COST RECOVERY OF GOVERNMENT BUDGETARY SERVICES

(A Study of Andhra pradesh State)

DR. S. SUDHAKAR1
ABSTRACT

One of the most distressing features of State finances in India is the emergence of enormous and growing
revenue deficit in recent years. Andhra Pradesh (AP) State is no exception to this. As percentage of Gross
State Domestic Product, revenue deficit of AP has gone up from 0.40% in 1990-91 to 2.35% in 1998-99. Thus AP is
heading towards fiscal crisis which ultimately undermine growth and equity objectives of the State
budget policy. Hence, there is an urgent need to prevent the likely fiscal crisis in the State. Either raising
revenue or cutting down expenditure under revenue account of the Government budget can prevent it.
However, raising revenue is a better way of preventing the fiscal crisis than cutting down the expenditure, since
the latter affects welfare of the poor apart from non-poor.

One important source of revenue is State's Own Non-Tax Revenue (SONTR). Growth and structure of AP
budget is more satisfactory than that of All States Combined (ASC). Nevertheless, performance of AP in raising
SONTR is less satisfactory than that of ASC during 1990-91 to 1998-99. SONTR is to be raised by increasing
cost recovery rates (CRR) of various government services through proper user charges collected from
beneficiaries of the services particularly belonging to non-poor. Increasing CRR to their normative levels
leads to reduction of unintended (implicit and explicit) subsidies in the State budget and ultimately promotes
growth and equity objectives of the State budget policy. The QRR is defined as "the ratio of cost.recovered from
beneficiaries to total cost incurred on eadh of the budgetary services provided by government in a year". AncJ the
resulting subsidy is nothing but "the difference between cost of delivering the government services and
recoveries arising from such deliveries unaer the revenue account of the budget".

It is observed from the study that average CRR of General Services (GS), Economic Services (ES) and Social
Services (SS) combined has declined from 14.22% in 1990-91 to 12.12% in 1998-99 in AP and from 13.01% to 11.91%
in ASC during the same period. Consequently, the subsidy on the above services has gone up from Rs.4680 crores
to Rs. 14120 crores in AP and from Rs. 61754 crores to Rs. 198966 crores in ASC. These subsidies are
unsustainable from the point of view of growth and equity in the long run.

As is well known, it is not only the poor who enjoy these subsidies but also non-poor. So, it is
legitimate to reduce the subsidies enjoyed by non-poor to zero, through proper user charges to be collected
from them. But, the question is how to apportion the subsidies between the poor and non-poor? In the
present study, an exercise is made to apportion the subsidies between Low Income Group (LIG), Middle
Income Group (MIG) and High Income Group (HIG). This is done on the basis of "Per Household Government
Expenditure Benefits" derived by each of the three income groups from different components of government
services. (See K.N. Reddy and S. Sudhakar, "Incidence ot Public Expenditure in India: A Study of Andhra
Pradesh, Commonwealth Publishers, 1989). For this purpose, AP State is selected pertaining to the year
1999-OO(BE).

Results of the above exercise reveal that total subsidy on SS is Rs.7751 crores of which the subsidy of
non-poor (MIG and HIG combined) is Rs.3407 crores. If the subsidy on SS enjoyed by the non-poor is
recovered, CRR goes up from its present 1.57% to its normative level of 44.54%. Similarly, as much as Rs. 4942
crore subsidies arise from ES of which the share of the non-poor is Rs. 4234 crores. If this subsidy derived by
the non-poor is recovered through higher user charges, CCR goes up from its present 15.42% to its normative
level of 86.63%. The subsidy derived by the non-poor from SS and ES put together comes to Rs. 7641 crores in

1
Associate Professor, Department of Economics. Osmania University College for Women. Koti.
Hyderabad-500 095.(AP)
AP during 1999-00. If this whole subsidy is recovered from the non-poor though in a phased manner, the
revenue deficit in AP is not only wiped out completely but also results in a surplus. However, it is purely a
tentative exercise to show a legitimate way of reducing the revenue deficit. Anyhow, it is a topic for deep
inquiry in future.

1. INTRODUCTION:

One of the most alarming features of State finances in India is the emergence of enormous and growing
revenue deficits in recent years. Andhra Pradesh (AP) State is no exception to this. Revenue deficit of AP State
has increased from Rs.232 crores in 1993-93(accounts) to Rs.2684 crores in 1998-99(accounts). As a
percentage of Gross State Domestic Product (GDSP) of AP, it has gone up from 0.40% to 2.35% during the
above period2. It would further go up in future in a persistent manner unless certain corrective steps are
undertaken immediately, with political will, In the State to reduce it3.2 In other words, the revenue deficit of
AP State, as percentage of its budgetary total revenue expenditure, has gone up from mere 2.86% in
1990-91 (A/C) to 15.84% in 1998-99(A/C)4. As is well known, the growing revenue deficit would eat
into the government capital expenditure( and perhaps private capital expenditure also due to the
crowding out and complementarity effects) affecting growth and development of the state adversely
in the long-run. For instance, according to the Controller and Auditor General Report of AP, for
1998-995, capital expenditure as percentage of total expenditure of A.P. state has declined from 19%
in 1995-96 to 8% in 1998-99/ Further, it leads to a vicious spiral of growing deficits, rising debt, rising
interest costs and further expansion of the deficit6. For instance, total liabilities of AP state have gone
up from Rs.23410.61 crores in 1997-98 to Rs.28421.25 crores in 1998-997. Thus, in a year, the
liabilities have increased by Rs.5010.64 crores resulting in 54% of the total liabilities used to finance
the revenue deficit in 1998-99. The above evidence is ample enough to say that the budgetary
position of the AP State has been fastly deteriorating in recent years. Least, we can say that AP State
is heading towards a fiscal crisis. Hence, whatever may be the reasons for the possible crisis8 there is
an urgent need to look into the various possible ways of avoiding it in the state.

