←
Group-II Mains Supplement — Polity, Economy and AP Society · Chapter 5

AP Public Finance

What to remember

  • A State budget has three funds and three deficits to know. The Consolidated Fund, the Contingency Fund and the Public Account; and the revenue deficit, fiscal deficit and primary deficit.
  • Andhra Pradesh is a low-surplus, high-welfare State after bifurcation in 2014. It depends on central transfers, grants and borrowing, and it works within the limits set by its Fiscal Responsibility and Budget Management (FRBM) Act.
  • Externally Aided Projects (EAPs) bring concessional loans from agencies like the World Bank and ADB. They are routed through the Centre.

Constitutional framework of the State budget

  • Article 202: the Governor causes the Annual Financial Statement (the budget) to be laid before the State Legislature.
  • Article 203: the estimates are divided into expenditure charged on the Consolidated Fund (not voted) and other expenditure (voted by the Assembly).
  • Article 204: the Appropriation Bill authorises withdrawal from the Consolidated Fund.
  • Article 205: supplementary, additional and excess grants.
  • Article 206: vote on account and vote of credit.
  • Article 207: financial bills need the Governor's recommendation.
  • Article 266: the Consolidated Fund of the State and the Public Account of the State.
  • Article 267: the Contingency Fund of the State, kept at the Governor's disposal for unforeseen needs.
  • Article 243I: the State Finance Commission is set up every five years to review panchayat finances and recommend sharing of taxes; Article 243Y applies similar arrangements for municipalities.
  • Article 280: the Union Finance Commission recommends the sharing of central taxes and grants-in-aid to States.
  • The Assembly also votes the budget demand by demand. The Legislative Council (where it exists) can only discuss, not vote.

Components of the budget

AccountItems
Revenue receiptsState's own tax revenue (State GST, State excise, stamps and registration, motor vehicle tax, tax on petroleum and liquor), non-tax revenue (royalty, fees, dividends), share in central taxes, grants-in-aid from the Centre
Capital receiptsBorrowings, recovery of loans, disinvestment
Revenue expenditureSalaries, pensions, interest, subsidies, welfare transfers, maintenance
Capital expenditureIrrigation, roads, buildings, power, loans to public sector undertakings

Committed expenditure means salaries, pensions and interest. When these are a large share of revenue, little is left for development.

Deficits (formulas and example)

  • Revenue deficit = revenue expenditure − revenue receipts.
  • Fiscal deficit = total expenditure − (revenue receipts + non-debt capital receipts). It equals the net borrowing requirement.
  • Primary deficit = fiscal deficit − interest payments.

Example: revenue receipts 1,000; non-debt capital receipts 50; revenue expenditure 1,200; capital expenditure 300; interest payments 150.

  • Revenue deficit = 1,200 − 1,000 = 200.
  • Total expenditure = 1,500; fiscal deficit = 1,500 − (1,000 + 50) = 450.
  • Primary deficit = 450 − 150 = 300.

FRBM and borrowing

  • The Centre's FRBM Act of 2003 and the State's own Andhra Pradesh Fiscal Responsibility and Budget Management Act of 2005 set rules on deficits and debt. States borrow within limits fixed by the Centre on the advice of the Finance Commission; the usual benchmark is a fiscal deficit of 3 percent of GSDP, with extra room allowed from time to time subject to conditions such as power sector reforms.
  • States raise funds through State Development Loans (market borrowings), loans from the Centre, National Small Savings Fund loans, and Ways and Means Advances from the Reserve Bank for short-term needs.
  • Guarantees given by the State to public enterprises are contingent liabilities that may become real debt. Borrowing by State-owned corporations outside the budget has drawn attention from the Comptroller and Auditor General (CAG) and from the Finance Commission.
  • Debt is measured as outstanding liabilities, often shown as a percent of GSDP. Use the latest official release for numbers.

GSDP and per capita income

  • Gross State Domestic Product (GSDP) is the value of goods and services produced within the State. Gross State Value Added (GSVA) is the sector-wise breakdown.
  • It is estimated by the State's Directorate of Economics and Statistics with guidance from the National Statistical Office, usually on the 2011-12 base series. GSDP at current prices shows nominal growth; at constant prices it shows real growth.
  • Per capita income (more precisely, per capita Net State Domestic Product) = Net State Domestic Product ÷ population.
  • The State Socio-Economic Survey, released at the time of the budget by the Planning Department, reports these figures. For current values and rankings, check the latest official release.
  • GSDP is also the denominator for deficit and debt ratios, so a faster GSDP growth eases the burden.

