A Case Study On How Not To Bifurcate A State

As per the AP Reorganisation act, 2014, polavaram irrigation project is declared as national project. Therefore, execution of the project and obtaining all requisite clearances including environmental, forests, and rehabilitation and resettlement norms become the responsibility of the central government.

However, the state has volunteered to take up the task of execution of the project in order to expedite the works and complete the total project by 2019 since the projects executed by the central government are invariably found to be delayed leading to cost overruns. So far Rs. 15,380.97 crores has been spent on this project since its inception.

The centre has till date reimbursed the state Rs. 6,727.26 crores (after the promulgation of AP Reorganisation Act, 2014) and yet to reimburse a balance of Rs. 2517.84 crores. The last tranche of reimbursement was received by the state from the centre on 11th June, 2018. The state government submitted the revised cost estimate in August, 2017 for Rs. 58,319.06 crores (at 2013-14 price level).

Major share of project cost amounting to Rs. 38,000 crores is towards rehabilitation and resettlement where the cost increase is mainly due to the higher compensation to be paid for land acquisition consequent to the Land Acquisition Act, 2013 passed by the centre. The Technical Advisory Committee of CWC (Central Water Commission) has cleared the revised cost estimate of Rs. 55,548 crores only on 12th February, 2019.

The next levels of approval have to come from finance ministry and the union cabinet, which seems to be unlikely before the ensuing general elections.

Benefits of Polavaram Project

  • Enables irrigation of 23.20 lakh acres across the state covering major portion of 13 districts.
  • Diverts and utilizes the surplus waters of Godavari River into Krishna and other rivers to make the state drought free forever, meeting the demands for irrigation, drinking water and industrial purposes. Every year 2,500 TMC waters of Godavari River go waste into the sea and the Polavaram Project is expected to divert 2.27 TM cum (80 TM cft) of Godavari waters into Krishna River.
  • Generation of 960 MW of hydel power.
  • Has the potential to transfer the surplus waters of Godavari River to Cauvery through Krishna and Penna Rivers.
  • Increase in agricultural production to the tune of 109 lakhs M.T. per annum.
  • Inland water transport for the mineral and forest products and other agricultural and industrial products.
  • Recreation facilities and pisciculture.

As mentioned above, the polavaram project also has the potential to supply waters to Tamil Nadu which will reduce the friction between Tamil Nadu and Karnataka for Cauvery river water sharing. It is ironical that the centre is dragging its feet on Polavaram but the  Andhra Pradesh government recently bagged the Central Board of Irrigation and Power (CBIP) award for speedy execution of Polavaram multipurpose project in the category of “Best Implementation of Water Resources Project” for better planning, implementation and monitoring.

Despite all the odds, so far, 64 percent of the project work is completed and the state government is planning to complete the project by December, 2019.

Resource gap

As per the 14th Finance Commission estimatesa total of Rs. 22,113 crores is to be paid to Andhra Pradesh as revenue deficit grant for the 5 year period (2015-16 to 2019-20). The revenue deficit of AP in 2014-15 was Rs. 16,078.76 crores. The Centre gave a grant of Rs 2,303 crore and released Rs 3,979.50 crore.

The centre says the state’s total entitlement is only Rs 4,117.89 crore. The state government presented revised figures of revenue deficit after omitting Rs 7,070 crore towards farmers’ debt redemption scheme. Though the revised actual revenue deficit stood at Rs 7,509 crore, the centre has not released even the balance amount (Rs 3,520.50 crore) and says the state will get only Rs 138.39 crore more.

AP Government has requested the centre to constitute an independent committee to determine the exact amount of the revenue deficit of the state for the year 2014-15 but the centre has not responded to this till date.

Education

One each of the following institutions- IIT, NIT, IIM, IISER,  Central University, Petroleum University, Agricultural University and IIIT are to be set up under the Act. For the above institutions the state government has already given 2,909 acres of land. It is estimated that the centre has to release Rs.12,825 crores financial aid to complete the construction of the above institutions but has released so far only Rs. 895 crores (6.63% of the required funds).  

In addition to the above 8 institutions, AIIMS, Tribal University and National Institute of Disaster Management are also to be set up in Andhra Pradesh by the centre.

