhra Pradesh is far better than that of all states combined as reflected in
many fiscal indicators. However, as is evident from the paper, Andhra Pradesh state has to
undertake number of steps in future for the sustenance of its fiscal empowerment. They are
related to improvement in non-tax revenue by increasing cost recovery rate of the economic
services, reducing fiscal centralization, making the tax system less regressive by increasing the
share of direct taxes like profession tax, property tax and agricultural income tax, reducing the
share of discharge of internal debt in the total borrowing through proper debt management,
reducing loans and advances from the Centre and increasing share in central taxes, increasing
social sector expenditure and decreasing economic services expenditure, increasing quality of
expenditure by improving delivery mechanism in view of weak link between public expenditure
and Gross State Domestic Product as reveal by simple regression analysis.
This paper is divided into two parts. First part of the paper is published in this issue
consisting of introduction, chronological description of fiscal reforms in Andhra Pradesh during
1995-96 and 2008-09 and measures taken by the Central Government, Central Finance
Commission, and Reserve Bank of India to promote fiscal reforms at the States’ level along with
analysis of the fiscal performance of Andhra Pradesh(AP) and All the States Combined(ASC)
covering only the revenue receipts of the AP and ASC. Second part of the paper is published in
the following issue consisting of analysis of fiscal performance of the AP and ASC pertaining to
capital receipts, revenue expenditure, capital expenditure, revenue deficit, fiscal deficit, primary
deficit/balance and public debt of the AP and ASC along with conclusions.
1
Professor of Economics, Department of Economics, University College for Women, Osmania University,
Koti, Hyderabad-500095, Andhra Pradesh. Email:samalas1955@rediffmail.com
Samala Sudhakar, Professor in Economics. 1

FINANCES OF ANDHRA PRADESH STATE: A COMPARATIVE STUDY
I. INTRODUCTION
India is a quasi-federal state comprising 28 states, six Union Territories (UTs) and a
National Capital Territory (NCT), Delhi. It has three tier system of government comprising the
Central Government, State Governments and Local Self-Governments2. The three levels of
government have their respective taxing powers and expenditure responsibilities that enable
them to promote socio-economic welfare of the people in their respective administrative
jurisdictions (See Appendix-A). Over the past few decades a clear trend has emerged worldwide
towards fiscal decentralization including India.3 There is no doubt that success of the Eleventh
Five Year Plan of India mostly depends upon the augmentation of resources of by the states 4.
More than ever before, the success of the Eleventh Five Year Plan will depend upon the quality
of service delivery by the State Governments5. Thus, the State Governments have greater role in
attaining faster, inclusive6 and sustainable growth in India. Furthermore, the State governments
have a role in macroeconomic stability in view of the higher level of expenditure incurred by
them compared to the Central Government.
Fiscal reforms, undertaken in India in the early 1990s, were a part of the overall
macroeconomic policy framework to bring macroeconomic stability in the Indian economy.
Fiscal reforms in India were initiated in three distinct but interrelated areas: (1) restoration of
fiscal balance; (2) restructuring of public sector; and (3) strengthening of the fiscal-monetary co-
ordination. The strategy for restoring fiscal balance comprised tax and non-tax reforms,
expenditure management and institutional reforms. The issues related to restoration of fiscal
balance in India were (1) size of fiscal adjustment; (2) fiscal adjustment by revenue
augmentation or expenditure cuts; (3) components of revenue and expenditure adjustments; (4)
impact of global economic growth; (5) fiscal consolidation7 reversibility; (6) adverse
macroeconomic impact of fiscal consolidation; (7) accounting standards; (8) relationship
between restoration of fiscal balance and federal fiscal structure; (9) discretionary or rule based
restoration of fiscal balance. These are the issues that are to be resolved on a sustainable basis.
Restoration of fiscal balance at the Centre had a definite impact on the finances of the
State Governments pushing them into fiscal stress in mid-1990s. Furthermore, a survey on
worsening State Finances by the RBI (2003) revealed that the following factors were responsible
for the deterioration of the Finances of the States in India: (1) reluctance to raise additional
resources, (2) competitive reduction in taxes by the states; (3) absence of service tax and
agricultural income tax; (4) sluggishness in Central transfers reflecting the deterioration of the
Center’s own finances and (5) inappropriate user charges. On the side of the public expenditure
2 rd th
Local Self-Governments have got constitutional status in 1992 with 73 and 74 Amendments to the
Indian Constitution.
3
The Reserve Bank of India Study on State Finances: A Study of Budgets of 2006-07.
4
Eleventh Five Year Plan of India (2007-2012), Vol. I, Chapter-3.
5
Ibid. Chapter-1.
6
Inclusive growth is a process which yields broad-based benefits and ensures equality of opportunity for
all. (Eleventh Plan, Chapter-1)
7
Fiscal consolidation is a policy aimed at reducing government deficits and debt accumulation.

of the States, (1) skewed composition of spending towards salaries; (2) a regressive distribution
of benefits; (3) low civil-service productivity; (4) high level of corruption; (5) an ineffective
spread of funds over too many projects and (6) duplication of services provided by the private
sector have undermined the quality of public expenditure at the state level 8.
Fiscal reforms in the States were, inter alia, necessitated by: (1) growing fiscal
imbalances; (2) sluggishness in Central transfers resulting from falling tax to GDP ratio; (3)
introduction of reform-linked assistance as a part of Medium-Term Fiscal Reform Program on
the basis of the recommendation of the Eleventh Finance Commission; and (4) adjustment
program undertaken in some of the States which are linked to borrowings from multilateral
agencies. Rule based fiscal policy replaced the discretionary fiscal policy at the Centre in 2003
with passing of the FRBM Act and at the states level in 2005. Fiscal rules have been adopted by
the Centre and the States for (1) ensuring macroeconomic stability; (2) enhancing the credibility
of the government’s fiscal policy and aid in deficit elimination; (3) ensuring long-term
sustainability of fiscal policy; and 4) minimizing negative externalities within a federation. The
FRBM Act stresses on inter-generational equity in fiscal management, long-term
macroeconomic stability and transparency. Fiscal measures initiated by the states may be
broadly grouped under (1) revenue mobilization, (2) expenditure containment and
management, (3) public sector restructuring and (4) institutional reforms. Further, the Central
Government, Finance Commissions, Reserve Bank of India strengthened the States efforts in
reforming their finances. A key objective at the state level fiscal reforms was the augmentation
of non-tax revenue by way of enhancement of user charges and returns on Government
investments through restructuring of the State level public sector enterprises.
In view of the above facts, it is felt that there is a need to understand the finances of the
State governments in terms of their fiscal performance which has an impact on efficiency,
equity, stability and growth and development of the Indian economy. Hence, the present paper
attempts to make a study of the fiscal performance of State of Andhra Pradesh (AP) and
compare it with that of the All the States Combined (ASC) between 1995-96 and 2008-09
(reform period). In this paper, average fiscal performance of the ASC is taken as a norm against
which the fiscal performance of the AP is compared using relevant indicators of fiscal
performance during the fourteen years reform period i.e. between 1995-96 and 2008-09. It is
also examined whether the fiscal performance of the AP is sustainable in future by looking at
buoyancy of revenue and expenditure during the reform period. If not, what steps are to be
undertaken by the AP Government to improve and sustain the fiscal performance of the AP?
The data sources are government budgets in brief, the RBI studies on State Finances, Central
Statistical Organization, various publications of Directorate of Economics and Statistics of
Government of Andhra Pradesh, Finance Department of Government of Andhra Pradesh. In
addition to the above dimensions of the study, fiscal decentralization issues are also examined.
Quality of fiscal adjustment is also examined. In the present paper, the following questions are
addressed with respect to fiscal reforms in Andhra Pradesh.
1. What steps were taken by Andhra Pradesh Government to improve fiscal performance
through fiscal reforms during 1995-96 and 2008-09?
8
World Bank (2004), India: State Fiscal Reforms in India, Progress and Prospects, Report No. 28849 – IN,
Overview, Washington.

2. What steps were taken by the Central Government, Finance Commissions and the Reserve
Bank of India to improve fiscal performance of the States during 1995-96 and 2008-09?
3. Whether the fiscal performance of Andhra Pradesh State has improved between 1995-96
and 2008-09 due to fiscal reforms?
4. Whether the fiscal performance of Andhra Pradesh state is better than that of the All the
States Combined during the fiscal reform period i.e. 1995-96 and 2008-09?
5. What role has Andhra Pradesh State played in strengthening local self governments during
the fiscal reform period i.e. 1995-96 and 2008-09?
This paper is divided into five sections to address the above five questions. First section
covers the introduction. Second section enumerates fiscal reform measures taken the Andhra
Pradesh Government in the areas of tax, non-tax, expenditure, institutional and debt during the
reform period under study. Third section covers the measures taken by the Central
Government, Finance Commissions and Reserve Bank of India to strengthen the fiscal reforms at
the states’ level. Fourth section focuses on the comparative analysis of fiscal performance of
Andhra Pradesh State and All the States Combined. Final section is devoted for conclusions.

II. FISCAL REFORMS IN ANDHRA PRADESH DURING 1995-96 AND 2008-09
First question is addressed in this second section. Fiscal reforms were undertaken in
Andhra Pradesh and all other states around 1995-96 following the fiscal reforms undertaken at
the Center’s level in the early 1990s9. Government of Andhra Pradesh aimed at implementing
fiscal reforms in the state strategically since mid-1990s10. The agenda of fiscal reforms embarked
upon by Andhra Pradesh Government may be grouped under the following inter-related
components: (1) Tax Reforms; (2) Non-Tax Reforms; (3) Expenditure reforms; (4) Institutional
Reforms; and (5) Debt reforms.
(1) TAX REFORMS: There was a decline in revenue receipts of Andhra Pradesh in 1990s
due to cumbersome and complex tax system, irregularities in the collection of taxes by the
executive government, an inefficient tax administration, proliferation of tax concessions and
widespread evasion of the taxes. These factors have eroded the State’s own tax base.
Irregularity in the collection of taxes by the government includes incorrect grant of exemption,
application of incorrect rate of tax, non/short levy of tax, non-levy of penalty and other
irregularities11. The principal objective of any tax reform exercise is to minimize compliance
costs, administrative costs and cost to the economy from the distortions that the tax system
creates. Rationalization and simplification of the tax system is inevitable for minimizing the
compliance and administrative costs and thereby increasing the efficiency and equity of the tax
system. However, the efficiency of the tax system in India as a whole must be balanced by fiscal
autonomy of the states. Andhra Pradesh Government has taken number of measures to
augment the tax revenue. Some of them are as follows. Profession tax was increased ten fold in
August 1996. Entry tax on motor vehicles purchased from other states was introduced. In 1999-
2000, the state joined with the Union to set uniform rates of sales tax and withdrawal of tax
based incentives. Revenue reforms committee headed by Dr. E.A.S. Sarma was appointed by
the AP government. Luxury tax on cigarettes was increased to 5%. Prohibition that was in
vogue since 1995 was lifted completely in 1999. It introduced a limited form of VAT on 19
commodities in April 1995 by adding a separate Schedule to the Andhra Pradesh General Sales
Tax Act followed by the introduction of full fledged VAT on 1st April, 2005.
(2) NON-TAX REFORMS: Non-tax reform measures are related to increasing revenue
from dividends and profits of State level public sector enterprises, interest receipts from the
loans given by the state, cost recovery from social services and economic services provided by
the state. Some important measures taken by the state government in respect of non-tax
reforms are as follows. Public Enterprises Management Board was constituted in 1982 (AP
Budget Speech for 1986-87). During 1984-85, public enterprises incurred losses of Rs.47 crore.
They made a profit of Rs.74.44 crore in 1985-86. Rehabilitation and reconstruction of State
Public Enterprises was continued subsequently after 1995. Irrigation rates were raised by five
9
Sarma, J.V.M. (2003), Fiscal Management: A Review, published in Hanumantha Rao, CH. And
Mahendra Dev, S. (ed), Andhra Pradesh Development (Economic Reforms and Challenges Ahead), Centre
for Economic and Social Studies, Nizamiah Observatory Campus, Begumpet, Hyderabad-500 016, India.
10
For instance, Andhra Pradesh State published a Vision-2020 document on 26th January, 1999 aiming at
9% to 10% growth rate at the state level. Fiscal reforms strategy paper was released on 29th January, 2002
along with 15 strategy paper for the development of critical sectors in the state.
11
Sreedevi, N. (2009), State finances of Andhra Pradesh: An Overview, published in Mahendra Dev et al
(Ed), Human Development in Andhra Pradesh: Experiences, Issues and Challenges, Centre for Economic
and Social Studies, Hyderabad, Andhra Pradesh.

