People's Democracy

THE MESS IN AP ECONOMY

Growth Rates Decline Under Reforms

M Venugopala Rao

A STUDY on development in Andhra Pradesh under economic reforms has confirmed that growth rates in various sectors were lower in the 1990s compared to the growth rates achieved in the 1980s, the all India growth rates and those of fast growing states. 

Study papers published as a book under the title Andhra Pradesh Development by the Centre for Economic and Social Studies (CESS), Hyderabad reveal this reality, notwithstanding the claim that “these initiatives have earned a name for Andhra Pradesh as one in the forefront of economic reforms, raising high expectations within the country and abroad about its performance”.  It is noteworthy that the period of declining growth rates covers the trends of development in the state during the period of implementation of the Washington Consensus-inspired reform process by the Chandrababu Naidu government. The book is edited by C H Hanumantha Rao, Honorary Fellow and chairman of CESS, and its Director S Mahendra Dev.

LAGGING BEHIND

The gross state domestic product (GSDP) growth in Andhra Pradesh during the 1980s (1980-81 to 1990-91) was 5.50 per cent per annum against 5.37 per cent per annum at the all India level.  While the annual GSDP growth rate at the all India level increased to 6.13 per cent during the 1990s (from 1993-94 to 2000-01), in Andhra Pradesh it declined to 5.31 per cent.  As a result, in GSDP growth rate, among 15 major states in the country, the rank of Andhra Pradesh declined from 4 in the 1980s to 8 in the 1990s.  Also compared to the per capita GSDP growth rate of 4.38 per cent per annum in the 1990s at the all India level, the per capita GSDP growth rate in Andhra Pradesh was lower at 4.04 per cent per annum. Even in per capita GSDP growth rate, the rank of Andhra Pradesh among the major states declined from 5 in the 1980s to 8 in the 1990s. The level of per capita income in the state has always been lower than all India, and the gap has widened somewhat in the 1990s between the state and all India as well as fast growing states, which is evident from the increasing divergence in these per capita growth rates.

Regarding sectoral growth rates, in the 1980s Andhra Pradesh’s GSDP growth rate in agriculture and allied services was one of the lowest in the country with 2.21 per cent, while it increased slightly to 2.47 per cent in the 1990s.  However, the GSDP growth rate of industry declined from 7.36 per cent in the 1980s to 6.20 per cent in the 1990s and that of services from 7.69 per cent to 6.71 per cent.  The growth rate of gross fixed capital formation, which is important for economic growth, declined from 6 per cent in the 1980s to 3.6 per cent in the 1990s, with its decline in the private sector being higher from 5.1 per cent to 1.9 per cent. 

DECLINE IN AGRICULTURE

Agriculture and allied sectors in the state registered a growth rate of 2.47 per cent in the 1990s. This agricultural growth rate is below the low all India growth rate and significantly lower than 3.7 per cent projected by the “AP Vision 2020” document for the period 1995-2000.  The available data shows that the state experienced a decline in capital formation in agriculture sector in the post-reform period, even in absolute terms, basically on account of a decline in capital formation by the private sector. The growth rate of crop output in the state decelerated from 3.4 per cent in the eighties to 2.3 per cent in the nineties.  The growth rate of total factor productivity in the crop sector declined from 1.58 per cent to 1.05 per cent over the same period.  As a result, the state  has slided down in its competitiveness in respect of several crops.  The resulting unremunerativeness of crop production probably explains the increase in fallow land noticed in some districts of Telangana and Rayalaseema. 

Area under public sources of irrigation, e.g., canals declined in the nineties due to deceleration in public investment.  As such, the entire increase in the irrigated area in the nineties is due to well irrigation which has become highly erratic in  most of the  areas on account of a steep fall in water table.  Growth rate of public expenditure on research and education declined from 6.6 per cent in the eighties to 3.9 per cent in the nineties.  The intensity of government investment in agricultural research and education in the state  at 0.26 per cent of its agriculture GSDP during 1992-94 was lower than for the other three southern states and was just around half of that for all India (0.49 per cent), i.e., for the Centre and states together.  Public expenditure on extension, which is borne by the state government, declined in absolute terms in the nineties.  It constituted a mere 0.02 per cent of state’s agricultural GSDP during 1992-94, as against the all states’ average of 0.15 per cent.

Several studies show that small and marginal farmers in AP still depend on informal or non-institutional sources of credit, particularly money-lenders, for 60 to 80 per cent of their credit requirements.  Consequently, the rates of interest charges are also quite high.  This has had an adverse fall-out in the context of the emerging high-input, high-risk agriculture.  With the virtual breakdown of the extension machinery and lack of access to institutional credit, small and marginal farmers are becoming increasingly dependent upon the private trade for credit and extension services.  In the absence of public regulation of such services, the resource-poor and gullible farmers are becoming victims of exploitation by the unscrupulous traders and money-lenders interested in selling spurious materials like pesticides.  The cases of suicide by the farmers in the state relate basically to small and marginal farmers and tenants, and are traceable to such deprivation and malpractices, and so highlight the immediate need for revamping the extension and credit delivery systems in the state.

