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Working Paper No. 288

Analysing Telangana State Finances:

Elongation of Term to Maturity of Debt to Sustain Economic Growth

No. 288 30-December-2019 Anindita Ghosh and Lekha Chakraborty

National Institute of Public Finance and Policy

New Delhi

NIPFP Working paper series



Analysing Telangana State Finances: Elongation of Term to Maturity of Debt to Sustain Economic Growth

Anindita Ghosh1

Lekha Chakraborty

Abstract

Telangana,thenewStateofIndia,wasformedonJune2,2014asperAndhraPradeshReorganisationAct,2014.AspertheStateReorganizationAct,alltheoutstandingliabilitiesonaccountofPublicDebtandPublicAccountoftheexistingStateofAndhraPradeshneededtobe“apportionedonthebasisofpopulationratio”ofthesuccessorStateTelangana.Giventhedevelopmentagendaofthenewstate,it isaformidablechallengetoadheringtofiscalrules by containing the debt-GSDP ratio at 20 per cent, while maintaining the stipulatedeconomicgrowthpathoftheStateat14-15percent,andevenattheprojected20percentinthelongrun.LaudabletheState’seffortstomaintainthehighgrowthtrajectory,howeverthemacro-fiscal parameters of the State - especially deficit and debt- are not within thestipulated fiscal threshold ratio.Against thisbackdrop,Telanganahasadoptedanewdebtstrategytogoforelongationofmaturitystructureofoutstandingdebt,toover40years,tomitigatetheroll-overrisksanddebtservicingcosts.Thisresilientdebtstrategyofshifttowardslong term tomaturity structureofpublicdebt isparticularly relevantwhenTelanganahasambitiousprojectslike“RythuBandhu”scheme(incomesupporttofarmers)andthecapitalinfrastructureprojectsforpublicirrigationandthecomprehensivedrinkingwaterprogrammetoallhouseholdstermed“MissionBhagiratha”.Thetaxbuoyancyisaboveunity,thoughtherearerevenueuncertaintiesfromGSTandtheintergovernmentalfiscaltransfersfromFinanceCommission. This can affect the State’smacro-fiscal projections. The fiscalmarksmanshipanalysisshowsthatthereareerrorsinfiscalforecasting,whichcallsforinternalcorrectionswithintheDepartmentofFinanceintheirforecastingmodelsofrevenueandexpenditure.

1GhoshisresearchfellowandChakrabortyisprofessoratNIPFP.ThispaperispreparedaspartofGatesPublicInnovationproject.TheanalysisofthispaperwaspublishedaseditorialcolumnintheFinancialExpress,datedDecember3,2019.ThanksareduetoNIPFPDatabankdivisionforprovidingtherequireddataforthestudy.



Analysing Telangana State Finances:

Elongation of Term to Maturity of Debt to Sustain Economic Growth

Telangana, since its formation on June 2, 2014, as per the Andhra PradeshReorganisationAct,2014.,isonthehighgrowthtrajectoryandtheeconomyisgrowingatahigher rate than national GDP growth. The statemaintains a surplus revenue deficit. ButTelanganahasafiscaldeficit-GSDPratioslightlyhigherthantheFRBM-legislatedthresholdat3%. The outstanding liability of the state is also above the FRBM stipulated ratio at 20%.Laudablearetheachievementsof thenewstate in termsofeconomicgrowth,butmacro-fiscalfundamentalslikefiscaldeficitandoutstandingdebtnotinconcomitantwiththeFRBMtargets.Thereforefiscalsustainabilityisaconcern.

Telangana has formulated a medium-term fiscal framework to work towardsstipulated threshold in debt-deficit dynamics. On the expenditure side, Telangana hasambitiousprojects.Itwasthefirststatetoannounceanincomesupportschemeforfarmers(Rythu Bandhu scheme), among the other five states in 2019-20. This is in the form ofunconditional cash transfers to farmers, instead of providing them loans. Farmers’ creditwaiver has created “moral hazard” issues. TheRBI State Finances report noted that theseincomesupporttransfersarecategorisedas“GreenBoxpayments”withintheframeworkoftheWorldTradeOrganisation(WTO).

Telanganahasgivenimportancetocapitalinfrastructureprojectstosustaineconomicgrowth. The flagship capital projects in Telangana include public irrigation projects and acomprehensive drinking water programme termed “Mission Bhagiratha” to provide safedrinkingwatertoallthehouseholds.

Ontherevenueside,giventheuncertaintiesinGSTrevenue,taxesarebuoyant.Wewill revisit this point later. The intergovernmental fiscal transfers from the 15th FinanceCommissionareapotentialsourceofrevenuetofinancetheirongoingcapitalprojects.The15th Finance Commission, during the commission’s state visit, noted that though capitalprojectsinTelanganahaveamultipliereffectoneconomicgrowth,therisingdebtanddeficitis a matter of concern. The state has echoed the concern that the potential significantweightageto“population2011”intheforthcomingtaxtransferformulaofthe15thFinanceCommissioncanplausiblyreducefiscaltransferstoTelangana,unlessthecommissiondesignsa transfer scheme tomitigate this potential loss to those states that have well manageddemographictransition.

Chatterjee and Eyigungor (2012) noted that when the possibility of self-fulfillingrollovercrisesistakenintoaccount,“long-termdebtissuperiortoshort-termdebt.”Theotherplausiblebenefitoflong-termbondissuanceisthatitcanfixtheyieldrateatcurrentlevelsofinterestratescenario,andalsoactas“referencerates.”TherecentOECDSovereignBorrowingOutlook report also showed that the share of long-term debt in the central governmentmarketabledebtreached90%in2015intheOECDregion,andisprojectedtorisegradually.Thisrelativelyhighleveloflonger-termdebtredemptionprofileintheOECDregionistolimitthepotential rollover riskand tomake thedebtportfolio resilient. TheRBI StateFinancesreportemphasisedthat,inIndia,thematuritystructureofdebtofthegovernmentofIndia



hasbeensteadilyincreasing,withthetenureofthelongestsovereigndebtsecuritybeing40years.