times in 1997-98. Power tariff was hiked by 9% in 1998-99. The government enacted the
Andhra Pradesh Electricity Reform Act 1998 that provided for the creation of an independent
regulatory commission to be called Andhra Pradesh Regulatory Commission. Generation,
transmission and distribution activities have been unbundled and two new corporations have
been brought into existence from 1st February of 1999. Between 1999 and April 2004, Andhra
Pradesh successfully liquidated, privatized or restructured 39 public enterprises, ranging from
operating sugar factories and fertilizer factories, to agro industry and handicraft corporations.
During 1995-2005, MCH was allowed to levy impact fee to capture unearned capital
appreciation on account of public investment in road development. APSRTC was permitted to
raise bus fares, and Water Users’ Associations were permitted to plough back the water rates
for maintenance. User charges were raised.12 The number of loss making enterprises came
down from 24 to 17. As of April 2004, over 22,000 employees have taken voluntary
retirement13. Public Enterprises Personnel Board was set up to increase the productivity of the
employees of the State Public Enterprises14.
(3) EXPENDITURE REFORMS: Expenditure reforms include restructuring and managing

the public expenditure. The government of Andhra Pradesh has also taken various steps on the
expenditure side to restore fiscal health. These include rationalization of subsidies,
restructuring expenditure, improving expenditure management, inviting private sector
participation in the infrastructure sector and framing growth enhancing policies.15 Thus, Andhra
Pradesh Government has taken number of measures to make public expenditure more
productive and equitable. They are as follows. Civil Service size was reduced by 2.6% by way of
attrition to reduce unproductive public expenditure. The government tried to manage public
expenditure by reducing non-merit subsidies and restructuring state public enterprises,
introducing institutional reforms like Fiscal Responsibility Legislation, increasing budget
transparency. Andhra Pradesh Government claimed to target the subsidies in better manner
(A.P. Budget Speech for 1998-99). The World Bank signed an agreement with the Andhra
Pradesh Government to provide Rs.2173 crore for investment of Rs.3320 crore in the priority
sectors of social and economic infrastructure to crowd in private investment and thereby
increase rate of growth of the economy of the state at the end of 1990s. Watershed
development program and clean and green program were launched. Accident insurance
scheme for the poor people in the name of Apathbandhu was launched on 2nd October, 1998.
Interest payments were reduced through debt swap scheme16 introduced in 2003-04 by the
Central Government. Efficiency of public delivery mechanism was emphasized. The
contributory pension scheme was introduced for those employees, who are recruited on or
after 1st September, 2004. Indira Prabha, Indira Kranthi Padham, Rajiv Yuvashakthi, Rajiv
Internet Village, Food Assurance Program and Broad Band Network Programs were introduced
12
White Paper on Fiscal Reforms, 2003, Government of Andhra Pradesh
13
Planning Commission (2007), Report of Sub-Group on Resources other than Tax Revenues of States for
11th Plan (2007-2012), Government of India, New Delhi, p.20.
14
Andhra Pradesh state had 40 public sector enterprises employing 3.50 lakh people and having over
Rs.4444 crores paid up capital (AP budget speech for 2001-2002).
15
Op. cit. (Sreedevi, N., 2009)
16
Debt Swap Scheme, introduced by the Centre in 2004-05, is a scheme under which the states swap the
loans given by the Centre bearing interest rates in excess of 13 per cent against small savings proceeds and
open market borrowings. This scheme reduces the burden of interest of the States by changing the
composition of the states’ debt but not the absolute amount.

for poverty alleviation and self-reliance of the poor. Agricultural Extension Service was
strengthened. Reduction of regional imbalances was emphasized. Rajiv Nagar Bata was
launched from 9th January, 2005 as mass contact program. Rajiv Gruhakalpa for urban housing
development was introduced. National Rural Employment Guarantee Act 2005 was passed in
Parliament in September, 2005. Industrial Investment Promotion Policy 2005-10 was
formulated in June 2005. Indiramma Program for rural housing was launched. Agricultural
Technology Mission was started on 15th January, 2006. Andhra Pradesh Rural Employment
Guarantee Scheme came into existence from 2nd February, 200617. Pavala Vaddi scheme was
introduced to help women self-help groups to empower women. Mass Rapid Transport System
(MRTS) with the cost of Rs.8760 crores was launched. 21st Century Gurukulams were planned.
Jawahar Knowledge Centres were established to provide training to rural based students.
Arogya Sri Scheme to provide health insurance to the poor people was launched (AP budget
speech for 2007-08.) Special Economic Zones were set up for the development of the most
potential sectors like cement, steel, paper, bulk drugs, pharmaceuticals, textiles etc. Social
Pension Scheme to the aged, orphans and destitute was introduced. Agricultural Insurance
Scheme was introduced. In order to provide food and nutrition security to every family,
government decided to launch Rs.2.00 per kilogram Rice Scheme. This scheme was expected to
help more than 80% of the state population (AP budget speech for 2008-09). Aam Admi Beema
Yojana Scheme was introduced to cover 38 lakh landless agricultural labor under which Rs.100
per head premium is paid by the government. Irrigation was given top most priority. The
government spent on irrigation a sum of Rs.37539 crores from 14th May, 2004 to 31st December,
2008 compared to Rs.10000 crores in the preceding 10 years. Jawaharlal Nehru Urban Renewal
Mission (JNNURM), Urban Infrastructure Development Scheme for Small and Medium Towns
(UIDSSMT), Basic Services for Urban Poor (BSUP) and Integrated Housing and Slum Development
Program (IHSDP) were undertaken for urban development. Jalayagnam program was
undertaken covering 81 irrigation projects with a capital outlay of Rs.1.76 lakh crore. The
program envisages creation of additional irrigation potential for 100.38 lakh acres besides
stabilizing 21.75 lakh acres.
(4) INSTITUTIONAL REFORMS: Efficiency of the institutions responsible for
implementing government programs is essential for fiscal empowerment of the states. For this
purpose, Andhra Pradesh State has undertaken number of measures. They are as follows.
Multi-year budgeting was introduced. Modernization of tax administration and democratic
decentralization were initiated. Transparency in administration and rationalization of tax
structure, privatization of the power sector were initiated. Andhra Pradesh introduced the
computerization of the process of the registration of documents (CARD system) to minimize the
delays in registration process and in returning documents. AP State Wide Area Network
(APSWAN), Twin Cities’ Information Network System (TWINS) and Computer-aided
Administration of Registration Department (CARD) were introduced. Administrative
decentralization was made by setting up Zilla Parishad and Mandal Praja Parishads. Rs.5 per
capita and Rs.2 per capita was provided to Mandal Parishad and Zilla Parishads respectively.
Changes in the Budget Format were made (AP Budget speech for 1987-88). ZBB was introduced
in 1999. Centre for Good Governance was set up to undertake a state financial accountability
assessment and suggest systemic improvements in early 2000. Panchayat secretary was
appointed to improve the Gram Panchayat Administration since 1st January, 2002. Institution
17
This scheme provides 100 days work every year for those households registered under the Act. If for any
reason, whatsoever, the government is unable to provide work within 15 days from the date of request,
unemployment allowance will be paid.

building through water users associations, state finance commission, holding elections to local
bodies, local mothers committees, anganwadi centres, social audit was initiated. Budget
allocations were made on a half-yearly followed by quarterly basis. Performance budgeting was
introduced. Rythu Bazars were established. District Planning Committees were constituted in
the place of District Development Review Committees. Government of Andhra Pradesh wanted
to strengthen Panchayat Raj Institutions in 2004. Massive computerization in the Commercial
Taxes Department and Stamps and Registration Department was introduced. Rajiv Palle Bata
was launched on 13th June, 2004 as a process of administrative decentralization.
Computerization and Management Information Systems (MIS) were set up in all revenue
earning departments. Fiscal Responsibility and Budget Management (FRBM) Act 2005 was
passed.18 This FRBM Act aimed at fiscal discipline in a credible, predictable and transparent
manner and reducing the scope for discretionary fiscal policy. Cooperative farming was
initiated. The AP State wanted to strengthen local self governments to increase efficiency in
fiscal programs.19
(5) DEBT REFORMS: The AP Government has also undertaken number of measures for
improves debt management at the state level for long-term debt sustainability.20 Some of them
are as follows. To improve the state finances, the AP state set up consolidated sinking fund,
guarantee redemption fund, statutory and administrative limits on guarantees and restructuring
of the PSUs followed by the recommendations of the Technical Committee on state government
guarantees appointed in 1999. Sinking Fund was set up in 1999-2000. Debt swapping to the
extent of Rs.3696 crores was undertaken during 2002-03. Government Guarantees were
expected not to exceed 8% of GSDP by 2005-06. As part of the States’ Debt Consolidation and
Relief Facility (DCRF), the state government developed fiscal correction path for 2005-06 to
2009-10. Up to 2007-08, the state government has received a debt relief of Rs.1889 crore and
interest relief of Rs.1574 crore. It should be noted that the Consolidated Sinking Fund will come
to the rescue of the state in increased repayment of debt obligations due to Debt Swap Scheme.
18
As mandated by the FRBM Act 2005, Government of Andhra Pradesh has to bring the revenue deficit by
0.32% of GSDP and Fiscal Deficit by 0.25% of GSDP each year. Fiscal Responsibility Legislation of
October, 2005 of Andhra Pradesh stipulates GFD at 3% of GSDP and Public Debt at 35% of GSDP by
March 2010. (Misra, B.M. and Kundrakpam, J.K., 2009).
19
His Excellency Sri Surjit Singh Barnala, the Governor of Andhra Pradesh said on 1 st June, 2004 in his
customary address to the 12th Assembly “……for empowering the Panchayat Raj and Local Body
Institutions.” A new government was installed in May 2004 having a national Common Minimum
Program (NCPM) which spelled out its economic objectives, among others, as (1) accelerating fiscal
consolidation and reform; and (2) ensuring higher and more efficient fiscal devolution. (AP Budget Speech
for 2008-09).
20
Orthodox stabilization models target primary surpluses to attain sustainable debt levels and thus the level
of interest payments has a crucial bearing on the macro economy. (Economic Survey, 2008-09).

III. MEASURES OF THE CENTRAL GOVERNMENT, CENTRAL FINANCE COMMISSIONS, AND
RESERVE BANK OF INDIA TO PROMOTE FISCAL REFORMS AT THE STATES’ LEVEL
Second question is addressed in this third section.