Either raising revenue or curbing expenditure or both, under revenue account, can reduce
revenue deficit. It appears legitimate to favour those steps which raise the total revenue instead of
curbing the expenditure since the latter step is likely to affect poor people alongwith non-poor. Of
course, reduction of the expenditure through rationalisation of it cannot be denied, though it is
highly controversial as to which of the components of government expenditure are to be pruned or
rationalised. Furthermore, pruning and rationalisation of expenditure has growth and equity
2
1. Economic Times, 4th April 2000, P-4.
3
In 1998-99 (RE), the revenue deficit of AP was Rs. 1086 crores which actually increased to Rs. 2684 crores in
1998-99(accounts). Thus, the revenue deficit has gone up by 147% compared to its revised estimate. It will
also be the same case for the revenue deficit of 1999-00. Budget estimate of revenue deficit in 1999-00 is Rs.
1564 crores which may go up to Rs. 3863:crores assuming it increases actually by the same 147% as was the
experience of 1998-99. Moreover, the revenue deficit as a percentage of the total expenditure, under
revenue account, in 1999-00(BE) was 7.79% and the same increased to 15.44% in 2000-01 (BE) in AP (See
Economic Times, 15* August, 2000, p-1.)
4
Op. Cit., Economic Times, 4,h April 2000, p-4.
5
Ibid. P-4.
6
Sudipto Mundle & M.G. Rao, (1992), "Issues in Fiscal Policy" in Bimal Jalan (Ed), 'The Indian
Economy: Problems and Prospects", Penguin Book India (Pvt) Ltd.
7
Op.Cit. Economic Times, 4th April 2000.
8
In the Indian literature on fiscal economics, three paradigms, though overlapping, are found for the
analysis of the fiscal crisis in India. They are Classical-Marxist, Liberal-Pluralist and New Political
Economy paradigms (See Rence J. Byres (Ed), 1998, "The Indian Economy: Major Debates Since
Independence", OUP New Delhi.
implications. Hence, it should be done very carefully in view of the economic reforms in India since
mid-1991. Thus, there is a strong case for raising the revenue through various means for reduction of
the revenue deficit and avoid possible fiscal crisis in the state as well as in other states. Reduction of
revenue deficit would promote growth by increasing government savings and thus its investment.

There are four main sources of revenue to any state in India. They are, i.State's Own Tax
Revenue (SOTR): ii. State's Own Non-Tax Revenue (SONTR); iii. State's share in Central Taxes (SSCT);
iv. Grants-in-aid from the Centre (GIAFC). Of all the sources of revenue, there is a greater scope for
SONTR to be raised through increase in user charges for various goods & services (henceforth
services) provided by AP State through its budget.

This is evident from the discussion below about the growth and structure of revenues and expenditures and
change in them over a period of time in AR Thus, main objective of this paper is to look at the cost recovery of
and the resulting implicit subsidy on various services provided by Andhra Pradesh State through its budget and
suggest a legitimate way of raising the cost recovery to its normative level so that revenue deficit of the
State is reduced to almost zero and if possible generate revenue surplus. For this purpose, this paper is divided
into six sections. Accordingly, with the introduction in the first section, in the second section, growth and
structure of revenues and expenditures of AP State are closely examined and the same were compared with
All States Combined (ASC) in order to bring out relative performance of AP in respect of its budget policy. In
the third section, Cost recovery of and the resulting subsidy on various services provided by AP islooked at in
relation to those of ASC. Again, this is done to highlight performance of AP in raising SONTR in relation to that of
ASC. For a comparative analysis in the third and fourth sections two points of time are chosen. They are
1990-91 and 1998-99.The year 1990-91 is chosen in view of the emergence of fiscal crisis in India in that year. Fourth
section deals with the actual cost recovery of and the resulting subsidy on Economic and Social Services
provided by AP in 1999-2000(BE) for which 'normative' cost recovery rates are suggested. Fifth section deals
with the way of determining 'normative' cost recovery rates for Economic and Social Services and their
impact on revenue deficit in AP for 1999-2000. Conclusions of the study are given in the last section.

II. Growth and Structure of State Revenues and Expenditure : (1990-91 & 1998-99)

Tables-1 & 2 give a picture about growth (compound average annual rate of growth) and structure
(percentage share of different components in total) of revenues and expenditures (Revenue Account only) of
both AP and 'All States Combined' (ASC) for nine.year period from 1990-91 (A/C) to 1998-99 (B.E.). In this section,
the growth and structure of both revenues and expenditures of AP are examined and then compared with that of
ASC so as to bring out relative budgetary performance of AP between 1990-91 and 1998-99.This comparison
seems to be imperative in view of systematic and comprehensive economic reforms initiated by the Government
of India in mid-1990 to stabilize the Indian economy through reduction in fiscal deficit and accelerate rate of
growth of the economy through structural reforms. Moreover, growth and stabilisation objectives can be
attained only when the reforms are speeded up in the States also. As is evident from Table-1, Total revenue
(TOR) of AP has grown at 12.66% while its total expenditure (TE) has grown at 12.76% between
1990-91 and 1998-99. Whereas, TOR of ASC has grown at 13.03% while the TE at 13.79% over the same period.
Thus, it is evident from the above that gap between TOR & TE growth rates are wider in ASC than in AP
contributing to larger revenue deficit in the former than in the latter. In other words, the revenue account
position in ASC has deteriorated more rapidly than that in AP.

Looking at growth rates of different components of TOR, growth of Tax Revenue (TAR) is more than that
of Non-Tax Revenue (NTR) in AP as well as in ASC. However, the NTR growth is little less in AP than in ASC.
Furthermore, the growth of State's Own Non-Tax Revenue (SONTR) in AP is 10.75% which is much less than
12.62% experienced by ASC. Within SONTR, revenue from Social Services (SS) has grown at 6.65% while the
expenditure on the same has grown at 12.62% in AP. As against this, revenue from SS has grown at
11.38% and the expenditure on the same at 12.40% in ASC. Thus, gap between the growth rates of revenue from
and the expenditure on SS has contributed more to the revenue deficit in AP than in ASC over the period under
study. Contrary to this, the revenue f ro.m Economic Services (ES), a component of SONTR, has experienced a
growth rate of 12.54% while the expenditure on the same has grown at 10.00% in AP whereas the same were
11.50% and 9.91% respectively in ASC. Thus, gap between the growth rates of revenue and expenditure of ES has
contributed to the reduction of the revenue deficit in both AP and ASC over the period under study. Further,
revenue from General Services (exclusive of interest, dividends and profits) (GS), another component of
SONTR, has grown at only 4.04% while its expenditure at 15.62% in AP. Whereas the same were 15.33% and
17.83% respectively in ASC. Here also, difference between the growth rates of revenue and expenditure of GS has
aggravated the revenue deficit in both AP and ASC, though much more in the former than in the latter. In addition
to this, it should be noted that, the growth of dividends and profits is -100.00% in AP while the same was
15.25% in ASC. Furthermore, interest receipts have grown at 10.70% and interest payments at 18.54% in AP
while the same were 12.40% and 17.31% respectively in ASC. Thus, gap in the growth rates of interest receipts
and interest payment has contributed more to the revenue deficit in AP than in ASC. Here, it should be pointed
out that interest payment is fastest growing component in the General Services provided by AP. From the
above comparative analysis, it is clear that as far as SONTR is concerned, performance of AP is less satisfactory
than that of ASC over the period under study. Thus, there is a need for some reasonable effort on the part of AP
in raising SONTR in the years to come in order to overcome the possible fiscal crisis reflected in
growing revenue deficit in AP.

