Kautilya; Jairam Ramesh

Undoubtedly, N. Chandrababu Naidu has transformed mindsets and given a whole new meaning to governance. But his critics are now accusing him of bankrupting the state. Much of the noise is being generated by his opponents but of late even sober economists who have held high policy-making positions and who are not unsympathetic to what he is trying to do have started expressing their uneasiness. Are these fears justified?

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Let us start with the facts as brought out by the Reserve Bank of India in its recent annual study of state finances. As of March 2000, the outstanding liabilities of Andhra Pradesh are budgeted (actuals may be higher) at Rs 27,845 crore, as compared to Rs 15,164 crore in March 1996. Thus, Naidu has almost doubled the debt of the state in just four years.

And this is not even the complete picture. It does not include guarantees and other "contingent" liabilities whose payment is contingent on the failure of the state Government or its agencies to discharge their debt obligations. These do not figure in budget documents. In Andhra Pradesh these guarantees have increased from Rs 4,343 crore at end-March 1996 to almost Rs 14,000 crore as of end-December 1999.

Thus, in absolute terms, Naidu is multiplying the state's indebtedness. This, however, is not the right way to look at debt. The two ratios that are commonly used to evaluate indebtedness are debt as a proportion of SDP (state domestic product or state's income) which portrays the "stock" of debt and interest payments as a proportion of revenues which indicates its "flow".

Take debt as a proportion of SDP. The RBI estimates that in 1996-97, Andhra Pradesh's ratio was 23.9 per cent, as compared to a national average of 31.1 per cent. States substantially worse off than Andhra Pradesh include Goa (49.7 per cent), Bihar (48.7 per cent), Orissa (48.6 per cent), Kerala (40.1 per cent), Punjab (37.1 per cent), Rajasthan (34.9 per cent) and Uttar Pradesh (33.6 per cent). Andhra's debt-to-SDP ratio in 1999-2000 is probably around 26 per cent. But one caveat -- the World Bank's figures are lower by about 3 percentage points and that needs to be reconciled by the Bank and the RBI.

Now come to interest payments as a proportion of revenue receipts, an index of debt servicing. In 1999-2000, Andhra's ratio is 17.3 per cent, compared to the national average of a little over 20 per cent. States in difficulty include West Bengal (35.6 per cent), Punjab (28.9 per cent), Uttar Pradesh (28.5 per cent), Orissa (27.7 per cent) and Rajasthan (24.8 per cent). And the rate of increase in these five states compared to 1990-93 is far higher than in Andhra Pradesh.

Thus, judged in relation to other states and to the Central government itself, Andhra's debt burden is not very high nor is its debt unsustainable. But this excludes state government guarantees. Andhra has been profligate in this regard, as has Maharashtra. Between the two, they account for a quarter and along with Gujarat and Punjab for half of all state guarantees. But since these liabilities are only "contingent", simply adding them to the figure of outstanding liabilities is wrong. The RBI takes a third of these guarantees and adds it to the debt. If this is done, Andhra's debt burden works out to around 29 per cent of SDP, still less than that of many states but higher than in Maharashtra and Karnataka. And if the guarantees are taken as a proportion of revenue receipts, the ratio for Andhra is around 67 per cent, as against India's 42 per cent.

It is also being alleged that the World Bank is contributing to the debt burden. Far from it. Thirty per cent of World Bank assistance is interest-free and the balance is to be repaid at around 12 per cent interest over 20 years -- very liberal repayment terms.

Nevertheless, Andhra's fiscal position is deteriorating and Naidu is beginning to skate on thin ice. If the state's economic growth does not accelerate beyond the '90s average of 5 per cent per year and if revenue growth is not sustained, he's in for trouble. Naidu's defence is that debt is being incurred for development projects like roads, irrigation and power that will yield commercial returns in future. However, the temptation to use borrowings to meet government's establishment expenditure is great, specially given that Andhra is cash-strapped. Maharashtra has done this in substantial measure. What Naidu needs to do, since so much is at stake, is take both his fans and critics into confidence and produce a white paper on the state's overall debt position that also details how he proposes to manage the debt. This is the first step.

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

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	Feb 28, 2000