CENTRAL GOVERNMENT: The Central Government has strengthened the fiscal reforms
of the states by the following measures. The Union Budget for 2002-03 made provisions for
reform-linked assistance of Rs.12300 crores for States under various schemes such as
Accelerated Power Development and Reform Program (APDRP), Accelerated Irrigation Benefit
Program (AIBP), Urban Reforms Incentive Fund (URIF), and Rural Infrastructure Development
fund (RIDF). In pursuance of the recommendations of the Eleventh Finance Commission of
setting up incentive fund, the Central Government drew up a scheme called the States Fiscal
Reform Facility for 2000-01 to 2004-05. The Central Government relinquished its plan loans to
the states since 2005-06 onwards based on the recommendations of the Twelfth Finance
Commission thereby reducing its high cost loans to the states. The Central Government, on its
part, initiated several measures to ease the debt burden of States: (1) the Debt Swap Scheme of
2003-04; (2) Debt Consolidation and Relief Facility (DCRF) (2005-06 to 2009-10). The DCRF
allowed rescheduling of central loans at reduced rate of interest of 7.5% and debt waiver
subject to enactment of the FRL and adherence to revenue deficit reduction targets, and (3)
reduction of interest rate on securities issued to NSSF between 1999-2000 and 2001-02 carrying
interest rate of 11.0-13.5 per cent to 10.5% since 2007-08. Further, in accordance with the
decision of the National Development Council, the obligatory share of the states in the NSSF has
been reduced to 80 per cent since 2007-08.
CENTRAL FINANCE COMMISSIONS: The Central Finance Commissions also strengthened

the fiscal reforms of the states by the following measures. Fiscal Reform Facility was suggested
by the Eleventh Finance Commission. The Eleventh Finance Commission had recommended the
establishment of an incentive fund for the purpose of encouraging fiscal reforms in the states on
the basis of a fiscal reform program that could be monitored. Medium Term Fiscal Reform
Program was recommended by the Eleventh Finance Commission to which the Centre’s
assistance to the states was linked. Medium Term Fiscal Reform Program covered fiscal
consolidation, public sector enterprises reforms, power/irrigation sector reforms and fiscal
transparency. Debt restructuring and rescheduling was initiated by the Twelfth Finance
Commission. The Twelfth Finance Commission suggested the states, first, to borrow directly
from the market at the market determined interest rates. Second, transfer of external
assistance by the Centre to the states with full exchange rate risk to be born by the states.
Third, fiscal restructuring plan for the states based on FRL including (1) elimination of revenue
deficit by 2008-09 and (2) containment of GFD to 3% of GSDP to become eligible for debt relief
and debt write-off in respect of central loans. The Twelfth Finance Commission suggested a
uniform fiscal restructuring path for the state governments involving 15 fiscal indicators. 21 Debt
Swap Scheme was introduced and implemented during 2003-04 and 2009-10 based on the
recommendations of the Twelfth Finance Commission. The release of this fund required a five
21
They are (1) states’ own tax revenue; (2) tax revenues; (3) own non-tax revenue; (4) non-tax revenues;
(5) total revenue receipts; (6) interest payments; (7) total revenue expenditure; (8) capital expenditure; (9)
total expenditure; (10) primary expenditure; (11) revenue deficit; (12) fiscal deficit; (13) primary deficit;
(14) interest payments/revenue receipts; (15) debt. (Source: B.M. Misra and J.K. Khundrakpam, 2008,
Fiscal Consolidation by Central and State Governments: The Medium Term Outlook, RBI Staff Studies).

percentage point reduction in the revenue deficit as a proportion to the State’s total revenue
receipts (TRR) in each year till 2004-05. As per this scheme, the States drew up a Medium Term
Fiscal Framework (MTFF) by setting targets for broad fiscal indicators in the medium term
covering various aspects such as fiscal consolidation, public sector enterprises reform, power
sector reforms and fiscal transparency. A fiscal correction path was developed by the Twelfth
Finance Commission giving outcome indicators with target dates of implementation during
2004-05 to 2009-10 based on fiscal targets set in the Fiscal Responsibility and Budget
Management (FRBM) Act of 2005 of Andhra Pradesh.
RESERVE BANK OF INDIA: The RBI played its role in improving state finances by
preparing model fiscal responsibility legislation, study of state finances, among others. 22 The RBI
initiatives include placing limits on government guarantees in 1999, encouraging open market
borrowings by the States through auction mechanism, advising the states in cash management,
funds management and reforms in budgetary practices, setting up consolidated sinking fund in
1999-2000 and contribution of 3% of outstanding market loans to the fund, examining the fiscal
risks in state government guarantees.
22
Op.Cit, Shymala Gopinath (2009).

IV. ANALYSIS OF FISCAL PERFORMANCE OF ANDHRA PRADESH AND ALL THE STATES
COMBINED
The third, fourth and fifth questions are addressed in this fourth section. The analysis is
divided into five sections. They are (1) Revenue Receipts; (2) Capital Receipts; (3) Revenue
Expenditure; (4) Capital Expenditure; and (5) Revenue Deficit, Fiscal Deficit, Primary
Deficit/Balance and Public Debt.
1. REVENUE RECEIPTS
Seventeen indicators are used, covering different components of the revenue receipts,
to judge the revenue performance of the AP and the ASC as shown in Table-1. First of them is
total revenue receipts (TRR)23 that indicate the income of government that determines the
amount of consumption expenditure of it and also its savings. TRR/GSDP (Gross State Domestic
Product at current prices) is used to measure the revenue performance of Andhra Pradesh (AP)
and TRR/GDP (Gross Domestic Product at current prices) is used to measure the revenue
performance of all the States Combined (ASC).
Table-1 reveals that the revenue performance of the AP has improved from 12.96% in
1995-96 to 18.78% in 2008-09 i.e. by 5.82% while that of the ASC has improved from 12.67% to
14.43% i.e. by 1.76% during the same period. It should be noted that the revenue performance
of the AP was more by 0.29% in 1995-96 compared to the ASC while the same was 4.35% more
for AP compared to the ASC in 2008-09. Table-2 reveals that the buoyancy 24 of the TRR of the
AP with respect to its GSDP is 1.30 between 1995-96 and 2008-09 while that of the ASC with
respect to GDP is 1.09 during the same period. The revenue performance of the AP and the ASC
has improved during the reform period. However, the revenue performance of the AP is far
better than that of the ASC during the reform period. The revenue performance of the AP is
also going to be better than that of the ASC in future as reflected in the buoyancy of the TRR for
the AP and the ASC.
Table-1 shows the tax effort, defined as the TR25/ (GSDP/GDP), of the AP and the ASC
during the reform period. The tax effort of the AP has increased from 9.13% in 1995-96 to
13.18% in 2008-09 i.e. by 4.05% while that of the ASC has increased from 8.61% to 10.22% i.e.
by 1.61% during the same period. Thus, the tax effort of the AP was 0.52% more than that of
the ASC in 1995-96 whereas the same was higher by 2.96% than that of the ASC in 2008-09. The
TR/TRR, a measure of performance of tax revenue, of the AP has increased from 56.63% in
1995-96 to 70.18% in 2008-09 while the same has increased from 68.01% in 1995-96 to 70.84%
in 2008-09. Thus, TR is the highest source of revenue to the AP and the ASC. The buoyancy of
the TR in the AP, as Table-2 shows, was 1.46 while that of the ASC was 1.12 during the reform
period. Thus, the tax effort of the AP is not only better than that of the ASC during the reform
period but also going to be better in future also compared to the ASC. The improved tax
revenue performance of the AP is due to increase in tax rates, expansion of tax base,
introduction of VAT, lifting prohibition, better income and expenditure tax performance, and
effective tax administration as narrated earlier in section-II of the paper.
23
TRR consist of Tax Revenue (TR), Non-Tax Revenue (NTR) and Grants from the Centre (GC).
24
Buoyancy of TRR is defined as the ratio of percentage change in TRR to the percentage change in
GSDP/GDP. CARG method is used to estimate the buoyancy.
25
Tax Revenue (TR) consists of Own Tax Revenue (OTR) and Share in Central Taxes (SCT).

Table-1 shows the performance of the AP and the ASC in mobilizing the resources from
the Non-Tax Revenue (NTR)26 sources during the reform period. The NTR performance is
defined as the NTR/TRR. The State’s own NTR performance of the AP has deteriorated from
15.52% in 1995-96 to 12.05% in 2008-09 i.e. by -3.47% while that of the ASC has deteriorated
from 16.68% to 9.28% i.e. by -7.40% during the same period. Further, the State’s own NTR
performance in the AP was less by 1.16% than that of the ASC in 1995-96 whereas the same was
more by 2.77% in the AP than that of the ASC in 2008-09. Thus, the NTR performance of the AP
has deteriorated less fast than that of the ASC during the reform period. One of the main
factors for the deterioration of the NTR performance in both the AP and the ASC during the
reform period is declining cost recovery rate of the Economic Services (ES) provided by the
States in India. The cost recovery rate in Andhra Pradesh for social services has increased from
2.40% in 1993-94 to 2.43% in 2003-04 whereas the same for economic services has come down
from 20.72% in 1993-94 to 16.51% in 2003-04. Similarly, the recovery rate for all the States
Combined (ASC) for social services has increased from 2.34% in 1993-94 to 2.74% in 2003-04
whereas the same for economic services has come down from 21.71% in 1993-94 to 19.53% in
2003-0427. The cost recovery rate, during the pre-reform period i.e. before 1995-96, for social
service in the AP has come down from 1.98% in 1990-91 to 1.22% in 1998-99 whereas the same
for economic services has increased from 12.60% to 15.47% during the same period. The cost
recovery rate for social services in the ASC has come down from 2.10% in 1990-91 to 1.93% in
1998-99 whereas the same for economic services has increased from 20.59% to 23.43% during
the same period28. However, as Table-2 shows, the buoyancy of the NTR in the AP is 1.12
whereas that of the ASC is 0.69 during the reform period. So, the NTR performance of the AP is
going to improve faster than that of the ASC in future. Nonetheless, the AP and the ASC have to
put in lot of efforts in improving the NTR performance in the days to come particularly by
increasing the recovery rate of economic services provided by state governments. Another
legitimate reason why recovery rate is to be increased in the case of economic services is that, in
Andhra Pradesh, nearly 85% of the ES expenditure is benefiting the non-poor and the remaining
15% is benefiting the poor whereas 45% of the SCS expenditure is benefiting the non-poor and
the remaining 55% of it is benefiting the poor in 1998-99929. Furthermore, it is expected that
the share of NTR is to be increased while that of the TR is to be reduced from the point of view
of increasing efficiency in the allocation of resources of the economy. It is to be noted that
despite the increase in irrigation rates, power tariff rates and other user charges in the AP
during the reform period, the NTR performance has deteriorated in the AP. This is really
paradoxical situation that is to be investigated further elsewhere. Really the NTR is very
fluctuating source of revenue in the AP.
26
Non-Tax Revenue (NTR) consists of only State’s Own Non-Tax Revenue (i.e. interest receipts,
dividends and profits, receipts from general services, social services, economic services and fiscal services,
royalties etc). This is because Grants from the Centre (GC) are discussed separately in this paper.
27
Purohit, Mahesh C (2006), Mobilizing Resources through Reform of State Non-Tax Sources for Planned
Development, Foundation for Public Economics and Policy Research, Delhi. A Report prepared for the
Planning Commission, SER Unit.
28
Sudhakar, S (2001), Cost Recovery of Government Budgetary Services: A Study of Andhra Pradesh
State, Asian Economic Review, Vol.43, No. 1, April. Pp. 62-94.
29
Ibid.

