30 May 2025 : The case for a special fiscal package for Andhra Pradesh

 Editorial 1 : ​​​The case for a special fiscal package for Andhra Pradesh

Context

The Finance Commission should create a fair and neutral formula so that States that have lost financial resources are still supported and not left out.

Introduction

Andhra Pradesh is facing serious financial problems, and there is a strong reason for the Finance Commission to give the State a special arrangement. When Telangana was created from the larger State of Andhra Pradesh in 2014, the remaining Andhra Pradesh asked for ‘special category’ status to manage the loss of Hyderabad, which was the main tax source for the combined State. Even though then Prime Minister Manmohan Singh promised in Parliament to support this demand, the law that divided the State did not include any special category status for Andhra Pradesh.

Financial Challenges and Political Developments in Andhra Pradesh Post-Bifurcation

• The division of the State took effect in June 2014, during the change from the United Progressive Alliance (UPA) to the National Democratic Alliance (NDA) government at the Centre.
  • Leadership Change: N. Chandrababu Naidu became the first Chief Minister of the remaining State of Andhra Pradesh.
• Throughout his term (2014-19), Mr. Naidu actively pushed for the parliamentary assurance of special status to be fulfilled.
  • Government Response: The Narendra Modi government rejected the demand, saying the Centre had stopped the ‘special category’ scheme based on advice from the 14th Finance Commission.
• Mr. Naidu returned as Chief Minister in 2024 but now faces almost empty state funds due to structural fiscal challenges and the burden of funding freebies introduced by the previous Y.S. Jagan Mohan Reddy government(which Naidu also supported during his campaign).
  • Financial Challenges: Competitive freebies during elections are a State-level issue, and the Centre is not required to help with these costs.
  • Centre’s Obligation: However, the Centre has a clear responsibility to compensate Andhra Pradesh for the structural fiscal losses caused by the bifurcation of the State.

Options for Supporting Andhra Pradesh Post-Bifurcation

• Option 1: Grant ‘Special Category’ Status
  • The Centre could make an exception and grant special category status to Andhra Pradesh, fulfilling the parliamentary assurance.
  • However, this status has been weakened compared to the past:
    • Earlier, special category States received substantial Plan assistance (grants).
    • Now, support mostly comes as external loans (e.g., World Bank loans) with slightly easier terms.
  • This makes the current special category status a less valuable benefit for Andhra Pradesh—a hollow victory.
• Option 2: Seek a Special Package of Assistance
  • Andhra Pradesh could ask for a special assistance package that is more generous and flexible than the current watered-down special category status.
  • There are several precedents for such politically motivated special packages:

• Drawback: These one-time, discretionary packages can weaken the federal structure by creating uneven support and are generally best avoided.
• Better Option: Finance Commission’s Special Package
  • The Finance Commission, being an apolitical, constitutional body, can recommend a special package for Andhra Pradesh.
  • Such a recommendation would carry more authority and legitimacy.
  • This approach maintains federal balance and avoids ad hoc, politically motivated packages.

Why Should the Finance Commission Consider a Special Package for Andhra Pradesh?

• Since 1956, divisions of States into smaller units have been based on political, administrative, or geographical reasons.
• These divisions have caused an uneven split in fiscal capacity between the new and remaining States.
• A key measure of fiscal capacity is the State’s own revenue (per capita), which reflects its financial strength.

Fiscal Impact of Recent State Divisions (Post-2000)

• In each case, the newly created States gained fiscal capacity at the expense of the remaining States.
• However, the loss for Bihar and Andhra Pradesh was much greater compared to Uttar Pradesh and Madhya Pradesh.

Suggested Formula for Special Assistance

• If a State’s loss in fiscal capacity due to division exceeds 10%, the Centre could provide a special package to compensate for this loss.
• The package would be time-bound and aim to support the State through this transition.
• According to this formula, both Bihar and Andhra Pradesh would qualify for assistance.

Conclusion

The Finance Commission can also use other methods it believes better show the gain or loss in a State’s financial strength. The key point is that States like Andhra Pradesh, which have lost fiscal capacity due to bifurcation, should not be left alone to manage on their own. It is the responsibility of the Finance Commission—which is free to make recommendations—to create a fair, unbiased, and formula-based solution that supports fiscal federalism and solves this problem.