Andhra pays for fiscal profligacy, may be denied debt relief

HYDERABAD: The Congress led government in Andhra Pradesh may have to pay the price for fiscal profligacy.
The state has been forced to amend a crucial law���called the Fiscal Responsibility and Budget Management (FRBM) Act���to borrow more money for funding populist schemes ahead of the polls.

But in the process, it could lose the benefit of a debt-waiver on past loans in the current fiscal. Late last week, the state-cabinet approved amendments to the FRBM���a law meant to bring in fiscal discipline���to enable the government borrow over Rs 16,000 crore this fiscal. States can float bonds to raise money and these are subscribed to by banks and financial institutions.

Andhra Pradesh is, perhaps, the first state to make such an amendment as revenues have slipped and the state needs money to meet expenditure commitments. For starters, the centre and several states have enacted the FRBM. Under this law, both the centre and states have to wipe out revenue deficit and cut fiscal deficit to 3% of the GDP by 2008-09. States that have enacted the FRBM enjoy two incentives based on the recommendations of the twelfth finance commission. One, they have been allowed re-structure their past debt.

Two, they are eligible for a debt waiver on central loans taken up-to March 2004 and whose repayments are due from 2005-06 to 2009-10. But the debt-write off scheme is linked to the reduction of revenue deficit. Simply put, any state that fails to cut revenue deficit will lose the benefit of debt waiver. Andhra Pradesh could lose this benefit in the current fiscal.

The state is entitled to a debt waiver of around Rs 3,400 crore over a five year span, starting 2005-06. Ironically, Andhra Pradesh had a revenue surplus in 2006-07, two years ahead of the deadline set-out under the FRBM.

In FY08, the state got a debt-relief of around Rs 1,889 crore. ���We have been attaining a revenue surplus despite huge allocations for revenue expenditure such as pensions, scholarships, rice subsidy and power subsidy. This speaks volumes about this government���s fiscal prudence and discipline in the management of resources,��� state finance minister K Rosaiah had said in this year���s budget.

For this fiscal, the state has projected a revenue surplus and fiscal deficit at 2.82%of the state GDP (SGDP). But now the state government has admitted to slippages in revenues. A major reason for this has been the drop in revenue from sale of land.

Any revenue shortfall would curtail fund-flow to projects and derail some of them. Chief minister Y S Rajasekhara Reddy hence sought the centre���s nod to borrow more money so that projects do not suffer for want of funds.

The state also wanted an exemption from the FRBM targets this fiscal due to extraordinary circumstances. Policy managers reckon that funds are needed to push investments and avert a slowdown in economy.

The state legislature is empowered to ratify changes in the FRBM and the proposed amendments are set to be tabled in the assembly session shortly. ���But under a constitutional provision, the state needs the centre���s prior consent to raise a loan���be it borrowings from the primary or secondary market���, says national institute of public finance and policy director M Govinda Rao.

Ironically, AP is just a case in point. The magnitude of the problem is much larger at the centre, given that it is also likely to renege on the commitments enshrined under the FRBM. Fact is the state government has launched several populist schemes including the Rs 2 kg rice scheme to woo voters.

So it had little option but to amend the FRBM. But surely, there is a price to pay for fiscal profligacy. Going by the rule book, AP will be denied debt relief if it slips on the FRBM target. Of course, it will be a different story if the centre decides to play Santa.