The World Bank and Andhra Pradesh are not as strange and uneasy bed fellows as they may look at first sight. In a recently circulated document, the World Bank has done a survey of the industrial and fiscal situation in the state and has recommended several key steps, which, if adhered to, will rejuvenate and kickstart the state's sleeping economy.

The document, prepared by the country operations, industry and finance division, sets forth an impressive agenda for economic reforms, but the overwhelming feeling which one is left with on reading the report is that the state is an extremely resource-rich state, which is shackled because of poor infrastructure, which is a consequence of the moribund fiscal situation. There is perhaps no other state in the country which has so many free lunches for so many people; and in the ultimate analysis, there is little left for development work.

The report argues that, "At the heart of the AP's poor performance is its inability to deliver essential infrastructure and social services. At 18 per cent of the gross state domestic product (GSDP) in the recent past, the state government expenditure is not excessive, but it has been insufficiently oriented towards development. The state's poor record in terms of growth and human resource development stands in sharp contrast to the large fiscal resources being absorbed by subsidy and welfare programmes (about 10 per cent of GSDP in 1995/96), suggesting that more development-oriented expenditure might have led to more satisfactory outcomes."

Andhra Pradesh, like much of India, has successfully managed to abort growth by spreading resources across a large number of competing users, thinly. As a result, while trying to keep everyone happy by giving something to everybody, it has neglected roads (less than 0.5 per cent of GSDP is spent on it, while vehicles increase by 11 per cent a year), canal irrigation (both the area and its utilisation rates have been rapidly declining over the years), and power (installed capacity increasing at five per cent a year over the last ten years, which is half the rate of growth of demand), to such an extent that these taken together are now stifling growth. The Rs 2-3.5 kg rice scheme, prohibition, cumbersome tax structure and a weak tax administration have put the fiscal situation under tremendous strain.

The confidential memorandum suggests that unless there is a re-orientation in focus and reduction in the number of welfare programmes, better-managed public expenditure management and improved revenue mobilisation, the state will have a rough ride ahead. It needs to be mentioned that the measures taken by the Chandrababu Naidu administration are indeed pioneering and need to be pursued and strengthened in the years to come.

The Naidu regime raised the prices of rice and simultaneously put a ceiling on the maximum limit per family, withdrew prohibition quickly on it being found to be a fiscal strain, raised power tariffs, and awarded the first build-operate-transfer contract for the construction of a port, all significant steps towards revitalising a weak, but potentially rich economy.

The report makes a number of recommendations for strengthening the state finances, which will require tremendous political will to implement. The report argues for an immediate need to strengthen the state's main taxes like the stamp duty, sales tax and profession tax. Further, what would be an immediate corollary would be a merger of sales tax, surcharge and the turnover tax into value-added tax (VAT).

Till recently, despite an outdated tax structure, Hyderabad was collecting more sales tax than Delhi did. This indeed proves that evasion is less of a pastime in the state when compared with other states.

However, turnover tax ought to be abolished altogether, which is nothing but a retrograde measure in an otherwise fairly sensible and rational system. The report also recommends the replacement of the nineteen commodity schemes with a trade margin value-added tax for large dealers and administrative reforms to improve both auditing mechanisms and revenue mobilisation structures.

The other major recommendation of the report is on the power sector, which, with the 16 per cent shortfall in demand, curbs growth. It is distressing to note that a state of the size of Andhra Pradesh has power investments less than half of that of the fourteen major states of India. The poor creditworthiness of the sector, the state electricity board's gargantuan losses and the heavily subsidised electricity for agriculture are the principal causes for the deteriorating position of the sector. These were partially supported by high levels of cross-subsidisation to industrial and commercial consumption.

About $2.5 billion is required every year for the next six years to reform the power sector. The recent tariff adjustments by the Naidu administration are indeed an excellent first step, but these need to be buttressed with structural reform measures aimed at the longer term like increasing agriculture tariffs, separation and privatisation of distribution and generation of power, creating an independent regulatory body and enacting appropriating legislation to corporatise and manage these as commercial undertakings.

In sum, Andhra Pradesh, as it appears from the pages of World Bank's fiscal adjustment report, appears to be a tiger in waiting. If the state, under a leadership which is demonstrating more sagacity and will than any of its predecessors ever did, learns to live within its means and puts in place appropriate institutions for the longer term, it will indeed emerge as a formidable economic powerhouse in the future.

The author belongs to the Indian Administrative Service, and the views expressed are his own.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.