Now, let us look at the structure of state budget in terms of percentage shares of its various
components of revenue and expenditure and change in them over the period between 1990-91 & 1998-99 for both
AP and ASC. The relevant data are given in Table-2. As is evident from the Table, percentage share of SOTR inTOR
has gone up while that of SONTR in TOR has gone down in both AP and ASC during the reference period making the
revenue structure more regressive since around 90% of the States'tax revenue comes from indirect taxes. Further,
SONTR share in TOR is higher in AP than in ASC in 1990-91 while the same is less in the former than in the latter in
1998-99. Within SONTR, the percentage shares of all five components have declined in AP between the period
under study. So, there is need to raise the percentage share of SONTR in TOR to make the structure of revenue
less regressive in AP in the years to come. As far as AP State is concerned, there is little scope to raise the State's
share in Central taxes and its share in grants from the Centre in future keeping in view of recent
recommendations of the Eleventh Finance Commission (EFC) about tax and non-tax devolution's from the
Centre to the States. Therefore, AP State has no other way except depending upon its own revenue sources
of SOTR & SONTR in immediate future. However, in the short-run, SOTR can not be raised by either
bringing agricultural income under the tax net in some form or the other, as suggested by the EFC. or
widening the service tax net to overcome the pressing problem of growing revenue deficit in AP9. Moreover, AP
State is not willing to touch the agricultural income for its tax purposes, perhaps in view of the present economic
and political power structure in the State10. Not only that, agricultural income tax may not be administratively
feasible to put into eftect.for various reasons. Hence, it appears that, ultimately, AP State has to depend upon
SONTR by either indexing the user charges (as recommended by the EFC) and/or increasing them to recover
whole or part of the cost of the various services provided by the government through its budget every
year. Particularly, it is to be recovered from non-poor. Furthermore, already, SOTR as percentage of GSDP has
gone up from 6.58% in 1993-94(A/C) to 7.28% in 1998: 99 (BE) in AP. This is high enough not to exploit further
keeping in view the present tax structure, which is regressive in the sense that 91% of the tax revenue in AP
comes from indirect taxes. Similarly, the SOTR as percentage of GNP has gone up from 5.90% in 1993-94 to
9.07% in 1998-99(BE) in the case of ASC.

Now, let us turn our attention to the structure of expenditure of AP and ASC under revenue
account of the budget for 1990-91 and 1998-99. (See Table-2). First of all, the developmental
expenditure as percentage of total expenditure has declined from 71.61% to 64.57% in AP and from 68.07% to
56.19% in ASC between the period under study, However, share of the developmental expenditure is higher in

9
Economic Times, 5th August 2000. P-6.
10
The Finance Minister of AP Mr.Y. Ramakrishnudu, said, "We have not thought about it (taxing
agricultural income or property) at all". Economic Times, 31st July, 2000.
AP than in ASC in both the reference years, which is to be appreciated. Further, of the developmental
expenditure, the percentage shares of expenditure on Social Services (SS) and Economic Services (ES) in
the total expenditure have declined from 38.46% to 38.04%; and from 33.15% to 26.53% respectively in AP and
the same from 38.96% to 34.89%; from 29.11% to 21.30% respectively in ASC between the period under
study. From the above, it should be noted that the expenditure share of SS has almost remained same
and that of ES has declined in AP This looks consistent with the present economic policy of the State in India as
far as ES are concerned. However, the expenditure share of SS should go up and that of General Services
(GS) should come down immediately to make the structure of the expenditure of AP State consistent
with its economic policy of the liberalisation and globalisation of the economy. Thus, growth and equity may
be promoted. It also should be noted further that the share of interest payments, a major component of GS, in
the total expenditure has increased rapidly from 10.70% to 16.78% in AP between the period under study.
This is to be contained immediately to overcome the problem of the revenue deficit of the State. On the
whole, the expenditure structure of AP looks better than that of ASC in both the years under study.
However, AP State is to increase the share of SS in future11 in view of its redistribute nature. The
development of SS sector promotes growth of the State economy by building up human resources.

III. Cost Recovery and Subsidy in AP and ASC : 1990-91 & 1998-99.

From the above discussion, it is clear that the better way of overcoming the present fiscal
problem of growing revenue deficit is raising SONTR through proper user charges and thus raising
actual cost recovery rate (CRR) to its 'normative' level. Consequently, it reduces unintended subsidy
(both hidden and open) on the budgetary services making the State budget more growth and equity
oriented. The CRR, in the present study, is defined as "the ratio of cost recovered from beneficiaries
to total cost incurred on each of the budgetary services provided by State government in a year". At
the same time, in this study, subsidy is nothing but "unrecovered cost of the services provided by
State government through its budget in a given year". The unrecovered cost is 'the difference
between cost of delivering various budgetary services and recoveries arising from such deliveries
under the revenue account of government budget12. Symbolically, the subsidy is represented by sj = rj
- ej (where sj stands for subsidy on jth component of a service, rj stands for revenue of jth component
of a service and e stands for expenditure of jth components of the same service). Thus, total subsidy of
each category of the services is equal to S = å sj The total subsidy not only includes the subsidy arising
out of provision of the services but also transfer payments. Here, total budgetary expenditure incurred in
a year on a particular service is equated with the cost of it. Thus, the subsidy is merely a difference
between expenditure on and revenue from a service provided by government during a given year.
Further, the present study, in this section, is confined itself to the Revenue Account of State
government budget for 1990-91 & 1998-99 in AP and ASC. All the services provided by a State through
its budget can be classified into three broad categories of General Services (GS), Social Services (SS)
and Economic Services (ES). Almost at the services provided under GS category, except interest
payments, can be regarded as "pure" public goods characterised by non-excludability and non-rivalry
in consumption. Hence, they cannot be easily priced and sold to individual consumers (Samuelson,
1954,1955)13. So, the expenditure on GS must be met from general revenues of the State. However, in
this study, the CRR of GS, along with SS & ES, is also looked at since it also exerts pressure on the
revenue deficit.