AsnotedbyRBI,since2015-16,15stategovernmentsincludingTelanganaandtheUTofPuducherryhave issued longer tenor securities.Among these states, Telanganahas thelongesttenorforstategovernmentsecurities,withthedebtmaturityprofilebeing30years.This is instructive, how a state within the framework of fiscal rules manages to keepaspirationalchoicestotakeitselftohighergrowthtrajectory.

Againstthisbackdrop,weanalysetheStateFinancesofTelangana.SectionIanalysesthe economic growth and its composition. Section II analyses the debt deficit dynamics.Section III deals with revenue receipts of Telangana, while Section IV analyses the publicexpenditurepatterns.SectionVexplainsthedebtstrategy.SectionVIconcludes.

I. Economic Growth

TheGSDPgrowthrateoftheStateisaround13-14percent.WithinGSDP,theStateismarkingsignificantgrowthintertiarysector.Theprimecomponentofgrowthintra-servicesector is real estate, ownership of dwelling and professional services (Directorate ofEconomicsandStatistics,GovernmentofTelangana,2017).TheStateischannelizingagoodamountofresourcestowardsirrigationandfloodcontrolaspartofeconomicservice.

Table1:Telangana-SectoralCompositionofGSDP(atcurrentprices)

Sector 2014-15* 2014-15 2015-16SRE

2016-17FRE

2017-18AE

Primary 17.9 19.5 18.1 18.8 18.2Secondary 25 19.2 18.3 17 16.4Tertiary 57.1 61.3 63.6 64.2 65.2

Figuresshowpercentagecontribution.SRE:secondrevisedestimate;FRE:firstrevisedestimate;AE:advancedestimateSource:DirectorateofEconomicsandStatistics,GovernmentofTelangana,Hyderabad*MinistryofFinance,GovernmentofTelangana,https://finance.telangana.gov.in

II. Debt and Deficits

The effective debtmanagement is very crucial for fiscalmanagement. It providessupport forbetterbudgetdesignconsistentwithmediumterm fiscalpolicy.TheStatehaspublicdebtapportionedaspertheAndhraPradeshStateReorganisationAct2014.AspertheStateReorganizationAct,alltheoutstandingliabilitiesonaccountofPublicDebtandPublicAccountoftheexistingStateofAndhraPradeshneededtobe“apportionedonthebasisofpopulationratio”ofthesuccessorStateTelangana.



Table2:DebtsandDeficitsoftheStateTelangana(%ofGSDP)

2014-2015

2015-2016

2016-2017

2017-2018

2018-2019RE

2019-2020BE

RevenueDeficit 0.073 0.041 0.21 0.459 0.041 0.665FiscalDeficit -1.86 -3.2 -5.35 -3.52 -3.36 -2.81Outstandingliabilities

17.51 18.74 22.51 24.23 24.77 23.00

Source:FinanceAccountandBudgetDocumentofTelangana,variousyears

Telanganahasnorevenuedeficit since2014-15as likeerstwhileundividedAndhraPradesh.TheStateexperienced2.6times increase inrevenuereceipts (asratioofrevenuereceiptin2014-15torevenuereceiptsin2019-20),whilerevenueexpenditureincreasedby2.5 times. Inboth2018-19and2019-20 (proposed) revenue receipt ismore than revenueexpenditure.Theinter-temporalgrowthrateofrevenuesurplusbetween2014-15and2019-20 BE is shown as 16.8 per cent while at the aggregated sub-national level, revenueexpenditureoutpacedrevenuereceipts.

Telanganawasabletomaintainthefiscaldeficit limitof3percentonlyin2014-15when it was formed. Since then, fiscal deficit was more than 3 per cent in every year.Telanganaexperiencesariseinfiscaldeficitfrom3.2percentin2015-16to5.35percentin2016-17andfurtherto3.52percentinthefollowingyear.Aspertherevisedlimitoffiscaldeficitat3.5percentbythenewFRBMrule,Telanganawasjustatthethresholdlimitin2018-19RE.Thehigherfiscaldeficit(greaterthan3percent)havebeennoticedwhichmaytakeintoaccounttherecommendationof14thFCallowingflexibilityof0.5percentoverandabovetheannualfiscaldeficitlimitonfulfillingcertainconditions.

In2015,the14thFinanceCommissionrecommendedthatstatescontinuetomaintainafiscaldeficitat3%oftheirGSDP. Itsuggestedthatthefiscaldeficit limitberelaxedtoamaximumof3.5%,only if stateswereable tocontain theirdebtand interestpayments tospecifiedlevels.Therelaxationwouldbeallowedinthefollowingcases:

(i) 0.25%ifthedebt-GSDPratiooftheStatewasunder25%intheprecedingyear,and

(ii) 0.25%ifinterestpaymentsoftheStatewerelessthanorequalto10%ofitsrevenue

intheprecedingyear.

These abovementioned extra-borrowing powers can be availed by a State eitherseparatelyorsimultaneouslyonlyif,firstly,thereisnorevenuedeficitintheyearinwhichthe borrowing limits are to be fixed and the immediately preceding year and secondly, acontroloverthefiscaldeficitatitsstipulatedlimitof3percent.