SLOW DOWN IN INDUSTRIAL GROWTH

The slow down in industrial growth in the post-liberalisation period is accounted by the deceleration in the growth of registered manufacturing sector.  It appears that in the liberalised regime growth in employment has been higher in sectors where the wage rates have risen slowly.  There is a general improvement in the labour productivity in almost all the industrial categories, but, in general, this increase in labour productivity has not been associated with the increase in the rate of growth of employment due to slow down in industrial growth.    There is evidence of a slow rate of growth of investment in the state in the 1990s.  According to the CII study, AP has the 8th rank among states in respect of investment attractiveness.  During August 1991 to June 2002, the top five states of Maharashtra, Delhi, Tamil Nadu, Karnataka and Gujarat accounted for 52 per cent of total foreign direct investment (FDI)  approvals in the country.  While Maharashtra topped in attracting FDI to the tune of Rs 48,722 crore (17.32 per cent), AP, despite its reforms, could manage to attract only Rs 13,092 crore of FDI which works out to 4.65 per cent of total FDI in the country.  One of the major constraints on the growth rate is ensuring timely availability of adequate credit at reasonable cost from institutional sources to the small and medium enterprises, especially to those located in rural areas.  The other is good governance for ensuring growth-promoting regulatory environment by cutting delays in clearances and corruption.

DETERIORATION IN INFRASTRUCTURE

Power sector in the state experienced a sharp deterioration in the nineties.  Tariff revision was undertaken in 1995-96 which led to an improved position of revenue collection in the following two years but declined very sharply from 1998-99 onwards.  The revision was resorted to again in  January 1999. 

It became clear that financial problems of APSEB were primarily due to (i) irrational tariff setting, especially for agriculture, which rendered the system unviable; (ii) increasing transmission and distribution (T&D) losses which were camouflaged by “treating” most of it as agricultural consumption. Power sector reforms in the state are stuck up on the core issue of tariff setting for agricultural uses and not much headway can be made without bringing about a measure of consensus by adopting innovative approaches to achieve the goals of higher revenue, greater equity, conservation of resources, e.g., power and ground water, and accountability of management to the consumers.

The existing systems of irrigation have deteriorated over time and addition to the capacity has been negligible due to the decline in public investment.   According to the Planning Commission, nearly 35 per cent of the ultimate potential from major and medium irrigation projects in the state is yet to be exploited. In the case of minor irrigation, about 40 per cent of the ultimate potential remains unutilised. Irrigation charges were increased by more than three times from 1997. Even so, the surface water rates will at best cover maintenance charges, whereas in the case of lift irrigation the farmer also bears the full capital cost of the well or bore.

GROWING PUBLIC DEBT

On the fiscal management side, the state’s own tax revenues, which had fallen to around 5 per cent of GSDP in 1995-96, rose steadily to about 8 per cent in 2000-01 – nearly the level obtaining in the early nineties.  The state’s own non-tax revenues fell from around 2.4 per cent of GSDP in the early nineties to around 2 per cent of GSDP in 1995-96 and fell further in the three subsequent years, but recovered by 2000-01 to the level obtaining in 1995-96.  However, the expenditure rose at a higher rate than revenues during this period, leading to a rise in fiscal deficit from 3 per cent of GSDP in 1995-96 to 4.5 per cent in 2001-02.  For 2001-02, there are indications that AP’s fiscal deficit as a ratio to its GSDP was lower than that for several major states and the all states’ average. Revenue deficit came down from around 31 per cent of fiscal deficit in 1995-96 to 25 per cent in 1999-2000.  Although the ratio deteriorated in the subsequent years, it continued to be well below that for the southern states and the all states’ average.  Capital outlay improved to 40 per cent of fiscal deficit and further to 50 per cent in 2001-02.  Expenditure on establishment came down from 29.6 per cent of total expenditure in 1995-96 to 25 per cent in 2000-01, while subsidies dropped from 27 per cent of total revenue expenditure to 14 per cent  (excluding power subsidy), and 21 per cent (including power subsidy) over the same period. Capital expenditure, including lending for developmental activities, which had declined to 2.1 per cent of GSDP in 1995-96 rose to around 2.6 per cent in 2001-02.

Consequent to the steady rise in fiscal deficit, there has been a big rise in public debt after 1995-96.  Debt raised was used mostly for repayment purposes.  Whereas in 1990-91 nearly 20 per cent of public debt raised was spent towards repayment, in 2000-01 as much as 71 per cent of the public debt raised was spent for repayment purposes. However, despite rising indebtedness, outstanding public debt for AP at 25.9 per cent of GSDP in 2000-01 was lower than for all the major states, the all states’ average being 30.69 per cent.  Even so, the steep rise in the AP’s debt-GSDP ratio in the last five years, which is expected to touch the level of 31 per cent of GSDP, is a matter of concern, as this can be sustained only with a rise in the growth rate of GSDP and the state’s revenues.

(To be continued)