YSRCP submits memorandum to 14th FC
D A Somayajulu
Member,
Political Affairs Committee
& Dt: 12th September 2014
P V Mithun Reddy
Member of Parliament
Memorandum to Fourteenth Finance Commission
Hon’ble Chairman and Hon’ble Members of Fourteenth Finance Commission
Kindly recall that at the All Party Meeting held by the Hon’ble Fourteenth Finance Commission at Jubilee Hall, Hyderabad on 13th September 2013, apart from making oral presentation, we also submitted a 13 page Memorandum. We write to confirm that we reiterate our stand submitted in the written submissions made by us on 13th September 2013.
The main requests we made in the above referred Memorandum are:
1. “The Union Government may kindly consider dispensing with a large number of CSS programs and instead make higher revenue devolution to the States and allow them to make their own choices for spending money on the welfare of the people and development programs. It is strongly urged that the Fourteenth Finance Commission should consider adding cesses and surcharges and non-tax revenues of Central Government to the present divisible taxes and of that atleast at 50% should be shared by the Union Government with states.;
2. “We request the Commission to reduce the Fiscal Capacity Distance weightage from 47.5% to 20% and the balance 27.5% has to be transferred to parameters like population, area, plan expenditure in proportion to total expenditure and for social sector spending. Special weightage should also be given to states which are contributing to National Food Security by offering power subsidies from their budgets. We also request that population should be reckoned as at 1971 base. We further request that the criteria for fiscal deficit should be changed. It should not be linked to GSDP; instead the eligibility for borrowing shall be on the basis of states own revenues. States with better revenue buoyancy should be given permission to borrow more for stepping up public expenditure. After all, loans are repaid out of the revenues of the State and not out of GSDP.
We request the following weights for devolution of Central Revenues:
Criteria and Weights for Tax
Devolution Criteria Weight
1. Population (1971) 30%
2. Area 15%
3. Fiscal Capacity Distance 20%
4. Plan Expenditure proportion to total
expenditure & Social Sector expenditure 25%
5. States contributing foodgrains
for national security 5%
6. Administrative Reforms etc 5%”
We request you kindly to agree to the aforesaid requests. In addition, we have one more request. The States bordering the Bay of Bengal have been facing one cyclone after the other almost once every year and in some years more than once causing in their trail heavy loss of life, property, standing crops, cattle, poultry birds etc. There must be a separate fund exclusively for the maritime states bordering Bay of Bengal for meeting not only immediate relief but also for rehabilitation etc. As things stand today, despite many state and central schemes under operation, people are by and large have been fending for themselves. Many a times, the rehabilitation has not been reaching even 10% of the affected families. Therefore, there is a strong case for additional grants to be made to these maritime states.
RESIDUARY STATE OF ANDHRA PRADESH
Between the last meeting in September 2013 and now, many changes have occurred. The State has been divided and two new states have come into existence from 2nd June 2014 by virtue of AP Reorganization Act 2014. While we continue to plead for the above weights for devolution of funds, in view of the unjust division of the State, leaving the economic power house viz, the Hyderabad Metropolitan Development Area wholly to Telangana State, the residuary State of Andhra Pradesh is expected to begin with revenue deficit which has become alien to united AP during the last 8 years, when the State enjoyed great economic prosperity and revenue surpluses, particularly during 2004-014.
For reasons best known to them, the successive Chief Ministers of Andhra Pradesh since 1956 promoted all the Central Public Sector Units that were meant for entire state of AP in and around Hyderabad compelling the entire ancillarization also to take place in and around Hyderabad only. It may please be recalled that the Government of India used the public sector as the main vehicle of economic growth with the private sector playing only a second fiddle till the onset of economic reforms initiated in 1991.
All the Civil & Defence research laboratories meant for entire AP were also located in and around Hyderabad. All institutions of higher learning and all advanced institutions of health care also got located in and around Hyderabad. Even the IT industry was promoted in and around Hyderabad city. The Capital is in Hyderabad. The High Court is in Hyderabad. The entire economic activity is in Hyderabad. The entire private sector also came to Hyderabad. Naturally, the spending ability is also concentrated in and around Hyderabad. Therefore, revenues, particularly the VAT, which bears direct proportionality to spending, have also been higher in and around Hyderabad.
The loss of Hyderabad, therefore, means loss of hope for the people of Seemandhra as they will be deprived of (a) the engine of economic growth (b) proportional revenues (c) employment opportunities and (d) social, educational and health care infrastructure.
Our party has presented the problems arising out of division to Prime Minister, President, the then Hon’ble Speaker by way of Petition. We could not stop the division, given our strength in Lok Sabha and Rajya Sabha.