11
Raja J. Chellaiah (1996), 'Towards sustainable Growth: Essays in Fiscal & Financial. Sector Reforms in
India". OUP, Delhi. P-41.
12
Sudipto Mundle & M.G. Rao, (1991), "Volume and Composition of Government Subsidies in India,
1987-88", Economic and Political Weekly, May 4, p-1157.
13
Ibid. P.239.
 Table-3 provides data on actual CRR of and subsidy on three categories of GS, SS and ES for
both AP and ASC in 1990-91 and 1998-99. The CRR of GS has declined from 33.29% in 1990-91 to
21.58% in i 998-99 in AP whereas the same has declined from 19.65% to 14.36% during the same period
in ASC. However, it must be noted that the high CRR of GS is because of high ratio of interest receipts
to interest payment, which is a major component of GS. The ratio represents the recovery of interest
by a State from its borrowers in relation to the interest payment made by the State to its lenders
during a given year. The ratio was 77.89% in 1990-91 and 42.11% in 1998-99 in AP. Thus, the CRR of
GS, net of interest component, declines from 4.75% to 2.09% in the State between the period under
study. Similarly, turning our attention to ASC, the interest recovery ratio of them has declined from
27.77% to 18.89% between the same period (SeeTable-1). Thus, the CRR of GS, net of interest
component, is 14.44% in 1990-91 but declined to 11.62% in 1998-99 in ASC while the same declined
from 4.75% to 2.09% in AP between the same period (See Table-1). From the above evidence, it is
quite clear that GS have put more pressure on the general revenues of AP than that of ASC since the
CRR, net of interest, is much less in AP than in ASC. Only spending on GS more efficiently and raising
the interest recovery ratio in AP can reduce the pressure. As Table-3 reveals, the resultant subsidy on
GS was Rs. 1010 crores in 1990-91 and the same increased to Rs. 4385 crores in 1998-99 in AP. As a
percentage of total subsidy on GS, SS and ES put together, the subsidy on GS has gone up from
21.58% in 1990-91 to 31.06% in 1998-99 in AP. Similarly, in the case of ASC, the subsidy on GS has
increased from Rs. 17787 crores to Rs. 82982 crores between the reference period. As a percentage
of the total subsidy, it has gone up from 28.80% to 41.71% between the same period. Thus the
subsidy on GS as a percentage of the total subsidy is less in AP than in ASC in both the reference
years, which is to be appreciated.

Further, as is evident from Table-3, the CRR of SS in AP was only 1.98% in 1990-91 and declined
to 1.22% in 1998-99, while the same in ASC has declined from 2.10% to 1.93% during the same
period. Thus, both AP and ASC almost provide SS at free of cost during the period under study.
Furthermore, the CRR of SS in AP is less than that in ASC in both the periods, which is very
disappointing. Looking at the CRR of the eleven components of SS, it is zero in the case of four
components of Water Supply & Sanitation (WSS), 'Welfare of SC, ST & OBC, Nutrition (i.e., food
subsidy) and 'Relief on account of Natural Calamities' in 1990-91 in both AP and ASC and same is the
case in 1998-99 except WSS for which the CRR has increased to 1.79% in AP and to 5.38% in ASC (see
Table-4). In the case of the remaining seven components, the CRR has declined, except Urban
Development, during the reference period in AR In the case of ASC, the CRR of Education, Sports, Art
and Culture (ESAC), Housing, Labour & Labour Welfare (LLW), and 'Others'has declined between 1990-91
and 1998-99. Whereas the CRR of Medical, Public Health and Family Welfare (MPHFW), Urban
Development (UD), Social Security and Welfare (SSW) has increased during the same period in ASC.
On the whole, it is quite clear that the CRR of SS in AP as well as in ASC is very much disappointing
from the point of view of budgetary position of the States today. Now looking at the resultant subsidy
on SS, it has gone up from Rs. 2075 cores in 1990-91 to Rs. 6097 crores in 1998-99 in AP and from Rs.
27376 crores to Rs. 78553 crores during the same period in ASC.Thus, the subsidy has increased by
2.93 times in AP and by 2.86 times in ASC showing a greater increase in AP than in ASC during the
reference period. Further, ESAC claims largest subsidy of all other components in both AP and ASC in
both the reference years. It should be noted that in AP the percentage share of Nutrition (i.e., food
subsidy) in total subsidy has increased from mere 0.49%(Rs. 10 crores) in 1990-91 to 12.93% (Rs. 767
crores) in 1998-99 while the same increased from 1.96%(Rs. 536 crores) to 2.98% (Rs. 2280 crores)
only in ASC during the same period. Thus, AP ranks first in food subsidy that can be reduced by better
targeting. Though most of the expenditure on SS is welfare oriented and redistributive in nature and
targetted towards children, women, disabled, economically poor, old age people etc., the CRR of
many components of them must be raised through higher user charges. This is because a
considerable part of the benefits of SS are flowing to the non-poor or unintended beneficiary as is
evident from the analysis in subsequent section-V. Particularly, this is true in the case of 'Education,
Sports, Art & Culture' (ESAC), 'Medical & Public Health' (MPH), 'Water Supply & Sanitation' (WSS) and
rban Development '(UD). Of the total subsidy of ESAC, MPH, WSS and UD put together claim 70.88%
in 1990-91 and 61.02% in 1998-99 in AP. At the same time-, they claim 80.35% in 1990-91 and
77.84% in 1998-99 in ASC (See Table-3). Thus, there is a strong case to search for legitimate ways of
raising the CRR of SS in AP in the years to come.

