EY - Andhra Pradesh bifurcation – a perspective

Andhra Pradesh bifurcation – a perspective

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The bifurcation of Andhra Pradesh will have significant implications on resource flow to the two new States – Telangana and new Andhra Pradesh – and on their economic development.

This report attempts to provide information and insight which would help put in perspective the challenges that the state bifurcation will pose before various stakeholders.

Andhra Pradesh Reorganisation Bill, 2014

The Andhra Pradesh Reorganisation Bill, 2014 was introduced in Lok Sabha on 18 February 2014 by the Minister for Home Affairs. It provides for the reorganization of the state of Andhra Pradesh. The Bill was approved by the President of India and published in the official Gazette. Referred to as The Andhra Pradesh Reorganisation Act, 2014 with effect from 2 June 2014, the new Andhra Pradesh and Telangana will have a common capital, Hyderabad, for a period of 10 years.

Andhra Pradesh (comprising 13 districts):

  • Anantapur;
  • Chittoor;
  • East Godavari;
  • Guntur;
  • Krishna;
  • Kadapa
  • Karnool;
  • Nellore;
  • Prakasam;
  • Srikakulam;
  • Vishakhapatnam;
  • Vizianagaram; and
  • West Godavari

Telangana (comprising 10 districts):

  • Adilabad;
  • Hyderabad;
  • Karimnagar;
  • Khammam;
  • Mahbubnagar;
  • Medak;
  • Nalgonda;
  • Nizamabad;
  • Rangareddi; and
  • Warangal

Key implications

Hyderabad's piquant position on resource flows

The bifurcation of Andhra Pradesh into two new States will have significant implications on resource flow, economic development and the levels of publicly provided services for the two new States. Resource allocation, as well as economic activities in the two regions will undergo significant and dynamic changes because of the move.

Resource transfer from the Centre

The bifurcation of Andhra Pradesh will have significant implications on the transfer of resources from the Centre to the two new state governments. These transfers shall take place under the aegis of three main channels:

  • The Finance Commission
  • The Planning Commission
  • The Central Ministries

“Erstwhile Andhra Pradesh has grown to become the second largest economy in the country because of abundant entrepreneurial talent, highly competent bureaucracy and the forward looking political leadership. The pace of development will be further accelerated in both the states as there is no dearth of entrepreneurial talent on either side. We hope that the new leadership teams will focus more on the development, rather than getting bogged down on inter-state disputes which are bound to arise.”

- G. Kali Prasad, Partner, EY

Effect on State taxes

Tax bases will get divided between the two new states, depending on how economic activities are distributed. Enterprises (public/ private) operating in the combined state whose headquarters are in Hyderabad may be paying a significant share of state taxes in Hyderabad. The division of such enterprises between the two new states, based on the location of their production facilities, will also divide tax revenues. It will be the same case for electricity duty revenue.

Division of assets & liabilities

The broad principle that will be followed for the division of physical assets of the erstwhile Government of Andhra Pradesh between the two new States will be based on the “location” of the assets. However, in cases where the location principle cannot be applied, the division will be based on the respective share of population.

Division of Public Sector Enterprises (PSEs)

The division of the PSEs of the existing state of Andhra Pradesh will be done according to the location of production facilities.

Division of Government employees

In relation to the Indian Administrative Services, Indian Police Services and Indian Forest Services, two separate cadres will be created: one for new Andhra Pradesh and the other for Telangana. From the day of bifurcation, the employees of public sector undertakings, corporations and other autonomous bodies will continue to function in such undertaking, corporation or autonomous bodies for one year.

“Any state bifurcation unleashes a series of dynamic adjustments in resource allocation and revenue flows. Adequately exploited, this opportunity can provide a tremendous fillip to the development of both regions and improvement in the socio-economic development. Andhra Pradesh’s bifurcation poses unique challenges and opportunities for both the states to redefine their agenda and put to effective use the additional resources that will be made available to emerge stronger.”

-  Jayesh Sanghvi, Partner & National Leader, International Tax Services, EY

Division of pensioners

The Reorganization Act has made detailed provisions for the division of pension liabilities of the existing state between the two new States. The focus on pension comes from the experience of the division of other states that have indicated unresolved issues pertaining to the division of pension liabilities.

Allocation of mineral resources and power

The allocation of natural gas will be made as per the policies and guidelines issued by the Government of India. The division of the units of Andhra Pradesh Power Generation Corporation (APGENCO) will be based on the geographical location of power plants. For Coal, new linkages shall be allotted to the successor states, as per the new coal distribution policy of the Government of India.

Allocation of water resources

The Ministry of Water Resources, Government of India, has the responsibility of constituting Krishna River Management Board and Godavari River Management Board within 60 days from the date of formal bifurcation. These boards will function as autonomous bodies under the administrative control of the Central Government.

Andhra Pradesh has been one of the frontrunners among the progressive states of India. With the bifurcation, we foresee that in the long run, both of the regions are likely to benefit.