Economy & Public Finance Management

Executive Summary

Vision 2029-Sector papers

Andhra Pradesh envisions itself as one of the top three Indian states by 2022, a developed state by 2029 and a leading global investment destination by 2050. The achievement of this vision necessitates sustained double digit economic growth over the next 15 years. The EPFM paper seeks to discuss the state of the economy as was, as is, and what it must become to realize its vision. Further, it explores strategies that the State may adopt in order to achieve its Vision.


Table 1: AP's performance relative to peer states
Particulars Year AP’s performance Performance of leading state
GSDP growth rate 2014-15 7.4 percent Puducherry (11.54 percent)
Per capita income 2014-15 prices Rs 90,517 Haryana (Rs 1,32,089)
Urbanisation rate 2011 29.5 percent Tamil Nadu (48.5 percent)
Unemployment rate 2012 Ranked #11 Gujarat (Ranked #1)
Rural workforce participation rate 2011-12 522 AP (Ranked #1)
Fiscal deficit as a percentage of GSDP 2013-14 2.1 percent Maharashtra (1.7 percent)
Revenue receipts as a percentage of GSDP 2013-14 9.3 percent Karnataka (10.5 percent)
Committed expenditure as a percentage of revenue expenditure 2013-14 53.9 percent Gujarat (38.3%)

CHALLENGES

The following are the challenges plaguing the state’s economy that are identified in the paper:

Low growth in Industrial Sector

Growth in AP’s industrial sector is struggling to gain momentum. From 2009 to 2014, industrial growth rates have remained at 5.6 percent, below the national average and far below the double digit growth rates of peer states like Tamil Nadu, Maharashtra, Karnataka and Gujarat.

Regional disparities in the level of development

Disparities are witnessed in the level of development between rural and urban areas on parameters such as unemployment rate (12 for rural and 43 for urban areas), labor force participation rate (477 for rural and 368 for urban areas) and workforce participation rate (399 for rural and 355 for urban areas).

High levels of unemployment / casual employment

The quality of employment remains a concern for the state; given the continuance of issues like low wage rates, the seasonality of employment, job insecurity, illiteracy, occupational hazards, etc. Around 94 percent of workers in the state are engaged in the unorganized sector, indicating the high prevalence of informal employment.

Inadequate infrastructure financing

AP is presently considerably behind peer states in terms of quality infrastructure. In terms of infrastructure financing, the state must create a platform with regard to access to funds to the private sector. Innovative funding options must also be explored in this regard.

Gender gap in labor force participation

The gap between male and female labor force participation rates must be addressed by the state. AP witnessed a female participation rate of 166 in urban areas in 2014-15, as against a male participation rate of 567 in the same category. It witnessed a female participation rate of 375 in rural areas in 2014-15, as against a male participation rate of 584 in the same category.


The following are the challenges plaguing the state’s public finance management that are identified in the paper:

Deterioration in resource mobilization

The state’s finances have suffered post bifurcation in 2014, as Hyderabad, a hub of economic activity and an important source of government finance, now no longer contributes to residual Andhra Pradesh. This has led to severe financial imbalance in the residual state, which is compounded by a huge expenditure liability (allocated on the basis of a 58.3 percent population share for AP). Being a predominantly agricultural economy doesn't help the state's case.

High level of committed expenditure

This expenditure mainly consists of commitments towards the payment of salaries, pensions and interest. The state has a high level of committed expenditure (pegged at 88 percent) and limited control over it.

Public debt management

Poor debt management is reflected in the way the state has borrowed at high rates to finance its consumption expenditure and breached its FRBM limits.


STRATEGIES

The following are the strategies highlighted in the paper, as regards both economy and public finance management.

Stepping up investments & savings

In order to achieve double digit growth, AP must invest heavily in order to increase Gross Capital Formation (GCF) in the state, and focus on boosting both public and private investments by strengthening the ecosystem. These investments coupled with productivity improvements would accelerate economic growth.

Gainful employment

The employed workforce is expected to grow from 42 percent in 2013-14 to 51 percent by 2029. By 2029, AP would have about 37.2 lakh incremental workforce coming into the system due to population growth. Attention must be given to improving female workforce participation by strengthening the job pool for women, introducing policies that affect public investment in infrastructure and efficiency of spending on health and education.