Next, the CRR of ES has gone up from 12.60% to 15.47% in AP and the same from 20.59% to
23.43% in ASC between the period under study. (See Tables-5 & 6). This is in complete contrast to
the CRR of SS in both AP and ASC during the same period. However, the CRR of ES in AP is less than
that in ASC for both the years of the study, which is to be noted. As far as AP is concerned, of the
total 22 components of ES, the CRR of ten components in 1990-91 and eleven components in
1998-99 is zero. Further, the CRR of Crop Husbandry, Animal Husbandry, Forestry and Wild Life, Other
Agricultural Programmes, Irrigation and Flood Control, Energy,Tourism, Others (altogether 8components)
have declined during the period understudy. The CRR of Fisheries, Co-operation, Industry and
Minerals has gone up during the same period in AP. Looking at the CRR in ASC, it is zero in the case of
nine components during both the periods under study. Further, the CRR of Crop Husbandry. Animal
Husbandry, Fisheries, 'Forestry and Wild Life', Plantations, 'Other Agricultural Programmes', Energy,
Tourism (altogether eight components) has declined during the same period. Whereas, the CRR of
Co-operation, 'Irrigation and Flood Control', 'Industry and Minerals', 'Transport and Communications'
and 'others' (altogether five components) has increased during the same period. In terms of the total
subsidy on ES, it has increased from Rs. 1595 crores in 1990-91 to Rs. 3638 crores in 1998-99 in AP while
the same has increased from Rs. 16591 crores to Rs. 37431 crores during the same period in ASC.
Thus, it has increased by 2.28 times in AP and by 2.25 times in ASC showing a greater increase in the
former than in the latter. Of the total subsidy, Rural Development claims largest subsidy followed by
Irrigation and Flood Control in both AP and ASC during the reference period. The subsidy on Crop
Husbandry, Rural Development, Irrigation and Flood Control, Transport and Communications put
together comes to 64.02% in 1990-91 and 96.03% in 1998-99 in AP while the same was 69.69% in
1990-91 and 74.16% in 1998-99 in ASC. On the whole, the CRR of almost all the components of ES is
very much low, except industries for which it is more than 100%, in AP as well as in ASC. Particularly,
there is a need to raise the CRR of Irrigation & Flood Control, Forestry and Wild Life, Transport and
Communications, Power, and Tourism in both AP and ASC and thus reduce the resultant subsidy. Only
on Irrigation and Flood Control, the subsidy in AP is Rs.1237 crores that comes to about 34% of the
total subsidy on ES. No doubt, the budgetary expenditure on ES would promote agriculture, industrial
and service sectors growth and development. But, the major proportion of the benefits go to
high-income groups or non-poor14. Hence, it is legitimate to raise the CRR of ES by increasing the user
charges on non-poor beneficiaries. Lastly, the average cost recovery rate of GS, SS and ES combined has
declined from 14.22% to 12.12% in AP and from 13.01% to 11.91% in ASC during the period under
study. (See Table-3).

Now, let us look at the quantum of subsidy element both open and hidden, in GS, SS. and ES
provided by AP State and ASC through budgetary operations and changes in them over the period
between 1990-91 and 1998-99. As is evident from Table-3, the total subsidy of GS, SS and ES
combined in AP was Rs. 4680 crores in 1990-91 and it increase to Rs. 14120 crores in 1998-99 (i.e.,
increase by 3.01 times). Similarly, the same has increased from Rs.61754 crores to Rs.1,98,966 crores
during the same period in ASC (i.e., increase by 3.22 times)(in nominal terms). It should be
remembered that the subsidy consists of three elements of distributive, allocative and producers
subsidies which cannot be separated15. Of the total subsidy, the share of GS increased from 21.58%
to 31,06% in AP and the same from 28.80% to 41.71 % in ASC between the period under study. At the
same time, the subsidy shares of both SS and ES have declined from 44.34% to 43.18% and 34.08% to

14
K.N. Reddy and S. Sudhakaf, (1989), Incidence of Public Expenditure in India". (A Study of Andhra Pradesh),
Commonwealth' Publishers, New Delhi.
15
Op.cit. Sudipto Mundle et. AL, 1991, p-239
25.76% respectively in AP and the same declined from 44.33% to 39.48% and 26.87% to 18.81%
respectively in ASC between the period under consideration. Thus, the subsidy shares of
developmental services have declined reflecting a distorted change in the pattern of the subsidy in
both AP and ASC. However, the subsidy share of SS is highest in AP while the same in GS, considered
as non-developmental services, is highest in ASC in. 1998-99. Thus the subsidy pattern of AP is better
than that of ASC. It is further observed that the total subsidy in AP has increased by three times while
the same in ASC by 3.22 times. Thus growth of the total subsidy of GS, ES and SS combined is less in
AP than in ASC.

IV. Cost Recovery and Subsidy in AP : 1999-2000 (BE).

So far, the budgetary condition of AP has been analysed critically in comparison to that of
ASC for two points of time in order to highlight the relative performance of AP government budgetary
operations. On the whole, it is observed that the relative performance of AP budgetary operations is
better than that of ASC between 1990-91 and 1998-99. However, it is also observed that the
budgetary position has deteriorated in AP over the period under study in terms of the revenue
deficit. Further, it is also observed above that there is a lot of scope in SONTR to raise it to some
'normative' level to balance the revenue account, if possible to generate surplus in it so that the fiscal
house of the States in general and AP in particular is brought to some order. However, the present
study concentrates on computing 'normative' cost recovery rates of different components of the
services provided by AP through the reduction of subsidy to the non-poor on the services. This
exercise is made in the ensuing section for the year 1999-00(BE). By apportioning the total subsidy on
each component of AP government budgetary services between three income groups for the year
1999-00, an exercise is made about the Normative Cost Recovery Rate (NCRR). But, before doing that exercise, it
is imperative to look at the actual CRR as well as the resultant subsidy a little bit closely for the reference
year 1999-00.