Table-1 reveals that Grants from the Centre (GC)30 received by the AP as a percent of its
TRR have increased from 15.58% in 1995-96 to 17.76% in 2008-09 i.e. by 2.18% whereas the
same for the ASC have increased significantly from 15.30% in 1995-96 to 19.87% i.e. by 4.57% in
2008-09. The GC/TRR was more by 0.28% for the AP than that of the ASC in 1995-96 while the
same was less by 2.11% for the AP than that of the ASC in 2008-09. Perhaps, the AP is not
rewarded well for its fiscal performance during the reform period by the Centre in transferring
its resources. Thus, the Central Finance Commission, Planning Commission, and the Central
Government have given more weight to the equity aspect of transferring the resources from the
Centre to the states than efficiency aspect.31 This may undermine the efficiency of the States in
allocating resources in the future. Anyhow, there is a need to balance efficiency and equity
aspects by the Finance Commission in the future. Plan grants from the Centre have increased
while the non-plan grants from the centre have come down during the reform period. This will
result in the neglect of maintenance of assets by the states created under the plan schemes.
Maintenance of the assets is as important as the creation of assets to increase or maintain the
productive of the assets and thereby increasing the growth of the economy. Thus non-plan
expenditure in a way is as important as plan expenditure for the development of the economy.
There is a wrong impression that non-plan expenditure is equivalent to non-development
expenditure which is to be erased from the minds of the policymakers, the public and the
academicians. As Table-2 shows, the buoyancy of the GC in AP was 0.98 whereas the same for
the ASC was 1.28 between 1995-96 and 2008-09. It demonstrates that fast growing states may
loose and less growing states may gain in terms of grants from the Centre. This may perhaps
create moral hazard problem undermining the efficiency in allocating resources by the states in
future. The XIII-Central Finance Commission must take into account this aspect in its
recommendations about the transfer of resources from the Centre to the States.
Table-1 shows own tax effort, defined as the OTR32/ (GSDP/GDP), of the AP and the ASC
during the reform period. The own tax effort of the AP has increased from 6.04% in 1995-96 to
9.63% i.e. by 3.59% in 2008-09 while that of the ASC has increased from 5.91% in 1995-96 to
6.75% i.e. by 0.84% in 2008-09. The own tax effort was 0.13% more in the AP than that of the
ASC in 1995-96 whereas the same was 2.88% in the AP than that of the ASC in 2008-09. The
OTR/TR, another measure of performance of own tax revenue, of the AP has increased from
66.07% in 1995-96 to 73.07% i.e. by 7% in 2008-09 while that of the ASC has decreased from
68.61% in 199-96 to 66.04% i.e. by 2.57% in 2008-09. Further, OTR/TR of the AP was less by
2.54% than that of the ASC in 1995-96 while the same was more by 7.03% than that of the ASC
in 2008-09. It is clear from the above that the own tax effort of the AP and the ASC has
increased during the reform period. But the increase in the own tax effort of the AP is far
exceeding that of the ASC during the reform period. This indicates that the initiation of the tax
reforms is not only important but also the way they are carried out is also important in getting
the intended results. In this case, the AP state is to be made a model for most of the other
states as far as the way the tax reforms are carried out in the AP. The satisfactory tax
performance of the AP is because of improved revenue from the commodity taxes [i.e. Sales
tax/VAT, State Excise Tax (SET) and Motor Vehicle tax (MVT)] besides taxes on income and
30
Grants from the Centre (GC) consist of state plan grants, central plan grants, centrally sponsored scheme
grants, special plan scheme grants, non-plan grants such as statutory grants and grants on account of natural
calamities.
31
See the Report of the Twelfth Finance Commission (2004), Government of India, New Delhi
32
Own Tax Revenue (OTR) consists of Taxes on Income and Expenditure (TIE) (i.e. agricultural income
tax and taxes on professions, trades, callings and employment), Taxes on Property (TP) (i.e. Land Revenue,
Stamps and Registration Fees, and urban immovable property tax), and Taxes on Commodities (TC).

expenditure (TIE) as is evident from the analysis below. This reflects the success of tax reforms
in the AP between 1995-96 and 2008-09. The buoyancy of the OTR in the AP, as Table-2 reveals,
was 1.34 during 1995-96 and 2008-09 while that of the ASC was 1.09 during the same period.
So, the OTR performance in the AP is going to be better than that of the ASC in future.
As Table-1 shows, the SCT/(GSDP/GDP) of the AP has increased from 3.10% in 1995-96
to 3.55% i.e. by 0.45% in 2008-09 while that of the ASC has increased from 2.70% to 3.47% i.e.
by 0.77% during the same period. The SCT/(GSDP/GDP) was 0.40% more in the AP than that of
the ASC in 1995-96 while same was 0.08% more than that of the ASC in 2008-09. The SCT/TR,
another measure of the degree of transfer of resources from the Centre, has decreased from
33.92% in 1995-96 to 26.92% i.e. by 7% in 2008-09 while that of the ASC has increased from
31.38% to 33.95% i.e. by 2.57% during the same period. The SCT\TR was 2.54% more in the AP
than that of the ASC in 1995-96 and the same was 7.03% less in the AP than that of the ASC in
2008-09. Thus, the transfer of resources from the Centre in the form of SCT for the AP has
deteriorated in 2008-09 compared to 1995-96 as is evident from the awards of the X, XI and XII
Central Finance Commissions in terms of the AP’s share in total transfers from the Centre33.
Perhaps, this is because of the more weight given to equity by the Central Finance Commissions
in devolving tax resources from the Centre to the States. As Table-2 shows, the buoyancy of the
SCT in AP was 1.99 during 1995-96 and 2008-09 while that of the ASC was 1.17 during the same
period giving an impression that the transfer of resources from the Centre to the AP may
improve in the days to come.
Own Tax Revenue (OTR) consists of three components which are TIE, TP and TC. As
Table-1 shows, TC claims around 89% of the OTR in the AP in 2008-09 while that of the ASC is
84% in 2008-09. Thus the states depend on indirect taxes for their OTR which are generally
regressive or pro-rich. As Table-1 reveals, the TIE/OTR has increased from 0.82% in 1995-96 to
1.09% i.e. by 0.27% in 2008-09 while that of the ASC has come down from 1.56% to 1.00% i.e. by
0.56 during the same period. The TIE/OTR was 0.74 less in the AP than that of the ASC in 1995-
96 and the same was 0.09% more in the AP than that of the ASC in 2008-09. The improved
performance of the AP in the case of the TIE is mainly because of the significant increase in the
profession tax rates in 1996 as already mentioned in section-II of the paper. Still there is a lot of
potential to increase the revenue from the TIE in all the states including the AP by bringing
unorganized self-employed persons under the profession tax net. So, the States have to put in
lot of effort to increase the revenue under the TIE in the future. The buoyancy of the TIE in the
AP, as Table-2 reveals, was 1.60 during 1995-96 and 2008-09 while that of the ASC was 0.91
during the same period. Profession tax collections are weak from self-employed persons.34
As Table-1 reveals, the TP/OTR has come down from 11.50% in 1995-96 to 10.30% i.e.
by -1.20% in 2008-09 while that of the ASC has increased from 11.36% in 1995-96 to 14.64% i.e.
by 3.28% in 2008-09. The TP/OTR was 0.14% more in the AP than that of the ASC in 1995-96
and the same was -4.34 less in the AP than that of the ASC in 2008-09. The AP performed poorly
as far as the TP is concerned. The AP has to put in lot of effort in raising the TP revenue in the
days to come at least equivalent to the ASC ratio of 14.64% in 2008-09. Perhaps, the decline in
the TP/OTR in the AP in 2008-09 is due to global economic recession that affected the real
33
For evidence see Thirteenth Finance Commission Report for 2010-2015, Vol. I, December 2009,
Chapter-3, page-28.
34
Sreedevi, N. (2009), State Finances of Andhra Pradesh: An Overview, published in Mahendra Dev et al
(ed), Human development in Andhra Pradesh: Experiences, Issues and Challenges, Centre for Economic
and Social Studies, Hyderabad, Andhra Pradesh.

estate business adversely in Andhra Pradesh as elsewhere. However, the AP has to increase the
TP/OTR by 4.34 percentage points (i.e. Rs.1551 crore in 2008-09) compared to the ASC TP/OTR
of 14.64% in 2008-09. For instance, the rate of stamp duty in Andhra Pradesh is 5% of the
market value of property sold. The same is 8.4% in Bihar, 13% in Tamil Nadu, 10% in Rajasthan,
10% in Gujarat. Thus the rate of stamp duty is one of the lowest in India.35 The share of direct
taxes (TIE and TP in the OTR in AP is to be increased while that of the taxes on commodities (TC)
is to be decreased to make the AP tax system less regressive. The share of direct taxes (TIE and
TPP) in the OTR of the AP is 11.39% in 2008-09 while that of the ASC is 15.64% in 2008-09
indicating the less regressive tax system of the ASC than that of the AP. The share of indirect
taxes (TC) in the OTR of the AP is 88.60% in 2008-09 while that of the ASC is 84.37% in 2008-09.
The buoyancy of TP in AP, as Table-2 reveals, was 1.44 during 1995-96 and 2008-09 while that of
the ASC was 1.27 during the same period.
As Table-1 shows, the TC36/OTR of the AP has increased from 87.70% in 1995-96 to
88.60% i.e. by 0.90% in 2008-09 while that of the ASC has come down from 87.07% in 1995-96
to 84.37% i.e. by -2.70% in 2008-09. The TC/OTR was 0.63% more in the AP than that of the ASC
in 1995-96 and the same was 4.23% more in the AP than that of the ASC in 2008-09. This
confirms the more regressive pattern of the AP tax system than that of the ASC. The AP has to
focus its attention to reduce the regressive pattern of its tax system in the days to come. The
inequalities in terms of the Gini-Coefficient of consumption expenditure have increased in the
AP37. The tax system of the AP might have contributed its might in increasing the inequalities of
income and consumption during the post reform period. The buoyancy of the TC in AP, as
Table-2 reveals, was 1.37 between 1995-96 and 2008-09 while that of the ASC was 1.07 during
the same period. It should be noted that theoretically, commodity taxes are believed to be
regressive (pro-rich) because the proportion of income devoted to consumption decreases as
income increases resulting in higher proportion of tax to income ratio at the bottom of the
income scale.38
As Table-1 reveals, the (ST/VAT)/OTR of the AP has come down in AP from 72.12% in
1995-96 to 68.64% i.e. by -3.48% in 2008-09 while that of the ASC has increased from 55.40% in
1995-96 to 60.46% i.e. by 5.06% in 2008-09. The (ST/VAT)/OTR was 16.72% more in the AP than
that of the ASC in 1995-96 and the same was 8.18% more in the AP than that of the ASC in 2008-
09. The decrease in ST/OTR in AP is mainly because of the prohibition policy of the AP
government in 1995-96. The prohibition was introduced by the AP government in 1995-96 and
relaxed in 1997-97 and eventually the prohibition was lifted in 1999. Since the time of lifting
prohibition in the AP, revenue from the State Excise Tax (SET) has increased significantly
reducing the (ST/VAT)/OTR in 2008-09. The buoyancy of ST/VAT in AP was 1.31 during 1995-96
and 2008-09 while that of the ASC was 1.15 during the same period. It is to be noted that sales
35
Sarma, J.V.M. (?), An Overview of state tax system in India (other than Sales Taxation). It is a report
prepared for the Asian Development Bank. P.16.
36
Taxes on Commodities (TC) consist of Sales Tax/Value Added Tax (ST/VAT) (i.e. state sales tax, state
VAT, central sales tax, sales tax on motor spirit and lubricants, surcharge on sales tax, turnover tax etc.),
State Excise tax (SET), Motor Vehicle Tax (MVT) and other commodity taxes (i.e. taxes on goods and
passengers, taxes and duties on electricity, entertainment tax etc.).
37
The Gini Ratio of Consumption Expenditure of Andhra Pradesh has increased from 28.93 for rural and
32.31 for urban in 1993-94 to 29.40 for rural and 37.43 for urban in 2004-05. (Source: Human
Development Report of Andhra Pradesh, 2007, Centre for Economic and Social Studies, Hyderabad,
Chapter-4, p.42.)
38
Musgrave, Richard A. and Musgrave, Peggy B (1989), Public Finance in Theory and Practice, Fifth
Edition, Tata McGraw-Hill Publishing Company Ltd., New Delhi.

