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Excessive loans: Centre pulls up AP Govt on debt scenario

On April 22, the Andhra Pradesh government informed the Union Ministry of Finance that it had raised loans worth Rs.18,500 crore through the Andhra Pradesh State Development Corporation (APSDC) from various public sector banks during the 2020-21 financial year by pledging its future tax revenue. 

Four months later, on July 30, the Finance Ministry pointed out to the state government that pledging of future tax revenue is “not in consonance” with the Constitution. The Finance Ministry has now sought comments from the Andhra government for several perceived financial irregularities in the state’s finances.

The Finance Ministry sought comments after the alleged violation was pointed out. The former bureaucrat alleged that the state government was using the loans to fund its welfare schemes. Subsequently, YSRCP rebel Member of Parliament Raghu Ramakrishna Raju Kanumuru also wrote to the Finance Ministry and to Prime Minister Narendra Modi alleging financial irregularities. 

The letter from Sumit Agarwal, Assistant Director of Public Finance — state division with the Finance Ministry, to the Andhra Pradesh Principal Secretary of Finance said, “Prima facie, the pledging of future tax revenues appears to be not in consonance with Article 266 (l) of the Constitution. Further, some of the provisions of the Andhra Pradesh State Development Corporation Act, 2020 appear to be violating the provisions of Article 293 (3) of the Constitution. It is requested to kindly provide comments in this regard.” 

In his letter to the Finance Minister Nirmala Sitharaman in June, rebel YSRCP MP Raghu said that under ‘Mission Build Andhra Pradesh’, the state government was transferring government properties. He outlined an instance in Visakhapatnam where the Collectorate, Tahsildar and other government buildings had been transferred to the Andhra Pradesh Skill Development Corporation “by planning to mobilise loans by mortgaging such government assets to the tune of Rs 1,600 crore.” He added that money had been raised and more was likely to be, and that there was a “serious threat” of default.

RRR’s letter on AP’s debt 

Raghu also wrote to PM Modi, stating that the Andhra Pradesh government is borrowing funds by incorporating new corporations. He accused the state government of concealing this information from the Government of India, thus violating all the existing norms of the Fiscal Responsibility and Budget Management Act (FRBM), 2003 and other borrowing and guarantee guidelines. FRBM is designed to establish financial discipline in the economy among states and reduce fiscal deficit.

Meanwhile, the Finance Ministry seems to concur with my view that future revenue of the state cannot be escrowed. The crucial point here is, does the state have the right to escrow future revenues? Even if you’re cash strapped, you can escrow future revenues and raise some funds, but do states have the legal right? 

It’s for the legislature of the day to legislate on the revenue. adding that risk, however, is with the public sector banks such as the State Bank of India, Punjab National Bank and Canara Bank that lent the money.

It is important to note that Andhra Pradesh is financially existing on a hand-to-mouth basis, with the hand being supported by borrowings day to day. As part of this, the state government has gone in for borrowings from nationalised banks by creating an escrow account and pledging future retail excise tax revenues into that account in addition to providing government guarantees for the same.

An escrow account is one that is managed by an outsider on behalf of two agreeing parties completing a transaction. The account may hold valuables such as money, property deeds and other personal finance documents.

Normally, an escrow arrangement is resorted to when funding is for a project with streams of income, and the loan is sanctioned based on the projects’ commercial profitability. But in this case, he said that what is escrowed is not future streams of income from a project as it is not commercial in nature, “but future taxes of the state to obtain a loan to fulfil the electoral promises of the Chief Minister.

Debt burden currently

For the state government, this is a convenient and ingenious way of circumventing FRBM norms, said the former bureaucrat. 

In his piece, he says that pledging future taxes have to be voted upon by the legislature of the time, and the expenditure can be approved at the time. How can the present government escrow these future taxes on which it has no right, and the bank accept it and give such huge loans?

The Andhra Pradesh state now has a debt burden of Rs 3,73,140 crore as of November 2020, PTI reported citing figures from the Comptroller and Auditor General (CAG).

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Tejaswini Pagadala

Communications Consultant: TEJASWINI PAGADALA is an independent communications consultant. She has previously worked with the Andhra Pradesh Chief Minister’s Office as the Communications Officer where she has written English speeches for the CM, managed English media communication from the CMO and handled social media accounts of Andhra Pradesh Chief Minister and the Government.
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