As is evident from Table-7, the CRR of GS is 24.19% in 1999-00 resulting in a subsidy of Rs. 4974 crores. Of
the GS, the CRR of the interest component is 45.26% giving rise to an interest subsidy of Rs. 1758 crores which
comes to 35.34% of the total subsidy on GS in the reference year. This is unwarranted. In the case of
'Stationary & Printing' and 'Public Works', there is some scope of increase in their CRR by increasing the user
charges since they can be priced and sold in the market. The component of 'contributions and recoveries
towards pensions and other retirement benefits' has a CRR of 0.85% only claiming 33.53% of the total GS subsidy.
There is little scope to reduce subsidy by increasing the CRR in this component. In the case of other components
of GS, no scope exists for such step since they constitute 'pure' public goods, the expenditure of which must be
met from tax revenues only. Hence, whatever cost recovered from GS is mere incidental. It should be noted that the
total subsidy on GS has put pressure (defined in terms of the total subsidy on GS as percentage of the
TAR) on tax revenue to the extent of around 37.33%. (The TAR of AP was Rs. 13322.52 crores in 1999-00). This will
definitely have a repercussion on the expenditure allocations to ES and SS. Interest subsidy is no more
legitimate to continue because it benefits largely the high-income groups since they hold usually major part of
the public debt. So, AP government should take steps to increase the interest receipts immediately so that the
interest subsidy is reduced to zero over reasonable time. In other words, the interest subsidy implies
the low efficiency with which the government assets are managed. Of course, improving law and order conditions
in the State, which is a remote reality, can reduce the subsidy on the police. In the case of the remaining
components, no much scope exists for reducing the subsidy except spending on them more efficiently.

Next, looking at Table-8, it is clear that the CRR of SS is 1.57% leading to a subsidy of Rs. 7736 crores in
1999-00. Of the total 15 components of SS for which the CRR is computed, the CRR of Welfare of SC, ST and OBC,
Nutrition (i.e., Food Subsidy), Relief on account of Natural Calamities, and Secretariat-Social Services is zero.
In the case of 'Other social services'and Civil Supplies the CRR is more than 100% resulting in negative subsidy. In
the case of remaining nine components, the services are provided almost at free of cost except Labour and Labour
Employment'. Further, it is observed from Table-9 that within 'Education, Sports, Art and culture' (ESAC)
component, the CRR of Secondary Education is more than that of University and Higher Education in AP for
1997-98. The CRR of 'University and Higher Education' is almost equal to that of Elementary Education in
1997-98. Of the total subsidy on SS, 41.53% (Rs. 3213 crores) is claimed by only ESAC, which is the highest of all
other components in 1999-2000. Nutrition, 'Medical and Public Health' (MPH), 'Welfare of SC, ST, & OBC and
'Water Supply and Sanitation' (WSS) claim 14.45%, 11.37%, 12.77% and 4.33% respectively in 1999-00. Thus, the
percentage shares of these five components together in the total subsidy on SS come to 84.45%. Scope for
significant reduction of the subsidy exists only in the case of ESAC, MPH, and WSS by increasing user charges
and thus increases the CRR. It is interesting to' know that in the year 1997-98, within ESAC, 42.34% of the
total subsidy on ESAC is claimed by Elementary Education: Further, within the MPH, 16.46% of the
subsidy on MPH is claimed by Rural Health while 54% was claimed by the Urban Health in 1997-98.
This is inequitous enjoyment of the subsidy since 3/4 of the population live in the rural areas and the
remaining ¼ live the urban areas. It means, 75% of the population enjoys only 16.41% of the subsidy
on MPH whereas 25% of the population enjoys 54% of the subsidy. (See Table-9)

Table-10 provides data on the CRR and the resulting subsidy on ES for AP in 1999-00. There
are 34 components of ES for which the CRR and the corresponding subsidy are computed. The CRR of
ES, comprising 34 components, is 15.42% in 1999-00. Of the 34 components, the CRR of 19
components is zero. In the case of 'Non-ferrous mining and metallurgical industries', 'Other
industries', and 'Ports and Light Houses', the CRR is more than 100% resulting in negative subsidy. It
is very much encouraging situation. It should be noted that the CRR of Major and Medium Irrigation
component is mere 0.45% but claiming nearly 32.23% of the total subsidy on ES i.e., Rs.1447 crores.
Further, the CRR of Roads and Bridges component is onfy 4.28% but claiming 12.72% of the total
subsidy on ES which comes to Rs. 571 crores. Thus there is a need to raise the CRR of Major and
Medium Irrigation, Roads and Bridges and thus reduce the subsidy on them in the years to come. No
doubt, the expenditure on ES contributes to the development of the agricultural, industrial and
service sectors whose benefits are shared not only by poor but also by non-poor. However, it is not
wrong to say that the benefits of most of ES are enjoyed in proportion to the economic and social
power held by different sections of the people.Thus, richer sections of beneficiaries must pay higher
user charges. For instance, the government expenditure on agriculture and allied activities and
Irrigation benefits the agriculturists in proportion to the land operated or owned, rich farmers may
have to pay higher user charges. But, the problem is to determine how much the richer sections have
to pay. For this purpose, an exercise is made below to determine normatively the CRR of different
government services through the apportionment of the total subsidy between different income
groups of beneficiaries of the services.

V. Normative Cost Recovery Rate (NCRR) in A.P. 1999-2000 (B.E.)

It is seen from the above discussion that there is an urgent need to increase total revenue
under the revenue account of the government budget of the State through SONTR by increasing the
user charges properly and thus increase the CRR of ES & SS to their normative levels in the days to
come. But, the question is who has to bear the burden of the increased user charges? Definitely,
there is no doubt that the benefits of ES & SS are enjoyed by all sections of the people, but not
uniformly. Obviously, there will be no objection to the provision of the basic government Services at
free of cost to the poor in the State. Thus the burden should fall on the non-poor only. Then, the next
question is how much burden the non-poor should bear? To find an approximate answer to this
question, total benefits of the government budgetary services are to be apportioned between poor
and non-poor. Accordingly, in this section, an attempt is made to apportion the benefits of AP
government services, as a first approximation, between three income groups based on the results of
a study about the distribution of the benefits of government expenditure on ES & SS for the year
1984-85 in AP16. First of all, Per Household Expenditure Benefits (PHEB) of different components of ES & SS are