Economic Development Board

In order for AP to become an attractive global investment destination, a business-friendly ecosystem needs to be created that would streamline clearance procedures, reduce legal ambiguities and protect the interests of shareholders. Among other initiatives to enhance the ease of doing business, GoAP has proposed to set up an Economic Development Board that would both promote investments and facilitate the ease of doing business in the state.

Non-negotiable interventions

GoAP has undertaken interventions in certain crucial areas in order to accelerate economic and social development, boost infrastructure and industrial development, poverty elimination and so on. These “non-negotiable” reforms include encouraging the creation of global value chains, productivity enhancement, balanced growth, technological transfers and the knowledge economy.

Fiscal space required to sustain state finances have been outlined in the paper. The following is its indicative framework – increasing revenue through increased economic activity, which impacts the tax as well as non-tax revenues, expenditure management through effective subsidy targeting and reduction of the state’s debt liability, and using innovative methods of financing its growth.

A user charge for cost recovery is a method of creating fiscal space. User charges and implicit subsidies for publicly provided private goods are closely related. Implicit subsidies are defined as unrecovered costs, which can be recovered through the mechanism of cost recovery.

Revenue augmentation can be done through strengthening the tax administration, by improved tax policy analysis, data analysis, and revenue forecasting and economic impact assessment.

Debt restructuring

Project financing required to finance Vision 2029 can come from a variety of sources. The main ones are public borrowings from the Centre and other financial institutions, limited to 3 percent of the GSDP as per FRBM regulations. Other sources of financing include using foreign direct investment, diaspora bonds, pooled financing for urban local bodies, reviving MoU system for public sector units and utilizing mineral assets of the state.

The future growth paths of the state’s economy have been examined by analyzing key economic and public finance indicators, using econometric modeling, under three scenarios:

  • Business as Usual (BAU) (7.1 percent YoY GSDP growth)
  • Moderate growth (10 percent YoY GSDP growth)
  • Aggressive growth (11.7 percent YoY GSDP growth)

Table 2: Output of the ICOR model under three scenarios

Particulars 2014-15 Estimated Target 2028-29
Per Capita Income (Current Prices) – Rs. Lac INR 0.91 BAU 5.0
Moderate 7.2
Aggressive 8.9
Nominal GSDP – Rs. Lac Crore INR 5.2 lac cr BAU 30.7
Moderate 44.6
Aggressive 55.3
Real GSDP @ 2014-15 Prices   Rs. Lac Crore BAU 13.7
Moderate 19.7
Aggressive 24.5
Real Growth Rate (@2014-15 Prices) 6.9% (@ 2004-05 Prices for the last decade) BAU 7.1%
Moderate 10.0%
Aggressive 11.7%
Sector-wise Agriculture Industry Services Agriculture Industry Services
Sector-Wise Growth Rates (Constant Prices) 2014-15 4.7% 5.9% 8.6% 4.7% 5.9% 8.6%
9.9% 9.3% 10.3%
7.0% 15.0% 12.0%
Sector-Wise GSDP @ (Constant Prices) 2014-15 (INR lac cr) 1.4 1.1 2.7 2.7 2.4 8.5
5.4 3.7 10.6
3.7 7.6 13.2
Sector Contribution (%Share in GSDP) 24.0% 19.6% 56.5% 20% 18% 63%
27% 19% 54%
15% 31% 54%

KEY TARGETS

Table 3: Targets of the Vision: 2020 and 2029
Indicators 2020 2029
GSDP growth rate (%) 14% 12%
Per capita income growth rate (%)   17.05%
Agricultural growth rate (%) at constant prices   10.3%
Industry growth rate (%) at constant prices   13.6%
Service sector growth rate (%) at constant prices   12.1%
Investment (lac crore) (Public : Private) - 84 (25.2 : 58.8)
     


Feedback

6/6/2017

sheshanka

Andhra Pradesh envisions itself as one of the top three Indian states by 2022, a developed state by 2029 and a leading global investment destination by 2050. The achievement of this vision necessitates sustained double digit economic growth over the next 15 years

3/9/2017

VishnuReddy

The Government of Andhra Pradesh publishes ‘Socio-Economic Survey’ report every year and places it in both Houses of the State Legislature along with the budget documents. The report is a unique volume that captures the socio-economic changes taken place since the beginning of the financial year.