tax reform was started in the AP in the mid-1980s39. However, comprehensive tax reforms were
initiated in the AP more intensively and systematically since 1995-96.
As Table-1 shows, the SET/OTR of the AP has increased from 1.90% in 1995-96 to
13.43% i.e. by 11.53% in 2008-09 while that of the ASC has decreased from 13.30% in 1995-96
to 11.72% i.e. by -1.58% in 2008-09. The SET/OTR was -11.40 less in the AP than that of the ASC
in 1995-96 and the same was 1.71% more in the AP than that of the ASC in 2008-09. Prohibition
was relaxed in AP in 1997-98 and was lifted completely in 1999. At present, the state is
depending more and more on the SET. This is to be reconsidered given that the SET is regressive
tax since 80% of the SET comes from the poor. Furthermore, prohibition is an anti-poverty
measure in as much as 85 per cent of the revenue used to come from the poor people.40 As
Table-2 shows, the buoyancy of the SET in AP was 2.91 during 1995-96 and 2008-09 while that
of the ASC was 1.00 during the same period.
As Table-1 shows, the MVT/OTR of the AP has decreased from 9.44% in 1995-96 to
5.39% i.e. by -4.05% in 2008-09 while that of the ASC has decreased marginally from 5.82% in
1995-96 to 5.32% i.e. by -0.50% in 2008-09. The MVT/OTR was 3.62% more in the AP than that
of the ASC in 1995-96 and the same was 0.07% more in the AP than that of the ASC in 2008-09.
It is to be noted that the MVT and TP are progressive taxes. Hence, the MVT/OTR is to be
increased in AP as well as in other states to make the state tax system less regressive in future.
As Table-2 shows, the buoyancy of MVT in AP was 1.06 during 1995-96 and 2008-09 while that
of the ASC was 1.00 during the same period.
As Table-1 shows, the (OTR+NTR)/TRE, a measure of fiscal empowerment, of the AP has
increased from 60.36% in 1995-96 to 64.91% in 2008-09 while that of the ASC has come down
from 59.95% to 58.38% during the same period. It demonstrates that the ability of the AP
government to spend more on current expenditure from its own sources of revenue has
increased while that of the ASC has come down. Thus, the fiscal empowerment of the AP
government has improved while that of the ASC has deteriorated during the reform period. [To
be continued in the following issue]
39
The per capita sales tax was Rs.74.81 for Andhra Pradesh which was less than that of Kerala (Rs.107.86),
Tamilnadu (Rs.139.76). The Ordinance issued on 8th July, 1983 envisages increase in the rates of Sales
Tax on 99 commodities. The increase ranges from 1% to 7% as indicated below. The general rate of Sales
Tax has been increased by 1% i.e., from 4% to 5%. The existing rate of 4% was fixed in 1974 and there
has been no increase for the last nine years. Extent of enhancement in the number of items was: the rate of
tax 1% and below – 41 commodities; 2% - 23 commodities; 3% - 29 commodities; 4% to 7% - 6
commodities. Essential commodities were exempted and the tax rates on luxury items were kept high. The
MVT is increased by 15% on some classes of motor vehicles. Government has launched a scheme to sell
rice at Rs.2 per kg. to the weaker sections form the Ugadi day this year (w.e.f. April, 1983). Under this
scheme, every family having an annual income up to Rs.6000 will get 25 kgs of rice per month. (AP
Budget speech for 1983-84, Shri N. Bhaskar Rao).
40
See AP budget speech for 1995-96, N. Chandrababu Naidu.

2. CAPITAL RECEIPTS
As Table-3 reveals, the ID41/TCR42 of AP has increased from 15.01% in 1995-96 to 66.35%
in 2008-09 while that of the ASC has increased from 17.98% in 1995-96 to 64.11% in 2008-09.
Thus, the share of internal borrowing of the AP and the ASC in TCR has increased significantly
during the reform period.
The LAC43/TCR of AP has come down from 36.53% in 1995-96 to 12.09% in 2008-09
while that of the ASC has come down from 44.92% in 1995-96 to 6.36% in 2008-09. Thus, both
the AP and the ASC dependence on the Central loans have come down. But, the LAC of the AP is
higher than that of the ASC. The RLA44/TCR of the AP has come down from 36.03% in 1995-96 to
1.68% in 2008-09 while that of the ASC has come down from 8.02% in 1995-96 to 4.10% in 2008-
09. Thus, the AP could not recover properly the loans given by it to other public sector
undertakings particularly. RLA must be improved by the AP in view of its high LAC. The SS45/TCR
of AP has increased from 5.97% in 1995-96 to 10.38% in 2008-09 while that of the ASC has
increased from 12.23% in 1995-96 to 16.39% in 2008-09. However, the AP is depending less on
SS than the ASC for its capital receipts.
The RF46/TCR of AP has increased from 6.46% in 1995-96 to 36.47% in 2008-09 while
that of the ASC has increased from 4.81% in 1995-96 to 9.05 in 2008-09. Thus the AP is
depending more and more on the RF for mobilization capital receipts for capital expenditure
during the post-reform period. The AP is depending mostly in internal borrowing followed by
reserve funds. The AP is depending less on SS than the ASC for mobilization of capital resources.
The TCR/GSDP of AP has increased from 5.39% in 1995-96 to 5.73% in 2008-09 while that of the
ASC has come down from 4.03% in 1995-96 to 3.51% in 2008-09. The AP has increased its
capital expenditure and capital outlay, as is evident from Table-6, by mobilizing more capital
resources compared to the ASC during the post reform period.
41
Internal Debt (ID) consists of market loans, loans from the Life Insurance Corporation of India, loans
from State Bank of India and other banks, loans from National Bank for Agriculture and Rural
Development, loans from National Cooperative Development Corporation, Special securities issues to
National Small Savings Fund and others.
42
Total Capital Receipts (TCR) consist of external debt, internal debt (ID), loans and advances from the
Centre (LAC), recovery of loans and advances (RLA), small savings and provident funds etc. (SS), reserve
funds (RF), etc.
43
Loans and Advances from the Centre (LAC) taken by a state include loan against state plan schemes,
central plan schemes, centrally sponsored schemes, non-plan loans (i.e., share of small savings, natural
calamities), ways and means advances from the Centre, loans for special schemes etc.
44
Recovery of Loans and Advances (RLA) by a state include housing, urban development, crop
husbandry, food storage and warehousing, cooperation, minor irrigation, power projects, village and small
industries, industries and minerals, road transport, government servants etc.
45
Small Savings (SS) include state provident funds, etc.
46
Reserve Funds (RF) include depreciation/ renewal reserve funds, sinking funds, famine relief fund etc
and deposits and advances.

3. REVENUE EXPENDITURE
As Table-4 (row 13) reveals, the TE47/(GSDP/GDP) of AP has increased from 16.10% in
1995-96 to 22.01% i.e. by 5.91% in 2008-09 while that of the ASC increased from 15.09% in
1995-96 to 16.77% i.e. by 1.68% in 2008-09. The TE/ (GSDP/GDP) was 1.01% more in the AP
than that of the ASC in 1995-96 and the same was 5.24% more in the AP than that of the ASC in
2008-09. A significant increase in the size of public expenditure in the AP has taken place
despite the liberalization, privatization and globalization policy of India during the reform
period. Rather, the role of the state has been redefined rather than reducing its role during the
reform period in AP as well as in ASC. It appears higher role is assigned to the states than the
centre in India during the reform period. The Central Government Total Expenditure (Revenue
and capital expenditure combined) as per cent of GDP was 14.2% in 1997-98 and 14.3% in 2008-
09 (BE).48 Thus, it appears that the role of the States has been increasing while that of the
Centre has remained almost the same during the reform period i.e. between 1995-96 and 2008-
09. This is perhaps because of the fiscal decentralization process that has begun in India since
1992 onwards. However, state level benefit incidence studies are to be undertaken to examine
the equity aspect of public expenditure.49 There is also general consensus in India that output
and outcome of public expenditure are to be improved in India.
As is evident from Table-4, TRE50/ (GSDP/GDP) has increased from 13.17% in 1995-96 to
18.32% i.e. by 5.15% in 2008-09 in AP while that of the ASC has increased from 13.39% to
13.86% i.e. by 0.47% during the same period. The TRE/ (GSDP/GDP) was 0.22 less in the AP
than that of the ASC in 1995-96 and the same was 4.46% more in the AP than that of the ASC in
2008-09. The buoyancy of the TRE was 1.23 during 1995-96 and 2008-09 while that of the ASC
was 1.02 between 1995-96 and 2008-09 (Table-5). There is appreciable increase in the public
expenditure in the AP during the reform period. But, what is the quality of it? It is examined
below. As is evident from the regression coefficients estimated by simple linear regression
method (using Excel program) between the public expenditure (TE, TRE and CO) (independent
variables) and the GSDP/GDP (dependent variable) given in Table-8, the responsiveness of the
GSDP to public expenditure of the AP is less than that of the ASC raising doubts about the
quality of the public expenditure in the AP during the reform period. It may be noted that the
CARG (%) of the TE is 14.93% for the AP that is higher than that of the ASC i.e. 13.38% during the
reform period. Whereas the CARG of the GSDP for AP is 12.24% that is lower than that of the
ASC i.e. 12.46%. Thus, CARG of TE is higher and the CARG of GSDP is lower for the AP than that
of the ASC. It also raises doubts about the quality of the public expenditure in Andhra Pradesh
during the reform period under study despite the expenditure and institutional reforms
undertaken by the AP as narrated in section-II of the paper. The Andhra Pradesh Government
has to focus its attention on increasing the quality of its expenditure in the days to come so that
47
Total Expenditure (TE) consists of Total Revenue Expenditure (TRE) and Capital Outlay (CO).
48
Economic surveys, 2002-03 and 2008-09, Ministry of Finance, Government of India.
49
Reddy, K.N. and Sudhakar, S (1989), Incidence of Public Expenditure in India: A Case Study of Andhra
Pradesh, Commonwealth Publishers, New Delhi.
50
Total Revenue Expenditure (TRE) consists of Development Expenditure, Non-Development Expenditure,
Grants-in-aid and Contributions (GCS), Compensation and Assignments to Local Bodies and Panchayat Raj
Institutions (GCS) and Reserve with Finance Department of the Government.

GSDP growth rate would increase further through increasing productivity of the public
expenditure.
As Table-4 shows, the DE51/TRE in AP has increased from 67.50% in 1995-96 to 70.21%
i.e. by 2.71% in 2008-09 while that of the ASC has decreased from 61.57% in 1995-96 to 58.26%
i.e. by 3.31% in 2008-09. The DE/TRE was 5.93% more in the AP than that of the ASC in 1995-96
and the same was 11.95% more in the AP than that of the ASC in 2008-09. This seems to be in
conformity with the expenditure reforms in the AP as narrated in section-II. The AP government
attempted to reduce general services expenditure during the reform period. So, the significant
increase in TRE/GSDP in AP is mainly because of the significant increase in DE/TRE during the
reform period. Thus, the increase in the TRE in AP is moving in the right direction contributing
to the development of the state contrary to the TRE of the ASC of which DE/TRE is decreasing
undermining the development of the ASC during the reform period. The buoyancy of the DE, as
is evident from Table-5, with respect to the GSDP in AP was 1.25 during 1995-96 and 2008-09
while that of the ASC was 0.99 between 1995-96 and 2008-09.
As Table-4 reveals, the NDE52/TRE in AP has come down from 31.78% in 1995-96 to
29.25% i.e. by 2.53% in 2008-09 while that of the ASC has increased from 37.38% in 1995-96 to
38.86% i.e. by 1.48% in 2008-09. The NDE/TRE was 5.6 less in the AP than that of the ASC in
1995-96 and the same was 9.61% less in the AP than that of the ASC in 2008-09. Thus the
allocation of TRE of AP is in the desired direction contributing to the development of the state of
AP contrary to the ASC the development of which is undermined because of the increase in the
NDE during the reform period. The buoyancy of the NDE, as is evident from Table-5, with
respect to the GSDP/GDP in AP was 1.19 between 1995-96 and 2008-09 while that of the ASC
was 1.05 during the same period.
Grants-in-aid and Contributions by States (GCS) include grants, compensation and

assignments to local bodies and Panchayati Raj Institutions (PRI) provided by a state. It gives an
idea about the transfer of resources from the State to the local self governments highlighting
the degree of fiscal decentralization from the state to the local self governments. This is
mandated under the 73rd and 74th Amendments of the Indian Constitution in 1992 by giving
constitutional status to the local self governments and assigning fiscal powers to them. The
states have a constitutional obligation to strengthen the local self governments by transferring
more resources to them through the state budgets. Table-4 shows that the GCS/TRR of AP has
come down from 0.78% in 1995-96 to 0.53% i.e. by 0.25% in 2008-09 while that of the ASC has
increased from 1.12% in 1995-96 to 2.77% i.e. by 1.65% in 2008-09. The GCS/TRR was 0.34 less
in the AP than that of the ASC in 1995-96 and the same was 2.24% less in the AP than that of the
ASC in 2008-09. Fiscal centralization is taking place in AP contrary to the spirit of the 73rd and
74th Amendments to the Indian Constitution in 1992 which obligates the states to decentralize
the fiscal powers and responsibilities to the local self governments. However, there is fiscal
decentralization trend in the ASC during the reform period. Hence, the AP has to focus its
attention on speeding up fiscal decentralization in the days to come to improve the efficiency in
the allocation of resources by providing the public goods according to the preferences of the
51
Development Expenditure (DE) includes expenditure on Social Services (SCS) and Economic Services
(ES).
52
Non-Development Expenditure (NDE) includes expenditure on organs of state, fiscal services, interest
payments (IP) and servicing of debt, administrative services (AS), pensions, miscellaneous general
services.