Central transfers and AP-specific features

  • Devolution: the 14th Finance Commission raised the States' share in central taxes to 42 percent; the 15th Finance Commission (chair N. K. Singh, period 2021-26) set about 41 percent, after the creation of the Union Territories of Jammu and Kashmir and Ladakh.
  • Grants: revenue deficit grants, local body grants and disaster grants are recommended by the Finance Commission. Centrally Sponsored Schemes require State matching shares.
  • Special category status: the 14th Finance Commission made no distinction between special and general category States in its devolution formula, and the Centre cited this to decline special category status. For Andhra Pradesh, the Reorganisation Act, 2014 promised support, which was later given as a special assistance package. Polavaram is a national project under the Act, with the Centre meeting the cost of its irrigation component.
  • GST: the State has shared in GST from 2017; compensation for revenue loss was available to States for a limited five-year period.
  • Challenges after 2014: the State lost the capital city's revenue base, started with a large revenue gap, and had high welfare commitments, interest payments and power sector liabilities. The capital city at Amaravati and the Polavaram project need heavy investment.
  • Welfare: direct benefit transfers, pensions, subsidised food and farmer support take a large share of revenue expenditure. These schemes change with governments; check the latest official release.

Externally Aided Projects (EAPs)

EAPs are projects financed by loans or grants from multilateral and bilateral agencies such as the World Bank, Asian Development Bank (ADB), Asian Infrastructure Investment Bank (AIIB), New Development Bank, JICA (Japan) and KfW (Germany).

  • A State cannot borrow directly from abroad; the Centre signs the agreement and passes the funds to the State as loan and grant, usually back-to-back or in a manner set by the Government of India.
  • Examples from the State's history include the World Bank-backed Andhra Pradesh Economic Restructuring Project (early 2000s), irrigation and rural poverty projects, and projects for health, roads and urban services.
  • Projects need approval of the Department of Economic Affairs; repayments with interest are charged to State finances.
SourceNatureExample use
Market borrowingState Development LoansGeneral deficits
Central loansLoans for capital expenditureSpecial assistance
EAPsConcessional external loansRoads, health, irrigation
GrantsFinance Commission and scheme grantsLocal bodies, disasters

The current AP budget

The State presents its budget in the Assembly each year; some years it first passes a vote on account. When asked about the current budget, an answer should cover: total outlay in revenue and capital accounts, the main deficit measures, top spending sectors (welfare, irrigation, agriculture, education, health, roads and housing), and flagship schemes. These numbers change every year, so use the latest official release of the State Finance Department rather than remembering figures.

Exam traps

  • Contingency Fund is under Article 267 and operated by the Governor; the Consolidated Fund is Article 266.
  • Fiscal deficit includes borrowings; revenue deficit does not include capital items.
  • Primary deficit = fiscal deficit − interest, not plus.
  • State Finance Commission (Article 243I) is different from the Union Finance Commission (Article 280).
  • The Legislative Council cannot vote the budget demands.
  • A State cannot take an external loan on its own; the Centre arranges EAPs.
  • Per capita income is an average, not a measure of equal distribution.
  • The 14th Finance Commission's devolution formula made no special/general category distinction; the Centre cited this to deny special category status to AP (status was granted by the NDC, not the FC).

One-liners

  • 1. Article 202 is the annual financial statement.
  • 2. Article 266: Consolidated Fund and Public Account.
  • 3. Article 267: Contingency Fund of the State.
  • 4. Article 243I: State Finance Commission.
  • 5. Revenue deficit = revenue expenditure − revenue receipts.
  • 6. Primary deficit = fiscal deficit − interest payments.
  • 7. The usual benchmark for a State's fiscal deficit is 3 percent of GSDP.
  • 8. AP's FRBM Act was passed in 2005.
  • 9. GSDP estimates are prepared by the State's Directorate of Economics and Statistics.
  • 10. The 15th Finance Commission was chaired by N. K. Singh.
  • 11. Polavaram is a national project under the AP Reorganisation Act.
  • 12. EAPs are routed through the Government of India.

Practice questions

  1. The Annual Financial Statement (budget) of a State is laid before the Legislature under which Article?

    1. Article 112
    2. Article 266
    3. Article 280
    4. Article 202
    Answer

    D. Article 202

    Article 112 is for the Union; Article 202 for the State.

  2. The Contingency Fund of a State is established under

    1. Article 267
    2. Article 202
    3. Article 266
    4. Article 243I
    Answer

    A. Article 267

    It is held at the Governor's disposal for unforeseen needs.

  3. Who operates the Contingency Fund of a State?

    1. The Chief Minister
    2. The Governor
    3. The Finance Secretary alone
    4. The Speaker
    Answer

    B. The Governor

    It is placed at the disposal of the Governor, subject to later legislative approval.

  4. The Consolidated Fund of a State and the Public Account are provided in

    1. Article 280
    2. Article 275
    3. Article 266
    4. Article 267
    Answer

    C. Article 266

    Article 266 covers Consolidated Funds and Public Accounts.

