The AP growth story: How the state considerably improved its revenue after bifurcation

The question is whether the revenue growth will sustain, and how to add the revenue capacity to the state.

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Following the bifurcation of Andhra Pradesh in 2014, the newly-formed state of Andhra Pradesh comprising coastal Andhra and Rayalseema regions was faced with a major challenge: Hyderabad, the major source of revenue for united AP went to Telangana, and newly-formed AP had to figure out how to generate enough revenue and survive as an independent state. And if the AP budget 2017-18 is anything to go by, CM Chandrababu Naidu and his team seem to have done a good job of improving the revenue.

Before we review the revenue performance of Andhra Pradesh from Budget FY2017–18, it is worth recollecting this statement by Yanamala Ramakrishnudu, the Finance Minister of Andhra Pradesh during the FY 2015–16 Budget Speech.

“The State continues to reel under revenue deficit and this deficit continues even after the last year of the award of 14th Finance Commission. Our debt burden and fiscal deficit will continue to increase as we keep borrowing to meet revenue expenditure. This provides an understanding of how the state has been handling revenue deficit and fiscal deficit. In a financial year, revenue deficit occurs when the revenue expenditure is higher than the revenue receipts. Fiscal deficit, on the other hand, is the difference between the total expenditure and total receipts (including the borrowings), and is usually referred to as the percentage of Gross Domestic Product (GDP) at and Gross State Domestic Product (GSDP) for a state.”

After three budgets, the current dispensation in the state has made efforts to bring down revenue deficit while containing fiscal deficit within the limits. From an estimated Rs. 14,242 crores (2.72% of GSDP) in FY 2014–15, the revenue deficit, estimated to be a mere Rs. 416 crores (0.05% of GSDP) by the end of FY 2017–18, is a significant progress in improving the state’s finances.

Similarly, the fiscal deficit target is set at 3% of GSDP during FY 2017–18; it was 3.88% of GSDP in FY 2014–15. While the revenue deficit and fiscal deficit targets for FY2017–18 look optimistic, it remains to be seen how the state manages to achieve this turnaround within three years, especially the revenue deficit.

The decline in revenue deficit indicates an increase in revenue of the state, and thus requires an understanding of the revenue performance since the state was dismembered.

Revenue Deficit and Fiscal Deficit (as Nominal values and % of GSDP). Source: http://www.apfinance.gov.in

Revenue Performance of Andhra Pradesh (FY 2014–18)

State revenues constitute two components — the state’s own revenues and transfers from the Union of India. State’s own revenues come from tax revenues through commercial taxes, registrations and stamps charges, and excise duty — and non-tax revenues are generated from general, social and economic services.

The transfers from the Union of India are through grants, and tax devolutions. A change in these components will indicate whether the revenues are growing or declining.

State’s own revenue

Between the FY 2014–15 and FY 2015–16, the state’s own tax revenues increased by 33.67% — with above ₹40,000 crores as a possibility — and is predicted to increase steadily.

The major contributors to own tax revenues are stamps and registration fees, state excise duties, taxes on sales, trade etc., and taxes on vehicles — each of them increased by 37.73%, 20.43%, 34.29%, and 46.33% respectively. Interestingly, the state is planning to increase revenues from taxes and duties on electricity.

Andhra Pradesh State’s Own Revenues (in Crores). Source: http://www.apfinance.gov.in

The non-tax revenue saw huge decline of 39.86% from FY 2014–15 to FY 2015–16, but stabilised at ₹4,000 crores, and can expect an incremental growth. In FY 2015–16 Budget Speech, the Finance Minister emphasised on increasing the state’s own non-tax revenue.

We have plans to explore possibilities of increasing non-tax revenues as it will not impose any tax burden on the people. We have already engaged experts for this purpose. We are also in the process of studying the excise policy of Tamil Nadu to see whether there is any lesson to learn.

To increase the state’s own tax revenues, the government of Andhra Pradesh has invested heavily in Information Technology, strict enforcement of Aadhar based registrations, improving transparency levels, and eradicating illicit distillations. These initiatives are expected to reap benefits and increase the revenues to the state.

Perhaps, due to lower levels of industrialisation, and urbanisation, Andhra Pradesh has low tax-GSDP ratio compared to the neighbouring states. The 14th Finance Commission projected tax-GSDP ratio as 7.98% for FY 2015–16, and 8.41% by FY 2019–20. Efforts to increase the tax base will help increase revenues.

Transfers from the Union of India

The tax devolution from the Union of India has increased by 91.32% from FY 2014–15 to FY 2015–16, and is expected to grow steadily. While the increase in taxes is promising, the larger share of the grants-in-aid from the Union of India — over 50% of total Union transfers, and nearly 25% of the total revenues of the state — is a challenge in the long-term.

Based on the Andhra Pradesh State Reorganisation Act, 2014, the 14th Finance Commission suggested revenue deficit gap to the state till FY 2019–20, and this component in grants-in-aid will end from FY 2020–21. The budget estimate of grants-in-aid for FY 2017–18 is higher than the actuals of FY 2015–16 and the revised estimates of FY 2016–17.

The state has two years before the Union of India stops transferring the revenue deficit grant to the state. While the expectation of more grants till FY2019–20 is justified, the continuation of the same trend will pose challenges to any dispensation in 2019.

Union Transfers and Total Revenues (in Crores) of Andhra Pradesh. Source: http://www.apfinance.gov.in

Despite several challenges in revenue generation, the government of Andhra Pradesh and the Union of India have managed to tap the maximum revenues from the 13 districts of the state. FY 2017–18 is the third consecutive financial year for the dismembered Andhra Pradesh, and achieving this year’s targets of revenue deficit and fiscal deficit provides a better outlook on the revenue generation capabilities of the state.

The question is whether the revenue growth will sustain, and how to add the revenue capacity to the state.

Public investments, urbanisation, the size of manufacturing and commercial sectors (industrialisation), and openness of the economy are key components of revenue capacity of the state. The onus is on both the state government and the Union of India to strengthen the revenue base, improve revenue generation and financial situation of Andhra Pradesh.

The author is a volunteer with The Takshashila Institution - An independent networked think tank on India's strategic affairs.

Note: This article took several inputs from the paper “Simple tools for evaluating revenue performance in a developing country” by Mahesh Purohit.