Dr Manmohan Singh, the then Prime Minister of India, recognizing that the residuary State would indeed suffer because of the division, gave the following assurances.
1. “Special Category Status will be extended to the successor state of Andhra Pradesh comprising 13 districts, including the four districts of Rayalaseema and the three districts of north coastal Andhra for a period of five years. This will put the state's finances on a firmer footing.
2. The resource gap that may arise in the successor state of Andhra Pradesh in the very first year, especially during the period between the appointed day and the acceptance of the 14th Finance Commission recommendations by the Government of India, will be compensated in the Regular Union Budget for 2014-15.
3. The Bill already provides for a special development package for the backward regions of the successor state of Andhra Pradesh, in particular for the districts of Rayalaseema and North Coastal Andhra Pradesh. This development package will be on the lines of the K-B-K (Koraput-Bolangir-Kalahandi) Special Plan in Odisha and the Bundelkhand special package in Madhya Pradesh and Uttar Pradesh.”
The BJP which was in the opposition at the time of the passage of AP Reorganization Bill, not only supported the aforesaid assurances given by the then Prime Minister, but also went further to assure the people of residuary state that the special category status will be given for a period of 10 years.
Inspite of these assurances, so far we did not hear anything about implementing Prime Minister’s assurances, particularly as regards the Special Category Status. This needs to be addressed urgently. Similarly, we are not aware of how much of the resources gap will be funded by the Central Government.
Besides, Section 46 (1) of the AP Reorganisation Act 2014 states as follows:
46. (1) The award made by the Thirteenth Finance Commission to the existing State of Andhra Pradesh shall be apportioned between the successor States by the Central Government on the basis of population ratio and other parameters:
Provided that on the appointed day, the President shall make a reference to the Fourteenth Finance Commission to take into account the resources available to the successor States and make separate awards for each of the successor States.
Section 94 (1) and (2) of the AP Reorganisation Act 2014 provide:
94. (1) The Central Government shall take appropriate fiscal measures, including offer of tax incentives, to the successor States, to promote industrialisation and economic growth in both the States.
(2) The Central Government shall support the programmes for the development of backward areas in the successor States, including expansion of physical and social infrastructure.
Despite the aforesaid assurances in the act, the Central Government has not so far announced the industrial incentive package and the package for development of backward areas.
As far as Capital City construction is concerned, the following assurances in Sections 94 (3) and (4) are given in the AP Reorganization Act. They are reproduced below:
(3) The Central Government shall provide special financial support for the creation of essential facilities in the new capital of the successor State of Andhra Pradesh including the Raj Bhawan, High Court, Government Secretariat, Legislative Assembly, Legislative Council, and such other essential infrastructure.
(4) The Central Government shall facilitate the creation of a new capital for the successor State of Andhra Pradesh, if considered necessary, by de-notifying degraded forest land.
In the light of the above, it becomes the responsibility of the Central Government to provide funds not only for meeting the revenue deficit of the residuary state till it is able to improve its revenues to match its expenditure but also for building new capital and other infrastructure. The Union Government should also ensure that all the promises made in the 13th Schedule to the AP Reorganization Act 2014 along with the assurance relating to implementation of Polavaram Project as a National Project are honoured fully.
The Hon’ble Finance Minister of AP while presenting Annual Budget 2014-15 for the residuary State of AP on 20th June 2014, in his budget speech stated that
‘There is a huge impact of State bifurcation on State Finances. Since the debt, employees, pensioners are allocated based on population ratio, the Expenditure naturally will be more than 58% of the united State.
However, when it comes to revenue sales tax, which is the most important source of revenue for the State is expected to be only around 47% of the combined State’s revenue and revenue under stamp duty and Registration fees, motor vehicle tax are expected to be less than 50%.
Excise is the only tax where the share of residuary State will be close to 55%. Non‐tax revenue from mining will be less than 30% of the united State. Overall revenue share of residuary State from tax and non‐tax is estimated to be around 47% of the united State.’
Going by the above, it is to be understood that as Hyderabad city has become integral part of Telangana state, the revenues of the residuary state will only be 47% of the revenues of United AP as against the population percentage of 58%. The expenditure of the residuary state will however be in proportion to its population percentage of the united AP. A correct estimate of the revenues of the residuary state will be known only after six months, by which time the trend of actual revenue receipts will be known. Apparently, there appears to be too much confusion about various figures provided in the recent budget for 2014-15, which is evident from para 172 of the Budget Speech of Sri Yanamala Ramakrishnudu. The same is reproduced below.