local people. Furthermore, there is a lot of under spending in the Urban Local Bodies of the AP
in providing local facilities to the local people53. Delivery mechanism of government programs
can be strengthened by strengthening the local self governments. The Eleventh Plan can be
implemented successfully only by improving the quality of the government services that is
possible only when the local self governments are strengthened. Inclusive and sustainable
growth is possible only when local self governments are strengthened. In this aspect, the State
governments have a greater role. The buoyancy of the GC, as is evident from Table-5, was 1.03
during 1995-96 and 2008-09 while that of the ASC was 1.75 during the same period indicating
potential increase in centralization of fiscal power in the AP in future.
As Table-4 reveals, the SCS54/TRE has decreased from 44.95% in 1995-96 to 41.54% i.e.
by 3.41% in 2008-09 while that of the ASC has decreased from 36.97% in 1995-96 to 36.62% i.e.
by 0.35% in 2008-09. The SCS/TRE was 7.98% more in the AP than that of the ASC in 1995-96
and the same was 4.92% more in the AP than that of the ASC in 2008-09. There is a significant
decrease in the SCS/TRE in AP during the reform period while it remained almost the same in
ASC during the same period. However, the SCS/TRE is very much higher in AP than in the ASC
during the reform period which is to be appreciated. But, the decrease in the SCS/TRE in the AP
and ASC goes against the government policy priority to the social sector the development of
which is essential from the point of view of human development and equity. It is to be noted
that nearly 55% of the benefits of the SCS go to the poor while the remaining 45% of the
benefits go to the non-poor in AP.55 Furthermore, the benefits of the SCS accrue to the society
as whole possess public goods character. So, the State has to provide the SCS services. The
buoyancy of the SCS, as is evident from Table-5, in AP with respect to the GSDP was 1.20 during
1995-96 and 2008-09 while that of the ASC was 1.02 during the same period. As Table-4 (row-8)
reveals, Social Expenditure (SE) is the sum of SCS and (Rural Development) RD. The SE/TRE in AP
has come down from 50.30% in 1995-96 to 47.26% i.e. by 3.04% in 2008-09 while that of the
ASC has come down from 41.50% in 1995-96 to 40.92% i.e. by 0.58% in 2008-09. The SE/TRE
was 8.80% more in the AP than that of the ASC in 1995-96 and the same was 6.34% more in the
AP than that of the ASC in 2008-09. Hence, the AP has to increase its public expenditure on the
social sector in the days to come.
As Table-4 shows, the ES56/TRE of AP has increased from 22.55% in 1995-96 to 28.83%
i.e. by 6.28% in 2008-09 while that of the ASC has come down further from 24.60% in 1995-96 to
21.64% i.e. by 2.96% in 2008-09. The ES/TRE was 2.05 less in the AP than that of the ASC in
1995-96 and the same was 7.19% more in the AP than that of the ASC in 2008-09. The benefits
of the ES provided by the state go to the extent of 85% to the non-poor and the remaining 15%
53
See Sudhakar, S. (2008), Fiscal Performance of Urban Local Bodies in Andhra Pradesh: An Assessment,
Urban India, Vol. XXVIII, January-December, No. 1 and 2, A Journal of the National Institute of Urban
Affairs, New Delhi, pp. 49-82.
54
Social Services (SCS) expenditure includes expenditure on education, sports, art and culture, medical
and public health, family welfare, water supply and sanitation, housing, urban development, welfare of
SCs, STs, and BCs, labor and labor welfare, nutrition, relief on account of natural calamities and others.
55
Op.Cit. Sudhakar, S. (2001).
56
Economic Services (ES) expenditure includes expenditure on agriculture and allied activities (i.e., crop
husbandry, soil and water conservation, animal husbandry, dairy development fisheries, forestry and wild
life, plantations, food storage and warehousing, agricultural research and education, agricultural finance
institutions, cooperation and other agriculture programs), rural development (RD), special area programs,
irrigation and flood control (IE), energy, industry and minerals, transport and communications, science,
technology and environment, general economic services (i.e., tourism, civil supplies, secretariat etc.)

go to the poor57. Furthermore, most of the benefits of the ES are of private type which can be
provided by the private sector by creating markets or complementing the markets. So, most of
the ES can be provided by the market. Thus, the State should assume more responsibility in the
case of SCS than the ES. The Expenditure on ES is to be decreased and that on SCS is to be
increased from the point of view of both efficiency and equity. So, the AP and the ASC have to
increase the SCS/TRE and decrease the ES/TRE over time in the future encouraging private
sector participation in providing economic services. As Table-5 shows, the buoyancy of the ES
with respect to the GSDP in AP was 1.35 during 1995-96 and 2008-09 while that of the ASC was
0.94 during the same period.
As Table-4 shows, the (interest payments) IP/TRE in AP has come down from 14.25% in
1995-96 to 12.88% i.e. by 1.37% in 2008-09 while that of the ASC has increased from 15.13% in
1995-96 to 16.66% i.e. by 1.53% in 2008-09. The IP/TRE was 0.88% less in the AP than that of
the ASC in 1995-96 and the same was 3.78% less in the AP than that of the ASC in 2008-09.
Same is the case with IP/TRR as is evident from Table-4. The AP performance in the case of
interest payments is far better than that of the ASC resulting in the reduction of the NDE/TRE in
AP. The Debt Swap Scheme of the Centre is the main reason why the interest payments have
come down in AP because of effective use of the Debt Swap Scheme benefits from the Centre.
The buoyancy of the IP with respect to the GSDP in AP was 1.21 during 1995-96 and 2008-09
while that of the ASC was 1.09 during the same period. Interest payments at the States’ level
have come down because of the Debt Swap Scheme and Debt Consolidation and Relief Facility
as recommended by the Twelfth Finance Commission. There is still much scope at the AP level
to reduce interest payments by reducing LAC.
As Table-4 shows, the (administrative services) AS/TRE in AP has come down further
from 7.49% in 1995-96 to 5.72% i.e. by 1.77% in 2008-09 while that of the ASC has come down
from 9.23% in 1995-96 to 9.10% i.e. by -0.13% in 2008-09. The AS/TRE was 1.74 less in the AP
than that of the ASC in 1995-96 and the same was 3.38% less in the AP than that of the ASC in
2008-09. There is a significant decrease in the AS/TRE in AP compared to the ASC. This is
another reason why NDE/TRE has come down during the reform period in AP. The buoyancy of
the AS, as evident from Table-5, with respect to the GSDP in AP was 1.12 during 1995-96 and
2008-09 while that of the ASC was 1.01 during the same period. However, it may be noted that
the AS/(GSDP/GDP) has increased from 0.98% in 1995-96 in AP to 1.04% i.e. by 0.06% in 2008-09
while that of the ASC has increased from 1.23% to 1.26% i.e. by 0.03% during the same period.
It may mean productivity of government services has come down during the reform period if
government services are regarded as input in increasing GSDP/GDP. It is a subject to be debated
and studied further. Table-4 (row 12) shows that the (irrigation expenditure) IE/TRE of the AP
has increased from 7.71% in 1995-96 to 9.10% i.e. by 1.39% in 2008-09 while that of the ASC has
decreased from 4.93% in 1995-96 to 2.87% i.e. by 2.06% in 2008-09. A through study is needed
to know the impact of irrigation expenditure on agricultural growth in the AP.
57
Op. Cit. Sudhakar, S. (2001).

4. CAPITAL EXPENDITURE
As Table-6 reveals, the TCE58/ (GSDP/GDP) in AP has increased from 4.46% in 1995-96 to
5.21% in 2008-09 while that of the ASC has increased from 3.01% in 1995-96 to 4.04% in 2008-
09. The total capital expenditure is higher in the AP than in the ASC during the reform period.
Capital Outlay59 (CO) as a per cent of TCE in AP has increased from 65.69% in 1995-96 to 70.80%
in 2008-09 while that of the ASC has increased from 56.77% to 61.09% during the same period.
CO/TCE is higher in the AP than in the ASC during the reform period. This indicates creation of
more new assets owned by the state of AP than that of the ASC during the reform period. The
DID60/TCE in the AP has increased from 2.96% in 1995-96 to 36.35% in 2008-09 while that of the
ASC has increased from 3.24% in 1995-96 to 28.60% in 2008-09. The repayment of debt is
higher in AP than that of the ASC because of higher internal borrowing by the AP during the
reform period.
The RLC/TCE in AP has come down from 7.97% in 1995-96 to 4.14% in 2008-09 while
that of the ASC has come down from 14.73 in 1995-96 to 3.54% in 2008-09. The decrease in
RLC/TCE in both the AP and ASC is because of the sates resorting to market borrowing instead of
borrowing from the Centre during the reform period due to the Debt Swap Scheme. The
LAS/TCE in AP has increased from 23.38% in 1995-96 to 25.18% in 2008-09 while that of the ASC
has come down from 25.26% to 6.77% during the same period. It should be noted that RLA/TCR
has come down in the AP while that of the LAS 61/TCE has increased reflecting poor recovery of
loans in the AP. This may add to fiscal crisis in future in the AP. Poor recovery of loans forces
the AP state to borrow more increasing the debt burden and threatening the debt sustainability
in the long run. DE/CO has come down from 99.34% in 1995-96 to 98.47% in 2008-09 while that
of the ASC has come down from 96.45% to 95.77% during the same period. This also creates
fiscal problem because decrease in development expenditure undermines the development of
the economy. The NDE/CO in AP has increased from 0.66% in 1995-96 to 1.53% in 2008-09
while that of the ASC has increased from 3.55% to 4.23% during the same period. The DID/TCR,
DID/ID, (DID+RLC)/ (ID+LAC), and (DID+RLC)/ (ID+LAC+SS) demonstrate the ability of the State to
create new assets. Increase in these ratios indicates the deterioration in the ability of the state
to create new assets in the public sector and vice-versa. The DID/TCR, DID/ID, (DID+RLC)/
(ID+LAC), and (DID+RLC)/ (ID+LAC+SS) have increased in AP from 2.44%, 16.29%, 17.54%, and
15.72% in 1995-96 to 3.30%, 49.88%, 46.99%,41.50% in 2008-09 respectively while that of the
ASC also has increased from 2.41%, 13.44%, 21.32% and 18.09% to 3.87%, 43.60%, 44.57% and
36.16% respectively during the reform period. It reveals the decreasing ability of the AP and the
ASC in creating new assets that increase the productivity in the public sector and thereby
increase GSDP/GDP.
58
Total Capital Expenditure (TCE) consists of Capital Outlay (CO), Discharge of Internal Debt (DID),
Repayment of Loans to the Centre (RLC) and Loans and Advances by the State (LAS).
59
Capital Outlay (CO) is divided into Development Expenditure (i.e. expenditure on SCS and ES) and Non-
Development Expenditure (i.e. expenditure on general services).
60
Discharge of Internal Debt (DID) includes repayment of loans by a state against market loans, loans
from the LIC, loans from the NABARD, etc.
61
Loans and Advances by the State (LAS) include developmental loans and non-developmental loans
provided by a state.