Table3:RatioofInterestPaymentstoRevenueReceiptsinTelangana(%)Year 2014-

20152015-2016

2016-2017

2017-2018

2018-2019RE

2019-2020BE

Average

Interestpayment/ownrevenuereceipt(%)

14.63 13.90 14.80 16.84 16.07 15.38 15.27

Interestpayment/Totalrevenuereceipt(%)

10.24 9.93 10.40 12.20 9.80 10.55 10.52

Source:computed;datasource:FinanceAccountsandBudgetDocumentofTelangana,

Telanganawouldnotaffordtheextraborrowingbenefitlimitof0.25percentinthecurrentfinancialyearasthelastactualfigure-ofFY2017-18-putsinfronttheinterestpaymentobligation out of total revenue receipt quite higher than 10 percent (tables 2 and 3). Therevisedfigureof2018-19wasresilienttheinterestobligationwithinthelimitof10percent.Paralleltothat,inthelatestbudgettheStateclaimstoreducethedeficitlevelat2.81percentquitebelowthan3.25percent.

AnanalysisoffiscalmarksmanshipratiosrevealwhetherTelanganahavetheerrorsofoverestimation or underestimation of macro-fiscal parameters. This newly formed Stateallowedus tocompute the ratiosbasedon three timepoints.The ratiosarecomputedbyconsideringtheBE,REandActualfiguresfortheyear2015-16,2016-17and2017-18.Overestimationisexplainedbythemagnitudeoftheratiosgreaterthan1.Thefartheratioisfrom1,signifieshigherextentofoverestimation.Theunderestimationisdenotedbythevaluesoftheratioslessthan1.

Fromthetable4,itisquiteclearthatallthefiscalparametersareoverestimatedasperbudgetestimatesexceptfiscaldeficit.Thehighestoverestimationisbeingobservedforgrants from centre. The RE/Actuals give an under stated values for ownnon-tax revenue,capitalexpenditureandrevenuedeficit.Thebestestimationisobservedfortaxdevolution.Ontheotherhand,fiscaldeficitisthoroughlyunderestimatedbothonproposalandrevisionofbudgets.

Table4:FiscalMarksmanshipinTelangana

Heads BE/Actuals RE/Actuals

TotalRevenueReceipt 1.33 1.19

OwnTaxRevenue 1.13 1.07

OwnNon-taxRevenue 1.45 0.81

Shareincentraltaxes 1.00 1.01

Grantsfromcentre 1.98 1.83

RevenueExpenditure 1.23 1.12

CapitalExpenditure 1.08 0.89

RevenueDeficit 1.74 0.36

FiscalDeficit 0.82 0.63

Source:(Basicdata),FinanceaccountsandBudgetdocumentsofvariousyears,GovernmentofTelangana



Telangana has fiscal deficit to GSDP ratio higher than the rule-based numericalthreshold in every year,which clearly defines the fiscal stress of the State in front of thechallengeforfiscalconsolidation.Theexpenditureoncapitalaccountisunderestimatedonrevisionofbudget.

Over the years, the pressure of outstanding liabilities is increasing. The last fourbudgets mark outstanding liabilities higher than the stipulated limit by 14th FinanceCommission.(table2).Inordertocombatthesituation,thisStateplaysanimportantrolebyelongatingthedurationofdebtsissuedbytheStategovernmentmorethan10yearsuptoamaximum limit of 30 years. The burden of interest payment given the ability of revenueraisingcapacityoftheStateindicatesusthecleardirectiontomeasuredebtsustainabilityoftheState.

Source:CSOandFinanceAccounts(variousyears)

Figure1depictsthatthepercentageofinterestpaymentstoGSDPratioinTelanganavarieswithinthelimitof1.03to1.48approximatelyovertheperiodoflast6yearsincludingthelatestbudgetproposal.Theratioofinterestpaymentstoown(taxandnon-tax)revenueindicates the strengthof fiscal sustainability. Itmeasures the ability of the government tomeet past and present debt obligations out of its own resources. The average (interestpayment/ownrevenue)percentfor16majorstatesofIndiaduring2015-16was21.54percent.We incorporate this ratio forTelangana for6 fiscalyears (table3),whichmarginallyabovethestipulatedlimitat10percent.

AconsistentrevenuesurplusimpliesthattheStateisself-sufficientontheborderlinetomeetitsownexpenses.Thecrucialchallengecomestoholdthefiscaldeficitatthelimitof3%becausefiscaldeficitaccountsthetotalexpenditureovertotalreceiptsclubbingtogetherrevenueaccountandcapitalaccount.AndthefiscaldeficitgeneratestheState’sinclinationtowardsborrowingstofillthegap.ItisalatestchallengetoTelanganatoholdthelimit.

1.001.101.201.301.401.50

1.03

1.31 1.311.44

1.351.48

Figure 1: Interest Payment as % of GSDP



III Revenue Receipts

Weobservethatin2017-18,Telanganaachieved11.78%ofGSDPastotalreceiptofrevenueandin2019-20,itis13.99%ofGSDP.ThegrowthrateofGSDPofTelanganainFY2017-18overitspreviousyearwasatdoubledigitat14.3%.InFY2017-18,GSDPownrevenuecollectiontoGSDPratiowas8.54%(table5).WhenTelanganawasformed in2014-15, theshareofowntaxrevenuestoGSDPwasonly5.79%.Inthe2019-20BE,thisisexpectedtobe8.59%.Thismarksagrowthof48.35%inthetaxrevenueover6yearsortobeprecise,morethan8%averageannualgrowth.Theshareofnon-taxrevenuetoGSDPiscontinuouslyfallingsince2015-16,buthasimprovedin2019-20asperbudgetestimates.Thefiguresfornon-taxrevenueswereatpeakof2.49%in2015-16.Therewasadipin2018-19,whennon-taxrevenuefellto0.70%,asperrevisedbudgetestimatesofthatyear.

