Andhra Asked To Cut Staff, Limit Rice Subsidy To Needy
World Bank moots switch to VAT, enhanced private investment in infrastructure
The World Bank has advised Andhra Pradesh that any fiscal adjustment programme the state envisages should aim at slashing staff by a minimum one percent every year from 1997-98 till the end of the Ninth Plan period and limiting the subsidised rice programme to the dire needy.
In its Agenda for Economic Reforms for Andhra Pradesh, the Bank has also suggested drastic tax reforms, ultimately switching over to value added tax (VAT), and accelerated privatisation of most of the infrastructure. In this connection, it has lauded the effort made by the government in increasing five-fold the water rate and also bringing 19 commodities under VAT.
The World Banks suggestions have assumed relevance as the state government is seeking a loan of Rs 3,500 crore from the Bank towards fiscal adjustment programmes.
According to the Bank, if the state government adopted the adjustment scenario it has suggested, the growth rate of gross state domestic product (GSDP) could accelerate to 6.3 per cent towards the end of the Ninth Plan against the trend growth rate of 4.3 per cent.
An accelerated growth will strengthen the fiscal adjustment by broadening the revenue base and, more importantly, by generating employment and income for a larger proportion of the population thereby enabling the government to direct the budgetary subsidy and welfare spending to smaller target groups.
On the issue of government staff including those in local bodies, universities etc. but other than those in public enterprises the Bank says even a mere one percent reduction per annum would reduce the staff strength from 9.7 lakh personnel in 1997-98 to 9.23 lakh in 2001-02. The budgetary savings from this measure would reach about 2.3 per cent of the states GSDP in 2001-02. The salary bill will constitute 30.3 per cent of total expenditure in 2001-02 compared to 44.2 per cent if no adjustment is made.
The Bank has noted the recent decision of the government to enhance the rate of the subsidised rice from Rs 2 a kilo to Rs 3.50 a kilo and also the reduction in the monthly family quote from 25 kilograms to 20 kilograms.
While the ideal step would be to move towards a food stamp system to provide food entitlement to the poor, the Bank wants the coverage to be pegged to 30 per cent of the population in a six-year period from the existing 85 per cent and the sale price increased gradually in three years to 50 per cent of the costs.
The Bank estimates that through these measures, total saving would be 1.5 per cent of GSDP by the time restructuring is slated to be completed in 2001-02. In other words, it would reduce the rice subsidy from 10 per cent of total expenditure in 1995-96 to 2 per cent in 2001-02.
The Bank says a critical change in the composition of total expenditure would amount to the reversal of the trend regarding capital expenditure.
Under the adjustment programme suggested, both the revenue increase and re-prioritisation of expenditure would facilitate a substantial increase in funds available for capital expenditure from 13.5 per cent of total expenditure in 1995-96 to 27.3 per cent in 2001-02, or from 2.4 per cent of the states GSDP to 5.4 per cent.
This is a long overdue adjustment necessary to rebuild Andhra Pradeshs infrastructure and encourage private investment in the state.
The adjustment scenario would also facilitate larger funds to be allocated for social sectors, the share expenditure in education and health in total expenditure would increase from 15.3 per cent and 6 per cent in 1995-96 to 18.5 per cent and 8.2 per cent in 2001-02 respectively, says the Bank.
For the fiscal adjustment to be successful, the Bank said there was need for acceleration of private sector participation in infrastructure particularly in power, irrigation and ports.
While under the adjustment scenario the capital budget of the state could be raised from 2.4 per cent of GSDP in 1995-96 to 5.4 per cent in 2001-02, this would not be sufficient to finance the required investment in infrastructure.
Substantial private investment will, therefore, be needed to meet the demand for infrastructure services. The power sector would need $2.5 billion a year in the next six years to eliminate the power gap. The allocation for power in the capital budget would not exceed one-fifth of this amount.
In the port sector, the investment on minor ports is estimated at $1 billion in the next five to six years. Even under the best circumstances, the allocation for ports in the budget would not exceed one-tenth of this required amount.
Similarly, farmers participation in water management is essential not only to improve the efficiency of canal irrigation under public ownership but also to transfer the operation and maintenance (O&M) responsibility from the budget to the beneficiaries.