Published Editorial

Hyderabad tilt in AP split

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The Financial Express


DK Srivastava
Chief Policy Advisor, EY

With the bifurcation of Andhra Pradesh, two new states will come into existence: Telangana, and the residual Andhra Pradesh. The new Andhra Pradesh will be the relatively larger of the two with a share of 58% in population as well as area.

In February this year, a vote-on-account was presented for the combined Andhra Pradesh. As nearly three quarters of the financial year would still be left when the two states are formally notified in June 2014, the immediate task for the new governments will be to prepare their individual budgets. Estimates of the vote-on-account would become fructuous. In FY14, as per the budget estimates, the last full-year numbers of the combined state, revenue receipts were estimated at R1,27,772 crore of which nearly R96,575 crore were tax revenues, consisting of R72,444 crore of own-tax revenues, R24,131 crore of share in central taxes, and central grants of R15,803 crore. The relative shares of own tax revenues, share in central taxes, and central grants will change dramatically for the two states. Revenues and expenditures of the two states will add up to more than the corresponding figures of the combined state.

Andhra Pradesh will get larger per capita transfers via the Planning Commission and central ministries, having been accorded the ‘special category’ status for five years.

Telangana, with its less developed and low per capita income districts (other than Hyderabad) may get larger per capita transfers from both, the Planning Commission and the Finance Commission.
Hyderabad is allocated to Telangana although it will serve as common capital for ten years. Being the centre of economic activities and source of government finance, it will critically define the fiscal prospects of the two states. Its population is large and area limited giving it a population density of 18,480 persons per sq km against a figure of 273 for the rest of Telangana.

The special position of Hyderabad causes considerable complications in working out both own revenues and fiscal transfers. The relative shares in population, called the population ratio in the Andhra Pradesh Reorganization Act, specifically defined in the Act as 58.32 to 42.68 as per the 2011 census, is the key determinant in the division of assets and liabilities and the flow of central transfers.

There will, however, be some important concerns in using this ratio for determining central transfers. Both the Finance Commission and the Planning Commission continue to use the 1971 population data in determining their transfers. But Hyderabad has been the recipient of large population through migration from within the districts of Andhra Pradesh as well as from other states. This will render the use of 1971 data completely irrational. Furthermore, although physically Hyderabad has been allocated to Telangana, for the period for which, it will serve as a common capital, residents of both the new Andhra Pradesh and Telangana will reside here. Unless the population ratio is determined after bifurcating the citizens of the two successor states living in
Hyderabad, the use of the population ratio as defined in the Act will lead to biased results in favour of Telangana.

Own tax revenues of the two states will also depend on the division of the tax base between the two states. Hyderabad as the IT and business hub contributes a significant share, according to some estimates, more than 45% to Andhra Pradesh’s own tax revenues. This may be paid by citizens and companies of both states. How will this amount get divided? Of the 44 state-level public enterprises, the headquarters of all but 4 are located in Hyderabad. The headquarters of many private companies are also located in Hyderabad. Many of them may be paying a significant share of their state taxes in Hyderabad although their activities may be differentially spread across the two states. Some trade of goods and services that is presently intra-state within the existing Andhra Pradesh will become cross-state between Andhra Pradesh and Telangana becoming subject to the levy of Central Sales Tax. But this would not be possible within Hyderabad.

Non-tax revenues, following mainly the principle of location, will also be differentially affected. The division of mineral resources including coal and oil and gas will affect royalties. Offshore resources will go to Andhra Pradesh and land-based mineral resources will benefit Telangana relatively more.
The pattern of expenditure will also be quite different for the two states. Telangana will have to devote more resources on developmental expenditures, including on education and health, to uplift the economic developments of districts other than Hyderabad. The focus of Andhra Pradesh will be on selecting the location of the new capital city, which will unleash a massive flow of resources, both private and public, to cater to the new infrastructure and construction-related activities. Property prices including land prices are likely to shoot up in this area. Salary and pension liabilities will get divided between the two states, but bureaucracy will expand in both states.

In the long run, both regions will possibly benefit. But both of them will face considerable uncertainty in the immediate future. Background work for their respective budgetary exercises should start without delay.

Views are personal.