Table5:RevenueReceipts(as%ofGSDP)BudgetDetails(FY) 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

TotalRevenueReceipts 10.09 13.17 12.57 11.78 13.79 13.99

OwnRevenueReceipts 7.06 9.41 8.83 8.54 8.41 9.6

OwnTaxRevenue 5.79 6.92 7.35 7.5 7.71 8.59

OwnNon-taxRevenue 1.27 2.49 1.48 1.04 0.7 1.01

CentralTransfers 3.03 3.76 3.74 3.25 5.38 4.4

Taxdevolution 1.62 2.14 2.26 2.18 2.14 2.08

Grants-in-aid 1.41 1.63 1.48 1.07 3.24 2.31

Source:FinanceAccountandBudgetDocumentsofTelanganaandallGSDPdataaretakenfromMOSPIsiteandthefiguresareincurrentprices.

TelanganaexperiencedhugehikeinthereceiptofCentralgrants(figure4).Infact,thefallinState’snon-taxrevenuewasmorethancompensatedbytheincreaseingrants-in-aid.




Telangana received higher tax devolution as percentage of GSDP than grant aspercentageofGSDPtill2017-18.Weknowthataspertherecommendationsofthe14thFC,theStates’shareinthenetproceedsoftheUniontaxrevenueswouldbe42%whencomparedto 32% as recommended by the 13th Finance Commission. Following the horizontaldistributioncriteria,theshareofTelanganaisworkedouttobe2.44%oftotaltaxdevolutionsor total divisible pool of taxes. Among the twomajor components of central transfer,weobservethat thecontributionof taxdevolutiontothetotal revenuereceiptof theState isquitestationary.Itrangesfrom16%to18%aspartoftotalrevenuereceiptsoftheState.Thelatestbudgetcarriesanindicationoflowercontributionoftaxdevolution(14.89%)tothetotalrevenueofTelangana.

TheStateshowsagranttotaxdevolutionratioat0.49in2017-18.ItwasthelowesteverratiosincetheformationoftheState.After2017-18thetrendischanged,ithasincreasedto3.24percentofGSDPin2018-19.In2019-20,theratioofgranttotaxdevolutionis1.11(Rs2,058,305lakhasgrantandRs.2,283,530lakhsastaxdevolution).Wedecomposethesourcesofown tax revenuesaspercentageofGSDP.Theown tax revenueaspercentageofGSDPbetween2014-15and2018-19recordsamorethan30%growth.Thelatestbudgetproposesacontinuingtrendofgrowthingenerationofowntaxrevenue.

OwnRevenueReceipts

CentralTransfers0.002.004.006.00

8.00

10.007.06

9.418.83 8.54 8.41

9.60

3.03 3.76 3.743.25

5.384.40

Figure2:RevenueReceipts(Components)toGSDPratioinTelangana(%)

OwnRevenueReceipts CentralTransfers



Table6:DecompositionofRevenueReceipts(as%ofTotalRevenueReceipt)

BudgetDetails 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

Own Revenue Receipts

(1+2)

70.01 71.44 70.26 72.44 60.96 68.58

1.OwnTaxRevenue 57.38 52.51 58.45 63.63 55.91 61.37

2.OwnNon-taxRevenue 12.63 18.93 11.81 8.81 5.05 7.21

3.CentralTransfers(i+ii) 29.99 28.56 29.74 27.56 39.04 31.42

i.Taxdevolution 16.04 16.22 17.96 18.49 15.55 14.89

ii.Grants-in-aid 13.95 12.34 11.78 9.07 23.49 16.52

Source:FinanceAccountandBudgetDocumentsofTelangana

Intheyearofformation,theratioofowntaxrevenuetocentraltransferwas70:30forTelangana.AsperthelastFY2018-19RE,theratioturnsoutas60:40approximately.Ontheotherhand,attheaggregatelevelof28sub-nationalgovernments,in2014-15,theownrevenuereceipttocentraltransferratiowas58:42whichcomesdownto51:49in2018-19asper budget estimates (RBI, 2019). Telangana is above average central transfer dependentstate. Out of the two components of central transfer, tax devolution seems to be quiteconstant as percentage of total revenue receipts of Telangana. On the contrary, at theaggregatedlevelof28sub-nationalgovernments,thepercentageofrevenuegenerationondivisiblepool is increasing from21%of total revenue receipt to29%. Ananalysisof taxbuoyancyindicatestheelasticitiesoffiscalparameterswithrespecttoGSDP.

Table7:RegressionResultsonTaxBuoyancyMethod:LinearRegression

DependentVariable:

Intercept RegressionCoefficient

t-value

Taxrevenue -11.5 1.49* 16.68Ownrevenuereceipt

-6.9 1.24* 6.89

Non-taxRevenue 16.29 -0.14 -0.22CentralTransfer -14.1 1.6* 5.53


Thecoefficientofown-taxrevenuereceiptis1.24.Atthesametime,itistobenotedthat the coefficient forCentral transfer is1.6,which ismore than thatof taxbuoyancy. ItimpliesthatasinglepercentageincreaseinGSDPkeepsmoreimpactonCentraltransfer.