“For the financial year 2014‐15, Government proposes an expenditure of Rs.1,11,824 crores; Non‐plan expenditure is estimated at Rs.85,151 crores and Plan expenditure at Rs.26,673 crores. The estimated revenue deficit is Rs.6,064 crores and Fiscal Deficit is estimated at Rs.12,064 crores. The fiscal deficit works out to 2.30% of GSDP whereas the Revenue Deficit works out to 1.16%. These estimates include the receipts and expenditure of two months relating to undivided State of Andhra Pradesh and the anticipated additional assistance of Rs. 14,500 Crores from Government of India in the context of State reorganization. If these are excluded, the Revenue Deficit of the residuary State of Andhra Pradesh will be Rs.25,574 Crores and the Fiscal Deficit will be Rs.37,910 Crores as per Vote on Account and as indicated in the White paper on State Finances. In terms of percentage to GSDP, they work out to be 4.84% and 7.18% respectively.”
The White Paper on State Finances estimated a revenue deficit of Rs 15,600 crores for the ten months period of the current year. The Budget documents estimate a revenue deficit of Rs 6,020 crores while the Budget Speech says that the revenue deficit could go upto Rs 25,574 crores
On an average, during the last 10 years, the plan expenditure as percentage of total expenditure of United Andhra Pradesh was hovering between 33-35%. Consequently, the non-plan expenditure was around 65% of the total expenditure. Similarly, the capital expenditure as percentage of total expenditure was around 12%. Unfortunately, in the Budget for 2014-15, the plan expenditure has been budgeted at 23% of the total expenditure and consequently the non plan expenditure has gone upto untenable levels of 77% of the total expenditure. Even more dangerous trend has been the substantial reduction of the share of capital expenditure from 12% to 6% of the total expenditure in the current budget.
For reasons best known to the Government, the non-plan expenditure has been budgeted beyond all proportions. As per the pre-actuals for the united State of Andhra Pradesh, the non plan expenditure for 2013-14 was Rs.94,318 crores. The CAGR for non plan expenditure during the last five years was approximately 15% and applying this, the non-plan expenditure for united AP for 2014-15 would be around Rs. 1,08,465 crores. Even accepting the version of the Hon’ble Finance Minister of AP, the non-plan expenditure of the residuary state cannot go beyond 58% of the non-plan expenditure of united AP. At 58% which is the population share of residuary state, the non plan expenditure for 2014-15 for residuary state should be around Rs. 62,909 crores. As against this, the Government budgeted Rs. 85,151 crores, which is higher by more than Rs. 23,000 crores.
This is completely inexplicable given the fact that the Government has provided only Rs. 1000 crore towards loan waiver as against the promise of Rs. 1,02,000 crores. None of the other poll promises such as unemployment allowance of Rs 2000 per month per unemployed person has been included in the non-plan expenditure budgeted. We would have been happy had the non-plan expenditure gone up because of the provisions made for honoring poll promises. But, that is not the case. How then did the Non-Plan expenditure go up so steeply?
The residuary state needs to give push to the economic growth of the state from the current growth rate of 6%. It is universally acknowledged that higher the GDP growth rate leads to higher revenues. During 1999-2004, the Plan Expenditure grew only at 11.82% per annum compounding and as a result, the GSDP growth rate was as low as 5.92% for the five year period 1999-2004. As against that, Andhra Pradesh achieved high growth rate of 9.6% per annum compounding for the five year period 2004-09 because the Plan Expenditure for those five years grew annually at 21% compounding. Higher Plan outlays and higher Capital Expenditure will give big push to GSDP growth rate.
The need of the hour, therefore, is to step up expenditure on building good Capital City and other infrastructure. Increasing the Non-Plan expenditure by reducing the allocations on Plan expenditure and Capital Expenditure will have serious long term repercussions on the GSDP growth rate of the state and consequently state’s own revenues will also be adversely affected.
To sum up,
1. We request the 14th Finance Commission to increase the Central Transfers to states to 50% and kindly apply the following weights for devolution to various states:
Criteria and Weights for Tax
Devolution Criteria Weights
1. Population (1971) 30%
2. Area 15%
3. Fiscal Capacity Distance 20%
4. Plan Expenditure proportion to total
expenditure & Social Sector expenditure 25%
5. States contributing foodgrains
for national security 5%
6. Administrative Reforms etc 5%
2. We further request that all the assurances given in AP Reorganisation Act 2014 together with those given by the then Prime Minister, Dr Manmohan Singh for the development of the residuary state of Andhra Pradesh are fully honored.
3. The Finance Commission is requested to make correct estimate of the revenue deficit not only for the current year but also for future years and make special allocations to the State in view of extraordinary circumstances.
4. The State Government appears to have submitted detailed Memorandum seeking additional funds for the new state. We support the efforts of the State Government to mobilize additional funds for building new capital, educational & health care institutions and industrial and IT infrastructure.