16
Op.Cit. K.N. Reddy and S.Sudhakar, 1989.
estimated separately for Low. Middle and High income groups into which beneficiaries of ES & SS are
classified. These were estimated by using various distribution criteria17. PHEB distribution is used for the
apportionment of the subsidy on ES & SS across the three income groups. Of the three income groups, the
Low Income Group (LIG) is regarded as the poor18 and the remaining Middle Income Group (MIG) and High
Income Group (HIG) combined are regarded as the non-poor. (For details see K.N. Reddy and S.Sudhakar,
1989). The method of apportionment is as follows. To begin with, PHEB of ith income group for jth component
of a service is taken. It is denoted symbolically by (PHEB). (where stands for ith income group ranging from
1 to 3 and jth component of the service ranging from 1 to N). Then, (PHEB). of the three income groups are
added to get Total Per Household Expenditure Benefits (TPHEB) of jth component of a service. Symbolically, it Is
denoted by (TPHEB)j. Dividing (PHEB).. by (TPHEB)., we get proportionate share of ith income group of
jth component in the (TPHEB). It is derived for all the three income groups separately. Next, proportionate share of
each of the three income groups in the total population is taken. It is 48.23% for LIG, 48.11% for MIG and 3.66% for
HIG in 1984-8519. Symbolically, it is denoted by [(P),/(TP).] [ where (P) stands for population of ith income
group of jth component and (TP). stands for total population of the jth component of a service.] Thus, we
get the subsidy factor, (SF)= as follows.

17
Ibid.(See also Appendix Tables-1 A and 2A)
18
On the basis of data collected by National Sample Survey Organisation in its 38th round on Consumer
expenditure for 1983, AP government expenditure beneficiaries having monthly per capita consumer
expenditure between O-Rs.100 are regarded as Low Income Group (LIG), the beneficiaries having
monthly per capita consumer expenditure between Rs.100-Rs.300 are classified as Middle Income Group
(MIG), and those having Rs.300 and above are regarded as High Income Group (HIG). O-Rs. 100 monthly per
capita consumer expenditure closely corresponds to the poverty line (rural plus urban) defined by the
Planning Commission for 1983-84.Using this data, Per capita household expenditure benefits (PHEB) are
estimated for 1984-85 for the three income groups mentioned above.
19
Op cit, ICN.Reddy & S.Sudhakar, (1989).
 Where, (TS)j stands for total subsidy (in Rs.) of jth component of a service. Thus (S)ij is
computed separately for LIG, MIG and HIG for each component of ES and SS in AP for 1999-2000.
Then, (S) ij of HIG is added to the revenue recovered already from relevant component of ES and SS
and divided the same with the Total Expenditure (TE) on that component to get what is called
Normative Cost Recovery Rate (NCRR) of the component. Thus, the NCRR is computed for each of the
components of ES and SS for the year 1999-2000. Similarly, the NCRR is computed by adding the
subsidy of both the MIG and HIG to the already recovered revenue from component of a service.

Now let us look at the results of the exercise made on the basis of the above methodology.
To begin with, let us examine the distribution of the subsidy across the three income groups of LIG,
MIG and HIG. As can be seen fromTable-11, the percentage share of the HIG in the total subsidy on SS
is 10.66% (Rs. 827 crores) as against 33.29% (Rs. 2580 crores) for the MIG and 56.04% (Rs. 4344
crores) for the LIG. Thus, in absolute terms, the poor (i.e., LIG) are getting Rs. 4344 crores of the total
subsidy on SS in 1999-00. Whereas, the non-poor (i.e., MIG and HIG combined) are getting the
remaining Rs. 3407 crores of the total subsidy So, whole or a part of it can be recovered from the
non-poor in the form of higher user charges. The non-poor gets largest share of the total subsidy on
MPH (83.37%). Then followed by WSS (78.99%), UD (76.92%) and the lowest subsidy going to the
non-poor are ESAC (30.24%). The lowest subsidy of the non-poor on ESAC is mainly because of larger
enrolment of students from the poor in primary and secondary education provided by government. It
must also be noted that the non-poor claims to the extent of 32.15% of the food subsidy (Nutrition),
exclusively meant for the poor. This can be reduced to zero by targeting food subsidy exclusively
towards the poor. In absolute terms, the food subsidy enjoyed by the non-poor comes to around Rs.
359 crores which must be reduced to zero in the days to come with strong political will. When the
subsidy of Rs.3407 crores on SS going to the non-poor (MIG & HIG combined) is added to the already
collected revenue from SS, the NCRR of SS goes from the present 1.57% to as much as 44.54% in
1999-00.(see Table-12). It is to be achieved, if not immediately, eventually over a reasonable period
of time. From ESAC as much as Rs. 972 crores (30.25% of the total subsidy) can be collected from MIG
and HIG combined by achieving the NCRR of 30.92%. Least of all, if the subsidy derived by the HIG, a
component of the non-poor, is added to the revenue already recovered, the NCRR of SS goes up from its
present 1.57% to 11.59%. Thus an additional non-tax revenue of Rs. 827 crores can be augmented for
1999-00 from 13 components of SS. As much as Rs. 154 crores can be recovered from only HIG in
ESAC by the NCRR of 5.71% without much hesitation immediately keeping in view the present financial
crisis in education, particularly higher education. From HIG, Rs. 159 crores in WSS through the NCRR
of 47.93%; Rs.13 crores in Housing through the NCRR of 7.66%; Rs. 57 crores in Urban Development
through the NCRR of 42.26% and Rs. 430 crores in MPH through The NCRR of 50.60% can be
recovered without much hesitation. Of course, If the subsidy of Rs. 3407 crores enjoyed by the
non-poor (HIG & MIG combined) in SS is recovered through the NCRR of 44.54%, perhaps the
revenue deficit in AP is completely wiped out. (See Table-12).
 There are 31 components in ES having positive subsidy element (i.e., excess of expenditure
over revenue). AsTable-13 reveals, total subsidy on these 31 components is Rs. 4942 crores in
1999-00. Of which, Rs. 708 crores go to the LIG: Rs.2519 crores to the MIG: and Rs. 1715 crores to
the HIG from ES. In terms of percentage shares of the LIG, MIG and HIG in the total subsidy, it is
14.32%, 50.97% and 34.71% respectively. Thus, the poor gets 14.32% ( Rs. 708 crores) and the
non-poor gets 85.68% (Rs. 4234 crores) of the total subsidy on ES. Of all the components, Major and
Medium Irrigation and Minor Irrigation provide largest subsidy of Rs. 877 crores to the HIG which can
be recovered from rich farmers belonging to the HIG. In addition to this, agriculture and allied
activities provide a subsidy of around Rs. 105 crores to farmers. Thus, totai subsidy enjoyed by
farmers comes to Rs. 982 crores. In view of absence of the agricultural income tax, it is legitimate to
think about the recovery of this subsidy from the HIG farmers. (See Table-13). In case the subsidy of Rs.
1715 crores on ES enjoyed by the HIG is recovered giving rise to a normative revenue of Rs.2067 crores
(i.e.,Rs. 1715 crores plus Rs. 352 crores), the NCRR will be 39.04% in 1999-00 as against the actual
CRR of 15.42% in ES in the same year. On the other hand, if the subsidy of 4235 crores enjoyed by
both the MIG & HIG from ES is recovered giving rise to the normative revenue of Rs.4587 crores (i.e.,
about Rs. 4235 crores plus Rs. 352 crores), the NCRR goes up to 86.63% in the same year, (see
Table-14).