Table8:OwnTaxRevenue–MinorHead(%ofGSDP)BudgetDetails 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

OwnTaxRevenue 5.79 6.92 7.35 7.50 7.71 8.59

TaxesonIncome 0.05 0.06 0.06 0.05 0.05 0.05

TaxesonPropertyandCapital

Transactions

0.44 0.57 0.60 0.57 0.78 0.56

Stampsandregistrationfee 0.43 0.54 0.58 0.56 0.77 0.55

Taxes on Commodities and

Services

5.29 6.29 6.69 6.87 6.88 7.97

State Goods & Service Tax

(SGST)

0.00 0.00 0.00 1.73 2.57 3.04

StateExcise 0.56 0.66 0.85 1.25 1.19 1.23

SalesTax 4.37 5.16 5.19 3.33 2.56 3.19

Other Indirect taxes and

duties

0.37 0.46 0.65 0.56 0.56 0.51

Source:FinanceAccountandBudgetDocumentofTelangana(variousyears)

Telangana does not have any tax income from agriculture. A major tax head isproperty and capital transactions tax including land revenue, taxes on urban immovableproperty and stamps& registration fee. Out of total indirect taxes, sales tax is themaincomponentofindirecttaxesinFY2014-15.TheshareofsalestaxtoGSDPwas4.37%duringtheyearTelanganawasformed(table8). Itaccountsfor 83%contributiontotherevenuecollection in 2014-15. The predominance of sales tax is getting eroded. For 2019-20, thebudgetproposesthatsalestaxwillbe40%oftotaltaxesoncommoditiesandservices.StateGoodsandServicetaxes(SGST)constituted23%,33%and38%ofowntaxrevenuecollectionoftheStateduring2017-18,2018-19and2019-20BErespectively.SGST-GSDPratioshowsaclearincreaseoverthelastthreeyearsincludingthelatestbudgetproposal.

TheproportionofstateexcisetaxtoGSDPisincreasingsince2014withaslightfallin2018-19asperrevisedbudget.In2014-15,9.5%oftotalowntaxrevenuecollectionwasfromStateexcisetax.Ithasincreasedto16.6%in2017-18.Inthelatesttwoyears,thepercentageofStateexcisetaxtotheState’sowntaxrevenuedecreasedto15%and14%respectively.Thismay imply the need to expandmanufacturing and industrial base. Overall, the observedbuoyancyintaxrevenueofTelanganaindicatesthatthestateisgettingbackintothepathoffiscalconsolidationoverthemediumterm.



IV. Public Expenditure

The fiscal autonomy ratio which indicates the capability of the own tax revenuegenerationofthestatetofulfilitsburdenoftotalexpenditureisonlyabout52%in2019-20.Asanaverageover6years,Telanganaisabletomeetabout47.5%ofitstotalexpenditurefromitsowntaxraisedrevenuecollection.

Thefigure5depictsthatTelanganahasnotshownanincreaseincapitalexpenditureaspercentagetoGSDP.Therevenueexpenditurefollowsanincreasingtrendfrom11%GSDPin 2017-18 to 14% in 2018-19 RE and 13% in 2019-20BE. Capital outlay-GSDP percentagefollowsquiterigidpath2017-18onwardsat3%ofGSDP. Itwashighest (morethan5%) in2016-17.


Table9:TrendsinExpenditure(%ofGSDP)Components 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

TotalRevenueExpenditure 10.02 13.13 12.36 11.32 13.75 13.33

TotalCapitalOutlay/Capital

Expenditure

1.66 2.35 5.06 3.17 3.24 3.32

TotalExpenditure,ofwhich 11.67 15.48 17.42 14.50 16.99 16.65

Economicservice 4.88 5.75 7.68 5.00 6.32 7.05

Socialservice 3.89 5.64 5.83 5.32 6.73 6.04

Education,Sports,ArtandCulture 1.38 1.83 1.85 1.66 1.46 1.21

MedicalandPublicHealth 0.51 0.65 0.75 0.67 0.79 0.53

0.00

0.05

0.10

0.15

0.100.13

0.120.11

0.14 0.13

0.02 0.020.05

0.03 0.030.03

Figure3:ExpenditureTrendsinTelangana(as%ofGSDP)

TotalRevenueExpenditure CapitalOutlay



InterestPayments 1.03 1.31 1.31 1.44 1.35 1.48

Source:FinanceAccountandBudgetDocumentofTelangana

Table 9 shows that the share of total revenue expenditure to GSDP were 10.02percentin2014-15and13.33percentin2019-20BE.ThesharesoftotalrevenuereceipttoGSDP were 10.09 % and 13.99 % for 2014-15 and 2019-20 BE respectively (table1). ThisindicatesslightrevenuesurplusoftheState.

Out of the total expenditure-GSDPpercentages, thehighest proportion accrues toeconomicservice.Whenthestatewasformedin2014-15,about41.8%oftotalexpenditureoftheStatewentforeconomicservice.Inthelatestbudgetproposalof2019-20,7.05percentofGSDPisplannedtobespentoneconomicservicewhichaccrues42.3%oftotalexpenditure.while9.6percentofGSDPwasspentonsocialandgeneralservices(table9).Telanganaspentonly 5%ofGSDPoneconomic service in 2017-18. In that year, total expenditure toGSDPpercentwasalsoonly14.5%,whichwasminimumexpenditureaspercentageofGSDPoftheState.Interestingly,thegrowthof(totalexpendituretoGSDPpercent)over2014-15to2019-20budgetestimateis42.6%,whilethegrowthofexpenditureon(economicserviceoverthesameperiod toGSDPpercent) is44.4%. Thepercentage increase in totalexpenditureoneconomicserviceismarginal.BoththegrowthandpercentageincreasefiguresnotifyusthattheStateisnotveryvibrantinimprovingexpenditureoneconomicservice.