  5. The Appropriation Bill is introduced to

    1. amend the Constitution
    2. approve foreign loans
    3. appoint the Finance Commission
    4. authorise withdrawal from the Consolidated Fund
    Answer

    D. authorise withdrawal from the Consolidated Fund

    Article 204 deals with it.

  6. A vote on account is passed to

    1. meet expenditure for a part of the year before the full budget is passed
    2. dissolve the Assembly
    3. audit the previous year
    4. raise new taxes
    Answer

    A. meet expenditure for a part of the year before the full budget is passed

    Article 206 provides for it.

  7. The State Finance Commission is constituted under

    1. Article 280
    2. Article 243I
    3. Article 266
    4. Article 324
    Answer

    B. Article 243I

    It reviews the financial position of panchayats.

  8. The Union Finance Commission is constituted under

    1. Article 243I
    2. Article 267
    3. Article 280
    4. Article 243Y
    Answer

    C. Article 280

    It recommends tax sharing between Centre and States.

  9. Which of the following is the State's own tax revenue?

    1. Share in central taxes
    2. External loan
    3. Finance Commission grant
    4. State excise duty
    Answer

    D. State excise duty

    State excise is levied by the State.

  10. Revenue deficit is equal to

    1. capital expenditure minus capital receipts
    2. total expenditure minus total receipts
    3. revenue expenditure minus revenue receipts
    4. fiscal deficit minus interest
    Answer

    C. revenue expenditure minus revenue receipts

    It excludes capital items.

  11. Primary deficit is equal to

    1. fiscal deficit plus interest payments
    2. revenue deficit minus interest payments
    3. total debt minus GSDP
    4. fiscal deficit minus interest payments
    Answer

    D. fiscal deficit minus interest payments

    It shows borrowing excluding interest burden.

  12. Revenue expenditure is 1,200 and revenue receipts are 1,000. The revenue deficit is

    1. 1,200
    2. 200
    3. 1,000
    4. 2,200
    Answer

    B. 200

    1,200 − 1,000 = 200.

  13. Revenue receipts are 1,000, non-debt capital receipts 50, total expenditure 1,500. The fiscal deficit is

    1. 450
    2. 500
    3. 550
    4. 1,500
    Answer

    A. 450

    1,500 − (1,000 + 50) = 450.

  14. If the fiscal deficit is 450 and interest payments are 150, the primary deficit is

    1. 300
    2. 450
    3. 150
    4. 600
    Answer

    A. 300

    450 − 150 = 300.

  15. A State has GSDP of 20,000 and a fiscal deficit of 600. The fiscal deficit as a percent of GSDP is

    1. 30 percent
    2. 6 percent
    3. 3 percent
    4. 2 percent
    Answer

    C. 3 percent

    600 ÷ 20,000 × 100 = 3.

  16. A State has outstanding debt of 8,000 and GSDP of 20,000. Debt to GSDP ratio is

    1. 60 percent
    2. 40 percent
    3. 16 percent
    4. 25 percent
    Answer

    B. 40 percent

    8,000 ÷ 20,000 × 100 = 40.

  17. A State's per capita income is calculated as Net State Domestic Product divided by

    1. area
    2. number of districts
    3. number of workers
    4. population
    Answer

    D. population

    Per capita means per person.

  18. If a State's NSDP is 6,000 and population is 60, per capita income is

    1. 100
    2. 360,000
    3. 1,000
    4. 10
    Answer

    A. 100

    6,000 ÷ 60 = 100.

  19. Expenditure on salaries, pensions and interest is called

    1. contingent liability
    2. non-plan loan
    3. committed expenditure
    4. capital expenditure
    Answer

    C. committed expenditure

    These obligations are hard to reduce.

  20. The usual benchmark for a State's fiscal deficit under fiscal rules is

    1. 15 percent of revenue
    2. 3 percent of GSDP
    3. 10 percent of GSDP
    4. 0 percent
    Answer

    B. 3 percent of GSDP

    The ceiling may be adjusted by the Centre with conditions.

  21. The Fiscal Responsibility and Budget Management Act of Andhra Pradesh was passed in

    1. 1991
    2. 2019
    3. 2014
    4. 2005
    Answer

    D. 2005

    The Centre's FRBM Act was of 2003.

  22. Which of the following is NOT a source of State borrowing?

    1. State Development Loans
    2. Printing currency notes
    3. Ways and Means Advances from RBI
    4. Loans from the Centre
    Answer

    B. Printing currency notes

    Only the RBI/Centre issue currency; States cannot print notes.

  23. Guarantees given by a State to its public enterprises are

    1. capital receipts
    2. grants-in-aid
    3. contingent liabilities
    4. tax revenue
    Answer

    C. contingent liabilities

    They may turn into debt if the enterprise fails to repay.