Now let us look at the likely impact of the NCRR of ES & SS on the budgetary condition of AP
in 1999-00. In 1999-00, AP State budget estimate of TE under the revenue account is Rs. 20157 crores
while that of the revenue is Rs. 18593 crores having a revenue deficit of Rs. 1564 crores. However,
this revenue deficit is likely to go up in view of the experience of a large gap between the revised
estimate and the-corresponding actual of revenue deficit in 1998-99 in AP. In 1998-99, the revised
estimate of the revenue deficit was Rs. 1086 crores while the actual amount of it increased to Rs.
2684 crores (i.e., increase by about 147%). In 1999-00 also, if the same is repeated, the revenue
deficit is likely to go up from its present budget estimate of Rs. 1564 crores to Rs. 3863 crores. If the
subsidy of the HIG on ES & SS is recovered (i.e., Rs. 2542 crores approximately), the revenue surplus
will be about Rs. 978 crores in 1999-00, assuming that the revenue deficit remains at its budgeted level
of Rs.1564 crores (Rs. 2542 crores minus Rs. 1564 crores). Even, if the revenue deficit increases to
Rs.3863 crores as forecasted, the deficit would come down to Rs. 1321 crores (Rs. 3863 crores minus
Rs. 2542 crores). Thus, the revenue deficit comes down by about 66% which itself is a major
achievement. On the other hand, if the HIG & MIG subsidy on ES & SS combined (i.e., Rs. 7642
crores) is recovered, the revenue surplus in 1999-00 could be Rs. 6078 crores assuming that the
revenue deficit would be at its budgetary level of Rs.1564 crores (i.e., Rs. 7642 crores minus Rs. 1564
crores). Assuming the revenue deficit would be Rs. 3863 crores as per the forecast, the revenue surplus
would be Rs.3779 crores (Rs. 7642 crores minus Rs. 3863 crores). Thus, there is. a lot of scope for
improving the budgetary condition in AP by proper user charges imposed on the non-poor as far as ES &
SS are concerned. However, the above exercise is only an approximate one. It, however, shows a legitimate
way by which the budgetary condition of AP can be improved in the days to come Similarly, other States also
have a lot of opportunity to improve their respective budgetary positions by increasing the cost recovery
rates to their normative levels through proper user charges on various ES and SS provided by them. Certainly,
this is an area of deep inquiry in future.

VI. Conclusion

Of late, revenue deficit of AP State, apart from other states, has been increasing very fastly. Rising
revenue deficit reduces government capital expenditure, combined with private capital expenditure,
affecting growth prospects of the State economy adversely. So, the need to reduce the deficit is
imperative. It may be reduced by either cutting down budgetary revenue expenditure or raising budgetary
revenue. But, it appears that the deficit must be reduced preferably by increasing the revenue from the
point of view of growth and equity. Of the four sources of revenue available to a State, it is legitimate to raise
State's Own Non-Tax Revenue (SONTR) by raising actual cost recovery rates of various social and
economic services provided by AP State through its budget. The actual rates can be raised to their
normative levels through proper user charges collected from the non-poor beneficiaries of the
services. In fact, the actual cost recovery rates of the services are much lower in AP than in ASC during the
nine year period from 1990-91 to 1998-99. The lower cost recovery rates have resulted in large amount of
unintended subsidies enjoyed by the non-poor in AP undermining growth and equity objectives of its
budget policy. As much as 43.96% and 85.68% of the total subsidies (implicit and explicit) respectively on SS
and ES are enjoyed by the non-poor during 1999-00 in AP. In absolute terms they amount to Rs. 3407 crores on
SS and Rs. 4235 crores on ES. Altogether, Rs. 7642 crores subsidies were enjoyed by the non-poor in AP
during 1999-00. If these subsidies are reduced to zero through proper user charges, the average cost recovery
rate of SS goes up from its present 1.57% to a normative level of 44.54%. Similarly, in the case of ES, the rate
goes up from its present 15.42% to a normative level of 86.63% during 1999-00. Ultimately, this leads
to not only wiping out the revenue deficit completely, but also generating surplus in revenue account
of AP budget. Thus, government saving become positive which enables the government to invest in social
and economic infrastructure for promoting growth and equity. In the light of the policy of liberalisation of
market forces in India, the government expenditure on SS must be increased fastly to reduce poverty in the
State. Growh mediated strategy of poverty reduction needs to be supplemented by what Dreze and
Sen (1989) have described as public support-led strategy (quoted from Sudipto Mundle and M.G. Rao
(1997), P.208). Lastly, the present study has one important limitation. It is the use of per household
government expenditure benefits enjoyed by the LIG, MIG and HIG in AP pertaining to 1984-85 for
determining the subsidy enjoyed by the three income groups in 1999-00*. However, the study could show a
legitimate way of increasing the cost recovery rates of various government services to their respective
normative levels for overcoming the problem of growing revenue deficit in AP Certainly, this is an
area of further deep enquiry in the future.
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