Agricultureandalliedservicescompoundedwithirrigationandfloodcontrolrequired2.74%ofGSDPin2014-15.Inimpliesthatonagricultureandalliedservicewithirrigation&floodcontrol together,Telangana investsabout56%outof totalexpenditurededicated toeconomicservice(table10).After2014-15expensesonagricultureandalliedservicestoGSDPaspercentagecontinuedtodecreasefornexttwoyears,whileirrigation&floodcontrolgotmoreattentionduringthattimeintermsofahigherpercentagesharetoGSDP.Thistrendwascontinuedtill2017-18.Inthatyear,Telanganaexperiencedadeclineintheshareofexpenseson economic service to GSDP. Irrigation and flood control attained more attention thanagriculture and allied activities since 2013-14 till 2018-19RE. The latest budget somehowproposestospendahigherpercentofGSDP(2.12percent)onagricultureandalliedactivities,whereastheallocationonirrigationandfloodcontrolis1.99percentofGSDP.Inotherway,30%oftotalallocationoneconomicservicesgoestoagricultureandalliedactivitieswhereas28%goestoirrigationandfloodcontrol.



Table10:ExpenditureonEconomicServices-MinorHeads(%ofGSDP)BudgetDetails 2014-

20152015-2016

2016-2017

2017-2018

2018-2019RE

2019-2020BE

AgricultureandAlliedServices 1.16 1.15 1.03 0.94 1.92 2.12RuralDevelopment 0.71 0.88 1.01 0.62 0.75 0.64SpecialAreasProgrammes 0.00 0.00 0.00 0.00 0.00 0.00Irrigation&FloodControl 1.58 1.89 2.38 1.72 2.04 1.99Energy 0.7 0.86 2.29 0.94 0.58 0.51

IndustryandMinerals 0.14 0.15 0.07 0.12 0.16 0.05Transport 0.46 0.54 0.57 0.37 0.38 0.16OtherCommunicationServices 0.00 0.00 0.00 0.00 0.00 0.00ScienceTechnologyandEnvironment

0.00 0.00 0.00 0.00 0.00 0.00

GeneralEconomicServices 0.13 0.28 0.32 0.29 0.48 1.58EconomicServices 4.88 5.75 7.68 5.00 6.32 7.05

Source:FinanceAccountandBudgetDocumentofTelangana

In 2014-15, energy constitutes 14.3% share of economic service as compared toirrigation and flood control at 32.44%, in terms of allocation of expenditure on economicservices. There isnosignificantexpenditureonscience, technologyandenvironment.Thebudgetof2019-20allocatesRs.836.81 lakhsonlyonscience,technologyandenvironmentground.Transportreceived2.30percentofGSDPinthelatestbudgetproposal.ThedecliningshareofsecondarysectortoGSDP(table1)supportsthisfinding.

Table11:ExpenditureonEconomicServices–MinorHeads(%oftotalEconomicservice)

BudgetDetails 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

AgricultureandAlliedServices 23.72 19.96 13.45 18.77 30.43 30.00

RuralDevelopment 14.52 15.35 13.15 12.34 11.91 9.07

SpecialAreasProgrammes 0.00 0.00 0.00 0.00 0.00 0.00

Irrigation&FloodControl 32.44 32.93 31.03 34.48 32.29 28.27

Energy 14.30 14.95 29.83 18.87 9.21 7.21

IndustryandMinerals 2.85 2.61 0.93 2.39 2.53 0.77

Transport 9.38 9.34 7.46 7.33 6.04 2.30

Other Communication

Services

0.00 0.00 0.00 0.00 0.00 0.00

Science Technology and

Environment

0.02 0.02 0.03 0.03 0.03 0.01



GeneralEconomicServices 2.76 4.85 4.12 5.79 7.56 22.37


The figuredepicts the relativeweightageofeconomic serviceand social service intermsoftheallocatedexpendituretoGSDP.


Itisclearthatbetween2015-16and2017-18,economicservicegetsmoresharesofexpenses than social series. After that, next two years, i.e., during 2018-19 to 2019-20RE,gainedpriorityofpublicexpenses.Theanalysisrevealsthatemphasisonruraldevelopmentandirrigationandfloodcontrolsectorsduring2015-16till2017-18explainsthesharpriseinexpensesaccruingtoeconomicservice(table10).

Thesocialservice-GSDPpercentagehasincreasedfrom3.89%in2014-15,to5.32%in2017-18(table12).ThestatedfiguresexplainthatTelangananeedstoattendonethirdofitstotalexpenditureonsocialservicein2014-15whichhasbeen36.27%inthelastbudgetproposal. So, the extent of increase in expenditure for social service is higher than the

3.00

4.00

5.00

6.00

7.00

8.00

4.885.75

7.68

5.01

7.16

6.31

7.05

3.895.64

5.83

5.33

7.156.72

6.04

Figure4:ExpenditureofTelangana:SocialserviceandEconomicService(%ofGSDP)

Economicservice Socialservice



marginal increaseineconomicserviceallocationforover6years.Afterthatinthelasttwoconsecutivebudgets,theshareofallocationsforsocialservicetoGSDPhasincreasedtomorethan6%.