Of the 11 Institutions promised, 5 Institutions (IIT, NIT, IIM, IISER and IIITDM) are  functioning from temporary campuses since 2015-16; 2 Institutions (IIPE and NIDM) are functioning from temporary campuses since 2016-17; 2 Institutions (Central  University and AIIMS) are functioning from temporary campus from 2018-19 and one Institution i.e. Tribal University has not yet been established. As per the provisions of the Andhra Pradesh Reorganisation Act, 2014, Government of Bharat should have established a Central Agricultural University but this is not done. Instead Government of Bharat has released Rs.135 crore to existing Acharya N.G. Ranga Agricultural University.

Infrastructure

As per the provisions of the Act, the following infrastructure is expected to be created in Andhra Pradesh.

1. A new major port at Duggirajupatnam:

This port was to be completed in phases with Phase I by end-2018. This is a mandatory provision under the Act. However, since Niti Aayog has said this major port is not feasible, the centre has kept this issue in cold storage.

2. An integrated steel plant in YSR District: 

AP Government, has agreed to extend various incentives like providing captive iron ore mines, power subsidy, subsidised land, external infrastructure for the proposed plant. Preliminary feasibility report indicates a pre-tax IRR of 18.95%, which implies that the steel plant is highly feasible. Due to lack of response from the centre, the State went ahead to establish the integrated steel plant on its own and laid foundation stone on 27.12.2018 for the same.

3. A greenfield crude oil refinery and petrochemical complex: 

This Cracker and Petroleum Complex was to be set up in Kakinada. The 1 MMTPA complex with feedstock of Ethane, Naphtha and Propane is estimated to cost Rs.32,900 crore. The GAIL-HPCL consortium after discussions with Government of Andhra Pradesh suggested a viability gap funding of Rs.1,238 crores per annum for 15 years from zero date, to be provided by the State Government, repayable  over the next 15 years. Government of Andhra Pradesh agreed to subsidize power (Rs 577 Cr. per annum), water (Rs. 51Cr. per annum) and provide all external infrastructure support. Government of Bharat was requested to fund the viability gap as the project was promised by Government of Bharat to the residuary State of Andhra Pradesh.  The centre is yet to take action on this proposal.

4. Vizag-Chennai industrial corridor (VCIC) along the lines of Delhi-Mumbai Industrial Corridor: 

Asian Development Bank (ADB) is partnering with the Government of Andhra Pradesh in developing the VCIC. Government of Bharat was requested to consider VCIC also under the purview of National Industrial Corridor Development and Implementation Trust (NICDIT) to gain the benefit from the experience and expertise of planning and developing industrial corridors in Bharat and avail financial assistance from Government of Bharat. State Government requested Government of Bharat for development of VCIC on the lines of DMIC through 100% grant funding by NICDIT. The matter is yet to be decided by the centre.

5. Establishing a new railway zone: 

The Act has a provision for creation of a separate railway zone for the state of Andhra Pradesh. After much procrastination on 27th February, 2019 the centre has announced a new railway zone for AP to be headquartered at Vizag. The new zone known as South Coast Railway Zone  will comprise the divisions of Vijayawada, Guntakal and part of Waltair divisions. The other part of Waltair will be merged with another newly formed railway zone known as East Coast Railway being headquartered at Rayagada in Odisha.

The splitting of Waltair division into two is likely to result in major portion of the freight revenue (around 70%) going to Rayagada (Orissa) whereas much lesser revenues mostly from passenger traffic (around 30%) coming to AP. While it is true that the income of the railways will go to the centre, states will get their share of GST from the direct and indirect commercial transactions generated in their states by the railways apart from generation of direct and indirect economic activity which will be a significant amount.

6. Metro Rail facility in Vishakhapatnam and Vijayawada-Guntur-Tenali Metropolitan Urban Development Authority: 

Detailed Project Reports submitted by Andhra Pradesh for the Vijayawada and Visakhapatnam Metro Rail projects were given in-principal approval in 2015. However, Government of Andhra Pradesh has been asked to resubmit new Detailed Project Reports under new Metro Policy of 2017. Under the new Metro Policy of 2017, burden of raising funds for the project will be on Government of Andhra Pradesh. State Government requested Government of Bharat that Vijayawada and Visakhapatnam Metro Projects should be given viability gap funding and fast track approvals.