6. REVENUE DEFICIT, FISCAL DEFICIT, PRIMARY DEFICIT/BALANCE AND PUBLIC DEBT
As Table-7 shows, the (Gross Fiscal Deficit) GFD/GSDP of AP has come down from 2.92%
in 1995-96 to 2.81% i.e. by 0.11% in 2008-09 while that of the ASC has come down from 2.90%
to 2.26% i.e. by 0.64% during the same period. The GFD is still higher in the AP than that of the
ASC in 2008-09. The GFD was 0.02% more in the AP than that of the ASC in 1995-96 and the
same was 0.55% more in the AP than that of the ASC in 2008-09. So, the AP state has to put in
effort to reduce the GFD by 0.55% if GFD of the ASC is taken as norm. This is to be done by
increasing RLA and undertaking self-liquidating capital projects in the AP. The (Revenue Deficit)
RD/GSDP in AP has come down from 0.89% in 1995-96 to -0.19% (surplus) in 2008-09 while that
of the ASC has come down from 0.76% to -0.57% during the same period. The revenue surplus
is less in AP than that of the ASC in 2008-09. The (primary deficit) PD/GSDP of AP has come
down from 1.07% in 1995-96 to -0.56% (surplus) in 2008-09 while that of the ASC has come
down from 0.88% to -0.05% during the same period. The primary surplus is more in the AP than
that of the ASC enabling the AP government to spend more on creation of capital assets for
promoting growth of the AP. So, the fiscal performance of the present government is better
than the past government in AP compared to the ASC in 2008-09 as is evident from higher
primary surplus in the AP than that of the ASC.
The PUD/(GSDP/GDP in AP has increased from 18.34% in 1995-96 to 24.92% i.e. by
6.58% in 2008-09 while that of the ASC has increased from 19.59% to 29.08% i.e. by 9.49%
during the same period. The PUD/GSDP in the AP is already in conformity with the
recommendation of the XIII-Central Finance Commission of India.62 The PUD/(GSDP/GDP) was
1.25% less in the AP than that of the ASC in 1995-96 and the same was 4.16% less in the AP than
that of the ASC in 2008-09. The IP/PUD, a measure of average interest cost of the public debt, in
the AP has come down from 10.24% in 1995-96 to 9.47% in 2008-09 while that of the ASC has
come down from 10.33% to 7.94% during the same period. The cost of public debt of AP is
higher than that of the ASC in 2008-09. The nominal GSDP annual growth rate in AP was 13.17%
in 2008-09 which is higher than the IP/PUD i.e. 9.47%. Similarly, the nominal GDP of India was
15.48% in 2008-09 which is higher than the IP/PUD of the ASC i.e. 7.94%. So, the public debt is
sustainable in both the AP and ASC during the 2008-09 in the long run since GSDP growth rate is
higher than the average interest rate on the public debt.
62
See the Report of the XIII-Finance Commission of India for 2010-2015, Chapter-1, p.4, (December,
2009).

V. CONCLUSION:
India is a quasi-federal country having three levels of government i.e. the Centre, States
and Local Self-Governments. The States are expected play an increasing role in attaining the
objectives of Indian planning including targeted inclusive growth. The States encountered the
fiscal stress following the Center’s fiscal reforms undertaken in the beginning of the 1990s. As a
result, the most of the States undertook fiscal reforms in the mid-1990s including the State of
Andhra Pradesh. The states’ level fiscal reforms were facilitated by the Centre, Finance
Commissions and Reserve Bank of India through number of steps like Fiscal Reform Facility, Debt
Swap Scheme etc. In view of this, the present paper examined the fiscal performance of the
Andhra Pradesh State during the period between 1995-96 and 2008-09 and compared the same
with the fiscal performance of the All States Combined as a benchmark. The paper reveals that
the Andhra Pradesh fiscal performance is far better than that of the All the States Combined in
terms of many fiscal indicators confirming the success of the fiscal reforms undertaken in the AP
state. Tax reforms in the AP have been more successful than that of the ASC. The AP is fiscally
more empowered than the ASC as reflected in OTR/TR. The AP debt is more sustainable than
the ASC. Revenue Deficit and Primary Deficit have improved more in the AP than in the ASC but
not the Gross Fiscal Deficit. However, the fiscal situation may deteriorate in future in the AP
unless the following steps are taken by the AP state. They are: (1) Non-tax revenue is to be
increased by improving cost recovery rate of economic services particularly; (2) recovery of
loans and advances is to be improved in view of increasing loans and advances by the state and
decreasing recovery of loans and advances by the state in the AP; (3) Property Tax revenue is to
be improved by increasing property tax rates in the AP since the rates are one of the lowest in
the state compared to some of the other states in India; (4) MVT revenue is to be increased by
increasing rates of MVT; (5) quality of public expenditure is to be improved by better targeting
the expenditure programs and improving the public delivery system; (6) CO is to be increased to
create more new assets since increasing amount of the borrowed funds is spent for the
repayment of the public debt; (7) Debt cost is to be reduced; (8) fiscal centralization is to be
reduced by devolving more funds to the local self-governments by the AP state; (9) the AP state
tax system is to be made less regressive by increasing the share of direct taxes such as
profession tax, property tax and agricultural income tax; (10) share in central taxes is to be
increased while the high cost loans and advances from the Centre are to reduced; (11) social
sector expenditure is to be increased while the expenditure on economic services is to be
decreased through increasing private sector participation; (12) DID/ID is to be decreased to
enable the AP state to create more new productive assets by proper debt management.

TEXT TABLES
TABLE-1: REVENUE RECEIPTS OF ANDHRA PRADESH AND ALL THE STATES (PERCENTAGES)
1995-96 2008-09
Andhra All the Andhra All the
Fiscal Indicator Pradesh States Pradesh States
1 2 3 4
1. TRR/(GSDP/GDP) 12.96 12.67 18.78 14.43
2. TR/(GSDP/GDP) 9.13 8.61 13.18 10.22
3.TR/TRR 56.63 68.01 70.18 70.84
4. NTR/(GSDP/GDP) 1.91 2.11 2.26 1.34
5. NTR/TRR 15.52 16.68 12.05 9.28
6. GC/TRR 15.58 15.30 17.76 19.87
7. OTR/(GSDP/GDP) 6.04 5.91 9.63 6.75
8. OTR/TR 66.07 68.61 73.07 66.04
9. SCT/(GSDP/GDP) 3.10 2.70 3.55 3.47
10. SCT/TR 33.92 31.38 26.92 33.95
11. TIE/OTR 0.82 1.56 1.09 1.00
12. TP/OTR 11.50 11.36 10.30 14.64
13. TC/OTR 87.70 87.07 88.60 84.37
14. (ST/VAT)/OTR 72.12 55.40 68.64 60.46
15. SET/OTR 1.90 13.30 13.43 11.72
16. MVT/OTR 9.44 5.82 5.39 5.32
17. (OTR+NTR)/TRE 60.36 59.95 64.91 58.38
18. (GSDP/GDP)growth (%)current prices 15.77 17.08 15.33 15.48
Source: 1. Various Issues of Budgets in Brief, Government of
Andhra Pradesh, 2. Various Issues of State Finances:
A Study of Bdugets, RBI. 3. Andhra Pradesh Statistical
Abstracts, Directorate of Economics and Statistics,
Government of Andhra Pradesh, Hyderabad.
Note: TRR:Total Revenue Receipts; TR: Tax Revenue
NTR: Non-Tax Revenue; OTR: Own Tax Revenue
SCT: Share in Central Taxes; TIE: Taxes on Income and
Expenditure; TP: Taxes on Property; TC: Taxes on Commodities
ST: Sales Tax; VAT: Value Added Tax; SET: State Excise Tax
GC: Grants-in-aid and Contributions from the Centre.
MVT: Motor Vehicle Tax; GSDP: Gross State Domestic
Product; GDP: Gross Domestic Product (India)

TABLE-2; BUOYANCY OF REVENUE RECEIPTS OF ANDHRA PRADESH AND ALL THE STATES
1995-96 to 2008-09
Andhra All the
Pradesh States
1 2
1. Total Revenue Receipts (TRR) 1.30 1.09
2. Tax Receipts (TR) 1.46 1.12
3. Non-Tax Receipts (NTR) 1.12 0.69
4. Grants-in-aid & Contributions (GC) 0.98 1.28
5. Own Tax Revenue (OTR) 1.34 1.09
6. Share in Central Taxes (SCT) 1.99 1.17
7. Taxes on Income and Expenditure (TIE) 1.60 0.91
8. Taxes on Property (TP) 1.44 1.27
9. Taxes on Commodities (TC) 1.37 1.07
10. Sales Tax/Value Added Tax (ST/VAT) 1.31 1.15
11. State Excise Tax (SET) 2.91 1.00
12. Motor Vehicle Tax (MVT) 1.06 1.00
13. (GSDP/GDP) CARG (%) current prices 12.24 12.46
Note: CARG method is used for Buoyancy estimation.
Source: As for Table-1
TABLE-3: CAPITAL RECEIPTS OF ANDHRA PRADESH AND ALL THE STATES

(PERCENTAGES)
1995-96 2008-09
1 2 3 4
1. ID/TCR 15.01 17.98 52.25 64.11
2. LAC/TCR 36.53 44.92 9.52 6.36
3. RLA/TCR 36.03 8.02 1.31 4.10
4. SS/TCR 5.97 11.23 8.17 16.39
5. RF/TCR 6.46 4.81 28.72 9.05
6.DA/TCR 0 6.75 0 0
7.OTH/TCR 0 6.26 0 0
8. TCR/(GSDP/GDP) 5.39 4.03 5.73 3.51
Note:ID: Internal Debt; LAC: Loans and Advances from the Centre
RLA: Recovery of Loans and Advances; SS: Small Savings; OTH: Others
RF: Reserve Funds; TCR: Total Capital Receipts; DA: Deposits and Advances

TABLE-4: REVENUE EXPENDITURE OF ANDHRA PRADESH AND ALL THE STATES
(PERCENTAGES)
1995-96 2008-09
1 2 3 4
1. TRE/(GSDP/GDP) 13.17 13.39 18.32 13.86
2. DE/TRE 67.5 61.57 70.21 58.26
3. NDE/TRE 31.78 37.38 29.25 38.86
4. GCS/TRR 0.78 1.12 0.53 2.77
5. SCS/TRE 44.95 36.97 41.54 36.62
6. ES/TRE 22.55 24.60 28.83 21.64
7. RD/TRE 5.35 4.53 5.72 4.30
8. SE/TRE 50.30 41.50 47.26 40.92
9. IP/TRE 14.25 15.13 12.88 16.66
10. IP/TRR 15.25 15.98 11.95 16.00
11. AS/TRE 7.49 9.23 5.72 9.10
12. IE/TRE 7.71 4.93 9.10 2.87
13. TE/(GSDP/GDP) 16.10 15.09 22.01 16.77
14. AS/(GSDP/GDP) 0.98 1.23 1.04 1.26
Note: TRE: Total Revenue Expenditure; TE: Total Expenditure (TRE+CO)
DE: Development Expenditure; NDE: Non-Development Expenditure
GCS: Grants-in-aid and Contributions by the State;
IP: Interest Payments; SCS: Social and Community Services
ES: Economic Services; RD: Rural Development; AS: Administrative Services
IE: Irrigation Expenditure; SE: Social Expenditure