Table12:ExpenditureonSocialServices-MinorHeads%ofGSDP)

BudgetDetails 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE

SocialServices 3.89 5.64 5.83 5.32 6.73 6.04



Water Supply, Sanitation, Housing and Urban

Development

0.46 0.81 0.72 0.64 1.33 1.07

Information&Broadcasting 0.01 0.04 0.05 0.04 0.04 0.02

WelfareofScheduledCaste,ScheduledTribes&

BackwardClasses

0.67 0.85 1.05 1.10 1.77 1.20

LabourandEmployment 0.01 0.03 0.02 0.02 0.04 0.21

SocialWelfareandNutrition 0.84 1.39 1.38 1.18 1.28 1.78

Others 0.00 0.03 0.01 0.01 0.02 0.01


Table13:ExpenditureonSocialServices-MinorHeads%ofSocialServices)

BudgetDetails 2014-

2015

2015-

2016

2016-

2017

2017-

2018

2018-

2019RE

2019-

2020BE



Water Supply, Sanitation, Housing and Urban

Development

11.73 14.43 12.32 12.06 19.75 17.75

Information&Broadcasting 0.37 0.76 0.91 0.84 0.64 0.41

Welfare of Scheduled Caste, Scheduled Tribes &

BackwardClasses

17.12 15.02 17.97 20.62 26.22 19.94

LabourandEmployment 0.38 0.59 0.38 0.44 0.61 3.43

SocialWelfareandNutrition 21.72 24.67 23.67 22.20 19.07 29.55

Others 0.08 0.50 0.16 0.16 0.25 0.12




ThesectorslikeEducation,sport,artandculturetogetherreceivedmorethan35%ofallocationoutofallsocialservicesin2014-15(table13).AfterFY2015-16,theallocationforeducationasGSDPpercentreducedovertheyears.Theshareofeducationtosocialserviceisjust 20 percent in the latest budget proposal. The sector likewater supply and sanitationservice received 1.33% of GSDP as revised estimate of 2018-19 budget. This records thehighesteverallocationtowardsthisserviceasGSDPpercentage.Allocationonsocialwelfareandnutrition(outoftotalsocialserviceexpenditure) isashighas29.54%in2019-2010BEwhilethefigureis17.75%onwatersupplyandsanitation.Itistonotethatduringlast6years,theaverageannualgrowthofthepercentageshareofwatersupplyandsanitationtosocialserviceis8.6%.Theaverageannualgrowthonsocialwelfareandnutritionis6.1%.

V. Public Debt Strategy

WhatisrequiredfortheStateisapublicdebtstrategytosustainthehighgrowthpathwithoutpublicexpenditurecompression.Theempiricalevidence(ReinhartandRogoff,2008;ChecheritaandRother,2010;WooandKumar,2010;Cecchetti,MohantyandZampolli,2011)reveal thathigh levelsofdebt isnotconducive togrowth, rather itputsadraggingeffect.However,Telanganaistakingaboldsteptowardselongationofdebtmaturity.ThisstrategyrevealssuccessfulimpactsonG7countriesmostly.Thelongmaturityperiodofaboutmorethan10to30years,whatisappliedintheStateofTelangana,isexpectedtolimittherolloverriskinthedebtstructureandresilientthedebtportfolios.Inaddition,afterseveralyears,thedebtcouldgeneratespaceforfiscalsavings(Maravalle,A.,andRawdanowicz,L,2018).Inthisrespect,TelanganaisplayingtheinstructiverolebeforeotherStategovernmentsbyissuingsecuritieswithamaturityperiodof30yearswheretheGovernmentofIndiaownsthelongestsovereigndebtsecurityof40years(Table14).TheimpactisobservedinanimprovementofdebtprofileofTelanganawiththeweightedaveragematurityofmarketborrowingsat14.79yearsattheendofMarch,2019.Theimpactonfiscalsavingsisyettobeobservedwithagapoffewmoreyearsinfuture.

Inrecentyears,signsofpressuresonthefiscalpositionofstateshavere-emerged.The States are over-cautious in accepting liabilities in the form of creating loans directedtowards capital expenditure. TheStatesevenwithacquiringpositive signals forenhancingextra 0.5% outstanding liabilities after satisfying the two prime criteria (i.e. at least zerobalanceinrevenueaccountandamaximumlimitof3%infiscaldeficit)areexpressingtheirapathyforextrainvestmenttowardscapitalledinvestment.



Table14:MaturityProfileofOutstandingstate*govt.subsidies

(as%tototal))

State/UT AndhraPradesh

Gujarat Haryana Maharashtra Odisha Telangana Puducherry All stateandUTs

2019-20 7.6 5.7 2.8 6 3.6 -- 9 5.3

2020-21 7.6 6.4 3.2 7.4 8.9 -- 10.8 5.3

2021-22 8.3 9.8 7 10.9 12.4 -- 9.6 7.3

2022-23 9.8 8.2 10.3 8.8 12.5 0.9 9.1 7.7

2023-24 11 8.1 12.2 9.3 13 0.9 9 8.3

2024-25 8.8 8.3 11.9 9.8 3.6 8.7 8.5 9.3

2025-26 8.9 8 13.7 12.7 7.1 14.2 8.1 11.5

2026-27 7.9 10.7 12.4 12.7 7.1 16.7 5 13.1

2027-28 5.5 13.4 11.8 6.2 1.8 0.9 7.2 11.8

2028-29 6.1 20.3 5.3 5.1 1.8 0.9 4.5 11.4

2029-30 4.1 - -- 5.5 3.6 0.9 4.1 1.3

2030-31 3.4 1.1 -- -- -- 0.9 4.5 1

2031-32 3 - -- 2.1 8.6 4.4 10.4 0.9

2032-33 3.7 - -- 3.5 3.6 4.7 -- 1.6

2033-34 2.5 - 1.4 -- 1.8 -- -- 1.4

2035-36 0.2 - 0.5 -- 5.4 -- -- 0.1

2036-49 1.7 - 7.5 -- 5.4 46.2 -- 2.9

TOTAL 100 100 100 100 100 100 100 100

*selectedstates(outstandingasonMarch31,2019)Note:compensationbonds,loansnotbearinginterestandspecialbonds(UDY)arenotincludedSource:RBIrecords