Schedule 9 and 10 properties division

Assets were allocated on location basis and debt and liabilities are divided on population basis i.e., 58.32 % to Andhra Pradesh and 41.68% to Telangana. 91 institutions mentioned in Schedule-IX institutions and 142 institutions mentioned in Schedule-X institutions have not been bifurcated so far. The assets value of this institutions comes to Rs.1,97,280 Crore. Likewise the the AP Bhavan at New Delhi is not bifurcated so far.

Refund of taxes was given on population basis whereas tax recoveries are given on location basis, this alone has caused a huge loss of Rs.3,820 Crores to the Andhra Pradesh State affecting financial stability of the State.

Tax rebates for seven districts notified as backward areas

In September 2016, the Central Government announced tax rebates for seven districts of Andhra Pradesh (notified as backward areas)  — Anantapur,  Chittoor,  Cuddapah, Kurnool, Srikakulam, Vishakhapatnam and Vizianagaram, under the Andhra Pradesh Re-organisation Act, 2014. 

This tax rebate covers 15 percent of higher additional depreciation and 15 percent of investment allowance on the cost of plant and machinery acquired by any manufacturing undertaking setup during the period 1st April 2015 to 31st March 2020 in these seven districts. 

However, the state government has requested the centre for the following incentives (in line with the incentives that are being provided to 11 Special Category States):

  1. GST-Reimbursement up to the extent of Central Govt. share of CGST and IGST for 5 Years;
  2. Reimbursement of Centre’s share of income tax for first 5 years;
  3. 30% of the investment in Plant & Machinery with an upper limit of Rs.5 Crore;
  4. 3% on working capital credit advanced;
  5. Reimbursement of 100% insurance premium on insurance for 5 years; and
  6. Transport and Employment subsidy etc.

There is no positive response so far from Government of Bharat for the above.

Special Development Package

Government of Bharat has agreed to release an amount of Rs. 350 Crores every year for six years as special development package for the above mentioned 7 backward districts of AP. The Total amount to be released by Government of Bharat @ Rs.350 crores per year for 6 years comes to Rs. 2100 Crores. An amount of Rs. 350 Crores was released on 09.02.2018 to Andhra Pradesh under this head and was unilaterally and arbitrarily taken back by Government of Bharat on 15.02.2018.

For the capital city of Amaravathi, the centre has so far released Rs. 1,500 crores and promised to release another Rs. 1,000 crores.  

Centre has the powers under section 66 of the Act to assist both the states (AP and Telangana) in allocation of assets or adjustment of liabilities between both the states. Unfortunately, centre has not taken any serious steps under this section and it has even led to an unpleasant development of AP Power Generation Corporation moving the National Company Law Tribunal to recover its arrears amounting to more than Rs. 3,700 crores from Telangana Power Distribution Company by initiating insolvency petition under section 9 of Insolvency and Bankruptcy Code.

This is perhaps the first instance of one state entity initiating insolvency proceedings against another state entity, an avoidable development. The Governor, who is common for both the states, along with the centre should have taken the initiative to resolve this issue through negotiations but failed to do so.

By doing the state bifurcation in the most unscientific way, the then UPA led by Congress has incurred the wrath of the people of AP and was completely decimated in the 2014 general elections. BJP and TDP after coming to power in 2014 in the centre and state respectively for more than 4 years have been under alliance in NDA.

On 16th March, 2018, TDP parted alliance with NDA (BJP). If the loosely framed Act in 2014 by UPA government with lot of loopholes is the root cause of the entire issue, post general elections in 2014 conflict of interest between BJP and TDP appears to be the main reason for gaps in implementation of the various major provisions of the Act.

The only way out is for the parliament to amend the Act after 2019 general elections to incorporate specific timelines for implementation of various provisions of the Act and designate a nodal agency for coordination and resolution of differences between the state and the centre.

Hope some sense will prevail on the law makers and they will take the required remedial measures at least after the general elections in 2019.


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About the Author

B.N.V. Parthasarathi
Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected]