The Goods and Services Tax subsumed 47% of gross tax revenues of states but only 31% of the Centre’s. To make up for this loss of revenue, the mechanism of compensation to states was devised. This was enshrined in the Constitution (One Hundred and First) Amendment Act, 2016, and later in the GST (Compensation to States) Act, 2017. States were assured a 14% annual increment in their tax revenues over the base year, FY 2016.
If revenue growth did not keep pace, states were to be compensated out of the GST Compensation Fund. This Fund draws its resources from a cess levied on sin and luxury goods like cigarettes and SUVs.
While this compensation is important for all states, it has even more salience for Andhra Pradesh. The bifurcation crippled our finances with the dual strikes of public debt of Rs 97,000 crore and revenue deficit of Rs 13,776 crore. The final nail in the coffin was the betrayal of the former chief minister on securing the promise of Special Category Status. In this context, GST compensation is an important tool to maintain revenue growth. However, payments were delayed last year and have stopped this year.
Today, the state is facing historic pressures on the revenue and expenditure side. While the State GST Collections were down 42% YOY in Q1, expenditure has been front-loaded to fight the pandemic. These pressures, coupled with unpaid bills to the tune of Rs 60,000 crore from the previous TDP government led by Chandrababu Naidu, have put state finances under immense strain. The Centre’s insistence that states borrow the GST Compensation shortfall is simply untenable for Andhra Pradesh. The state has a budgeted fiscal deficit of 4.78% in FY 2021, which is in touching distance of the revised FRBM borrowing limit of 5%.
Existing fiscal resources have already been committed to ensuring people’s welfare in these hard times. A two-pronged strategy of cash transfers and infrastructure investments financed by higher borrowing under revised FRBM limits has been undertaken to drive the state out of the Covid crisis. First, cash transfers are being undertaken with schemes like YSR Cheyutha, Aasara, Jagananna Vidya Deevana, Vahana Mitra, Amma Vodi, YSR Navodayam, Nethanna Nestham and Rythu Bharosa. This has created a safety net for poor and backward families by targeting sectors like education, child healthcare, agriculture and industry. Targeted cash transfer is a proven welfare policy and is being employed by advanced economies like the US and Australia. The state has also secured the livelihoods of the poor by generating more than 20 crore person-days of work this year under the MGNREGS.
Second, infrastructure investments in education, power and irrigation are establishing the foundation for sustained economic growth. Water resources are being developed at a cost of Rs 11,805 crore through drought mitigation projects like the Palnadu and Rayalaseema Scheme. The Polavaram project is being completed in mission mode at a total cost of Rs 55,000 crore. Our hard-working farmers shall bear the fruits of this irrigation infrastructure for years to come. Be it upgrading 15,715 schools at a cost of Rs 3,000 crore under the Nadu Nedu scheme or building a 10 GW solar plant at an investment of Rs 35,000 crore, higher capital expenditure is going to improve growth.
This is in line with the prescriptions of experts, who have advocated for greater investments in infrastructure acting as the Keynesian multiplier. The state has also gone beyond conventional revenue sources to raise resources. Land parcels are being e-auctioned transparently at a premium over the market rate under “Mission Build AP”. Power and construction contracts finalised at exorbitant rates by the former TDP government are being renegotiated. After exhausting all options, the state is raising the FRBM borrowing limits from 3% to 5% by undertaking reforms in power distribution, urban local body revenue, ease of doing business and One Nation One Ration Card.
While the opposition has raised questions, they ignore the fact that in a time of crisis, even the Centre is looking to mop up Rs 2.1 lakh crore by disinvesting in PSUs like the LIC .The current economic slowdown coupled with higher expenditure shall widen the deficits for many states and the Centre. Unfortunately, this is a reality that Andhra Pradesh has been living with since it was bifurcated against its wishes. The Centre must take cognisance of the historical injustice dealt out to the people of Andhra and reconsider its proposal to make states borrow the GST Compensation shortfall.
Additional borrowings will worsen Andhra’s already worrisome finances and levy a burdensome cost on the future. Finally, the Centre must also move decisively and bestow Special Category Status on the state. Yet, even among these dark clouds, there continue to be silver linings. A predominantly agrarian economy boosted by bountiful rains will mitigate the impact of a national recession.
Cash transfers and infrastructure investments undertaken by the state government will further secure the people. Underlying all the steps taken by the Andhra Pradesh government is a recognition of the responsibilities bestowed on it by the people. The historic mandate of 2019 carried with it the hopes of a people who had been ignored for years by the TDP government. As a credible leader, Chief Minister Y S Jagan Mohan Reddy has recognised these expectations and taken measures that will secure people’s well-being in these turbulent times.
Lavu Sri Krishna Devarayalu
YSRCP MP from Narasaraopet, Andhra Pradesh
(krishna.lavu@yahoo.in)