ThelackofinclinationoftheStatestowardsdrawingfreshloansforcapitalintensiveinvestment could be explained in two ways. One reason may be the nature of capitalinvestmentitselfasthequantityof initial investmentishugewhichawaitsalonggestationperiod to fructify. Secondly, thedebtburden thereforebecomes consecutive yearby yearwhichpushestheStatestotheextrachallengingzonetomaintainthe limitofoutstandingliabilitieswithinthesafepremises.Ontheotherhand,iftheStatesfollowsthepathoffiscalconsolidationbycurtailingtheamountofcapitalinvestment,thatmayleadanadverseeffecton economic growth in the long run. This is evident from the analysis of economicconvergenceinthecontextofIndia(ChakrabortyandChakraborty,2019).Inthelightofaboveanalysis, Telangana needs its continual effort for wider tax base to generate indigenousresourcestrength.ThisState is recommendedtoexercise theextraborrowingcapacity forsupportingcapitalinvestmenttoendurethelongtailedeffectofgrowth.



VI. Conclusion

Given the developmental aspiration of the new state to remain in high growthtrajectory,investingincapitalinfrastructureprojectsiscrucial.Telanganahasrevenuesurplus,(norevenuedeficit),buthashighfiscaldeficittoGSDPratiothanwhatisstipulatedinthefiscalrules.Thepublicdebt-GSDPthresholdratioisat20percentasperFRBM,whileTelanganahashigherdebt-GSDPratioformaintainingthestipulatedeconomicgrowthpathoftheStateat14-15percent,andevenattheprojected20percentinthelongrun.

Theinvestmentincapitalprojectsthoughhavemultipliereffectsoneconomicgrowth,the rising debt and deficits in Telangana is amatter of concern. The recently announcedincomesupportschemeforfarmers–RythuBandhu–isalsoaconcernintermsofmaintainingdebtdeficitdynamicswithinfiscalrules.

Given thisbackdrop, thepublicdebt strategyof Telangana togo forelongationofmaturitystructureofoutstandingdebt,toover40years,isalaudablestepinthiscontext.Thiscanmitigatetheplausibleroll-overrisksanddebtservicingcosts.ThisresilientdebtstrategyisparticularlyrelevantwhenTelanganahasambitiousprojectslike“RythuBandhu”scheme(incomesupporttofarmers)andthecapital infrastructureprojectsforpublicirrigationandthe comprehensive drinking water programme to all households termed “MissionBhagiratha”.

Weobservethatthetaxbuoyancy-theresponsivenesstotaxtoincreaseinGSDP-isaboveunity.HowevertherearerevenueuncertaintiesfromGSTandthetaxtransfers,whichcanaffectthemacro-fiscalprojectionsoftheState.Ourbudgetcredibilityanalysisshowsthatthere are errors in fiscal forecasting in Telangana, which calls for conducting fiscalmarksmanship exercise within the Department of Finance in the State of Telangana, andidentifythesourcesoferrors,whetheritisduetorandomcomponentsorsystematicbiasofthepolicymaker,intheirfiscalprojections.



References

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Chakraborty Lekha and Chakraborty Pinaki, (2019). Federalism, Fiscal Asymmetries andEconomicConvergence:EvidencefromIndianStates,WP232,NationalInstituteofPublicFinanceandPolicy,NewDelhi

Chakraborty Pinaki and Manish Gupta, (2016). “Emerging issues in State Finances Post-FourteenthFinanceCommission”,National InstituteofPublicFinanceandPolicy,NewDelhi

ChakrabortyPinaki,ManishGupta,LekhaChakrabortyandAmandeepKaur,(2019).“Analysisof State Budgets 2017-18: Empirical Issues”, National Institute of Public Finance andPolicy,NewDelhi

Chakraborty, Lekha, Pinaki Chakraborty and Ruzel Shrestha, (2019). Budget Credibility ofSubnationalGovernments:AnalysingtheFiscalForecastingErrorsof28StatesinIndia,WP280,NationalInstituteofPublicFinanceandPolicy,NewDelhi

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Maravalle, A., and Rawdanowicz, L. (2018). To shorten or to lengthen? Public DebtManagement in the Low Interest Rate Environment, Working Paper No 1483.OECDEconomicsDepartment,Paris.



Reinhart,C.,andRogoff,K.,December(2008).BankingCrises:AnEqualOpportunityMenace,NBERWorkingPapersNo.14587,NBER.

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ReserveBankof India,(2018). FiscalPositionofStateGovernments,ReserveBankof Indiahttps://www.rbi.org.in/Scripts/Publications

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Woo,J.,andKumar,M.S.,(2015).PublicDebtandGrowth,Economica,82(328):705-73



MORE IN THE SERIES § Bhanumurthy, N.R., Sukanya

Bose, Sakshi Satija, (2019). FiscalPolicy,DevolutionandIndianEconomy,WP No. 287 (December).

§ Chakraborty, L., Kaur, A., Shrestha, R., Jain, K., Jacob, J. F., Ghosh, A., (2019).Nutrition Public Expenditure Review: Evidence from Gujarat, WP No. 286 (December).

§ Patnaik, Ila, Sane, R., and Shah, A., (2019).Chennai 2015: A novel approach to measuring the impact of a natural disaster,WP No. 285 (December).

Anindita Ghosh, is Research Fellow, NIPFP Email: [email protected]

Lekha Chakraborty, is Professor, NIPFP Email: [email protected]

National Institute of Public Finance and Policy, 18/2, Satsang Vihar Marg,

Special Institutional Area (Near JNU), New Delhi 110067

Tel. No. 26569303, 26569780, 26569784 Fax: 91-11-26852548

www.nipfp.org.in

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