  24. The agency that audits State accounts is the

    1. Planning Department
    2. Finance Commission
    3. Election Commission
    4. Comptroller and Auditor General
    Answer

    D. Comptroller and Auditor General

    CAG audits receipts and expenditure of States.

  25. GSDP stands for

    1. Gross State Domestic Product
    2. Gross Savings and Deposits Product
    3. General State Development Plan
    4. Gross State Debt Position
    Answer

    A. Gross State Domestic Product

    It measures output within the State.

  26. GSDP estimates in a State are prepared by the

    1. Directorate of Economics and Statistics
    2. Election Commission
    3. Public Service Commission
    4. Reserve Bank of India
    Answer

    A. Directorate of Economics and Statistics

    With NSO guidance.

  27. The 15th Finance Commission was chaired by

    1. C. Rangarajan
    2. Y. V. Reddy
    3. N. K. Singh
    4. Vijay Kelkar
    Answer

    C. N. K. Singh

    The 14th was chaired by Y. V. Reddy.

  28. The 14th Finance Commission raised the States' share in central taxes to

    1. 50 percent
    2. 32 percent
    3. 25 percent
    4. 42 percent
    Answer

    D. 42 percent

    The 15th kept it at about 41 percent.

  29. The 14th Finance Commission removed the distinction of

    1. Scheduled Areas
    2. special category States for most purposes
    3. backward districts
    4. Union Territories
    Answer

    B. special category States for most purposes

    It left States with a single devolution formula.

  30. Which project is declared a national project under the AP Reorganisation Act, 2014?

    1. Polavaram
    2. Srisailam
    3. Nagarjuna Sagar
    4. Somasila
    Answer

    A. Polavaram

    The Centre bears the irrigation component cost.

  31. Externally Aided Projects are routed through

    1. the Reserve Bank directly to the State
    2. the Government of India
    3. State Legislature only
    4. local panchayats
    Answer

    B. the Government of India

    A State cannot borrow abroad on its own.

  32. Which of the following is a typical external funding agency for State projects?

    1. IRDA
    2. NABARD
    3. SEBI
    4. World Bank
    Answer

    D. World Bank

    It is a multilateral agency.

  33. JICA, which funds projects in India, belongs to

    1. France
    2. Germany
    3. Japan
    4. United States
    Answer

    C. Japan

    JICA is the Japan International Cooperation Agency.

  34. The Appropriation Bill authorises

    1. raising of EAP
    2. withdrawal from the Consolidated Fund
    3. creation of districts
    4. appointment of the Governor
    Answer

    B. withdrawal from the Consolidated Fund

    Article 204.

  35. Consider the statements: 1. The Contingency Fund is operated by the Governor. 2. The Consolidated Fund is created under Article 267. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    The Consolidated Fund is under Article 266.

  36. Consider the statements: 1. Primary deficit = fiscal deficit − interest payments. 2. Revenue deficit includes capital expenditure. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Revenue deficit excludes capital items.

  37. Consider the statements: 1. State Finance Commission is under Article 243I. 2. Union Finance Commission is under Article 280. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  38. Consider the statements: 1. A State can raise loans directly from the World Bank. 2. EAPs are routed through the Centre. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    States cannot borrow abroad directly.

  39. Consider the statements: 1. The Legislative Council votes the demands for grants. 2. The Assembly votes the demands for grants. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 2 only

    The Council cannot vote on demands.

  40. Consider the statements: 1. Per capita income is NSDP divided by population. 2. It shows how equally income is distributed. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    It is an average and does not show distribution.

  41. Consider the statements: 1. Salaries, pensions and interest are committed expenditure. 2. Guarantees are always counted in the fiscal deficit. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 1 only

    Guarantees are contingent liabilities, not a direct part of the fiscal deficit.

  42. Consider the statements: 1. Polavaram is a national project. 2. The Centre bears the irrigation component cost under the Reorganisation Act. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

  43. A State spends 1,800 and collects revenue 1,300 with no capital receipts. The gap of 500 is its

    1. primary surplus
    2. GSDP
    3. revenue surplus
    4. fiscal deficit
    Answer

    D. fiscal deficit

    Borrowing needed to close the gap is the fiscal deficit.

  44. Article 207 requires which of the following for introducing financial bills in the State Legislature?

    1. Approval of the CAG
    2. Approval of the Finance Commission
    3. Approval of the President in every case
    4. Recommendation of the Governor
    Answer

    D. Recommendation of the Governor

    Certain financial bills need the Governor's recommendation.

  45. Which of these is a capital receipt of a State?

    1. State excise
    2. Motor vehicle tax
    3. Borrowings
    4. Stamp duty
    Answer

    C. Borrowings

    Borrowings create liabilities and are capital receipts.

Page 1 of 1
‹
›