TABLE-5: BUOYANCY OF REVENUE EXPENDITURE OF ANDHRA PRADESH AND
ALL THE STATES
1995-96 to 2008-09
Andhra All the
Pradesh States
1 2
1. Total Revenue Expenditure (TRE) 1.23 1.02
2. Development Expenditure (DE) 1.25 0.99
3. Non-Development Expenditure (NDE) 1.19 1.05
4. Grants-in-aid & Contributions by State (GCS) 1.03 1.75
5. Social and Community Services (SCS) 1.20 1.02
6. Economic Services (ES) 1.35 0.94
7. Interest Payments (IP) 1.21 1.09
8. Administrative Services (AS) 1.12 1.01
9. (GSDP/GDP) CARG (%) current prices 12.24 12.46
Note: CARG method is used for Buoyancy estimation.
TABLE-6: CAPITAL EXPENDITURE OF ANDHRA PRADESH AND ALL THE STATES

(PERCENTAGES)
1995-96 2008-09
1 2 3 4
1. TCE/(GSDP/GDP) 4.46 3.01 5.21 4.04
2. CO/TCE 65.69 56.77 70.80 61.09
3. DID/TCE 2.96 3.24 36.35 28.60
4. RLC/TCE 7.97 14.73 4.14 3.54
5. LAS/TCE 23.38 25.26 25.18 6.77
6. DE/C0 99.34 96.45 98.47 95.77
7. NDE/CO 0.66 3.55 1.53 4.23
8. DID/TCR 2.44 2.41 3.30 3.87
9. DID/ID 16.29 13.44 49.88 43.60
10. (DID+RLC)/(ID+LAC) 17.54 21.32 46.99 44.57
11. (DID+RLC)/(ID+LAC+SS) 15.72 18.09 41.50 36.16
Note: TCE: Total Capital Expenditure; CO: Capital Outlay;
DID: Discharge of Internal Debt; RLC: Repayment of Loans to the Centre
LAS: Loans and Advances by the States; DE: Development Expenditure
NDE: Non-Development Expenditure

TABLE-7: GROSS FISCAL DEFICIT, REVENUE DEFICIT PRIMARY DEFICIT AND PUBLIC
DEBT OF ANDHRA PRADESH AND ALL THE STATES (PERCENTAGES)
1995-96 2008-09
1 2 3 4
1. GFD/(GSDP/GDP) 2.92 2.90 2.81 2.26
2. RD/(GSDP/GDP) 0.89 0.76 -0.19 -0.57
3. PD/(GSDP/GDP) 1.07 0.88 -0.56 -0.05
4. PUD/(GSDP/GDP) 18.34 19.59 24.92 29.08
5. IP/PUD 10.24 10.33 9.47 7.94
6. (GSDP/GDP) Annual Growth (current prices) 15.77 17.08 15.43 15.48
Note: GFD: Gross Fiscal Deficit; RD: Revenue Deficit; PD: Primary Deficit
PUD: Public Debt; IP: Interest Payments; GSDP: Gross State Domestic Product
GDP: Gross Domestic Product.
(+) indicates deficit; (-) indicates surplus
TABLE-8:RELATIONSHIP BETWEEN GOVERNMENT EXPENDITURE

AND GDP/GSDP DURING 1995-96 AND 2008-09 IN ANDHRA PRADESH
AND ALL THE STATES COMBINED (ASC) (RS. IN CRORES)
TRE CO TE GSDP/GDP
Andhra All the Andhra All the Andhra All the Andhra All the
YEAR Pradesh States Pradesh States Pradesh States Pradesh States
1 2 3 4 5 6 7 8
CARG (%) 15.08 12.76 14.25 17.17 14.93 13.38 12.24 12.46
correlation 0.9907 0.99343 0.977 0.9857 0.9936 0.9959
slope 5.4452 7.21003 19.89 27.928 4.3258 5.7773
intercept 26550 -46564 85983 960672 37585 140896
Source: Author’s calculations.

APPENDIX-A
The Indian Constitution under the Seventh Schedule (Article 246) lays down the
respective functions and financial resources of the Government at the Union and state level and
contains three lists as set out below:
List I – Union List (97 Items)
Functions: Defense, atomic Energy and Mineral Resources, Foreign Affairs, diplomatic
Relations, Railways, Airways, Posts and Telegraph, Public Debt of the Union, Currency
and Coinage, RBI, Banking, Insurance, Stock Exchanges, etc.
Sources: taxes on Income (other than Agricultural Income), Customs Duties, Excise
Duties on manufactured goods, corporation tax, service Tax, etc.
List II – State List (66 Items)
Functions: Public order, Police, Local Government, Public Health and Sanitation,
Hospitals and dispensaries, Agriculture, water, Fisheries, Public Debt of State, etc.
Sources: Taxes on Agricultural Income, Taxes on Lands and Buildings, taxes on Mineral
Rights, Excise Duties, Entry Tax, Taxes on Electricity, taxes on the Sale or Purchase of
Goods (VAT), taxes on Vehicles, Tolls, taxes on Profession, Trades, Entertainment Taxes,
Stamp Duties, etc.
List III – Concurrent List (47 Items)
Criminal Law, Criminal Procedure, Administration of India, social Security, Employment
and Unemployment, Labor Welfare, Education, including technical education, medical
education and universities, Price Control, Factories, electricity, etc.
Source: RBI study on State Finances: A study of Budgets of 2007-08, p.114.
FUNCTIONS OF RURAL LOCAL BODIES: The Indian Constitution under the eleventh
Schedule (article 243G) lays down the functions of the rural self-governments that are as
follows: agriculture, including agriculture extension, land improvement, implementation of land
reforms, land consolidation and soil conservation, minor irrigation, water management and
watershed development, animal husbandry, dairying and poultry, fisheries, social forestry and
farm forestry, minor forest produce, small scale industries including food-processing industries,
khadi, village and cottage industries, rural housing, drinking water, fuel and fodder, roads,
culverts, bridges, ferries, waterways and other means of communication, rural electrification,
including distribution of electricity, non-conventional energy sources, poverty alleviation
program, education including primary and secondary schools, technical training and vocational
education, adult and non-formal education, libraries, cultural activities, markets and fairs, health
and sanitation, including hospitals, primary health centers and dispensaries, family welfare,
women and child development, social welfare including welfare of the handicapped and
mentally retarded, welfare of the weaker sections, and in particular of the scheduled Castes and
the Scheduled Tribes, public distribution system, and maintenance of community assets.
(Source: Directorate of Economics and Statistics, Gram Panchayats in Andhra Pradesh, Economic
Classification of Finances, 2003-04 and 2004-05, Government of Andhra Pradesh, Hyderabad).
For the functions of the Urban Local Bodies, See, Sudhakar, S. (2008), Fiscal
Performance of Urban Local Bodies in Andhra Pradesh: An Assessment, Urban India, Vol. XXVIII,
January – December, No. 1 & 2, p.69.National Institute of Urban Affairs, New Delhi.

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Government of Andhra Pradesh (2003), White Paper on Fiscal Reforms.
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Experience, Paper presented at the workshop on “Sub-National Fiscal reform and Debt
Management”, organized by the economic Policy and Debt Department, World Bank,
Washington, April 29, BIS Review 83/2009.

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Pradesh.
Musgrave, Richard A. and Musgrave, Peggy B. (1989), Public Finance in Theory and Practice,
Fifth Edition, Tata McGraw-Hill Publishing Company Ltd. New Delhi.
Misra, B.M. and Khundrakpam, J.K. (2008), Fiscal Consolidation by Central and state
Governments: The Medium Term Outlook, RBI Staff Studies.
Purohit, Mahesh, C. (2006), Mobilizing Resources through Reform of State Non-Tax Sources for
Planned Development, Foundation for Public Economics and Policy Research, Delhi. A Report
prepared for the Planning Commission, SER Unit.
Planning Commission (2008), Eleventh Five Year Plan (2007-2012), Vols. I, II and III, Government
of India, New Delhi.
Report of the Twelfth Finance Commission (2005-10), Government of India, November, 2004,
Reserve Bank of India Study on State Finances: A Study of Budgets of 2006-07
Reserve Bank of India (2004), Handbook of Statistics on State Government Finances, Mumbai.
Reddy, K.N. and Sudhakar, S. (1989), Incidence of Public Expenditure in India: A Case Study of
Andhra Pradesh, Commonwealth Publishers, New Delhi.
Sarma, J.V.M. (2003), Fiscal management: A Review, published in Hanumatha Rao, CH. And
Mahendra Dev, S. (Ed), Andhra Pradesh development (Economic Reforms and Challenges
Ahead), Centre for Economic and Social Studies, Hyderabad.
Sreedevi, N. (2009), State Finances of Andhra Pradesh: An Overview, published in Mahendra Dev
et al (Ed), Human development in Andhra Pradesh: Experiences, Issues and Challenges, Centre
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a report prepared for the Asian Development Bank.
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Assessment, Urban India, Vol. XXVIII, January-December, No. 1 and 2, A Journal of the National
Institute of Urban Affairs, New Delhi. Pp. 49-82.
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28849 – IN, Washington.

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FINANCES OF ANDHRA PRADESH STATE: A COMPARATIVE STUDY

Samala Sudhakar, Professor in Economics. 1

Samala Sudhakar, Professor in Economics. 2

Samala Sudhakar, Professor in Economics. 3

Samala Sudhakar, Professor in Economics. 4

Samala Sudhakar, Professor in Economics. 5

(3) EXPENDITURE REFORMS: Expenditure reforms include restructuring and managing

Samala Sudhakar, Professor in Economics. 6

Samala Sudhakar, Professor in Economics. 7

Samala Sudhakar, Professor in Economics. 8

Second question is addressed in this third section.

CENTRAL FINANCE COMMISSIONS: The Central Finance Commissions also strengthened

Samala Sudhakar, Professor in Economics. 9

Samala Sudhakar, Professor in Economics. 10

Samala Sudhakar, Professor in Economics. 11

Samala Sudhakar, Professor in Economics. 12

Samala Sudhakar, Professor in Economics. 13

Samala Sudhakar, Professor in Economics. 14

Samala Sudhakar, Professor in Economics. 15

Samala Sudhakar, Professor in Economics. 16

Samala Sudhakar, Professor in Economics. 17

Samala Sudhakar, Professor in Economics. 18

Grants-in-aid and Contributions by States (GCS) include grants, compensation and

Samala Sudhakar, Professor in Economics. 19

Samala Sudhakar, Professor in Economics. 20

Samala Sudhakar, Professor in Economics. 21

Samala Sudhakar, Professor in Economics. 22

Samala Sudhakar, Professor in Economics. 23

Samala Sudhakar, Professor in Economics. 24

Samala Sudhakar, Professor in Economics. 25

TABLE-3: CAPITAL RECEIPTS OF ANDHRA PRADESH AND ALL THE STATES

Samala Sudhakar, Professor in Economics. 26

Samala Sudhakar, Professor in Economics. 27

TABLE-6: CAPITAL EXPENDITURE OF ANDHRA PRADESH AND ALL THE STATES

Samala Sudhakar, Professor in Economics. 28

TABLE-8:RELATIONSHIP BETWEEN GOVERNMENT EXPENDITURE

Samala Sudhakar, Professor in Economics. 29

Samala Sudhakar, Professor in Economics. 30

Government of Andhra Pradesh, Economic-cum-Functional Classification of the Budgetary

Government of Andhra Pradesh (2008), Statistical Abstract: Andhra Pradesh, Directorate of

Government of Andhra Pradesh (2003), White Paper on Fiscal Reforms.

Government of Andhra Pradesh (2009), Economic-cum-purpose classification of Andhra Pradesh

Samala Sudhakar, Professor in Economics. 31

Reserve Bank of India Study on State Finances: A Study of Budgets of 2006-07

Sudhakar, S. (2008), Fiscal Performance of Urban Local Bodies in Andhra Pradesh: An

Sudhakar, S (2001), Cost Recovery of Government Budgetary Services: A Study of Andhra

Samala Sudhakar, Professor in Economics. 32

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