With the bifurcation of Andhra Pradesh, two new states will come into existence: Telangana, and the residual Andhra Pradesh. The new Andhra Pradesh will be the relatively larger of the two with a share of 58% in population as well as area.
In February this year, a vote-on-account was presented for the combined Andhra Pradesh. As nearly three quarters of the financial year would still be left when the two states are formally notified in June 2014, the immediate task for the new governments will be to prepare their individual budgets. Estimates of the vote-on-account would become fructuous. In FY14, as per the budget estimates, the last full-year numbers of the combined state, revenue receipts were estimated at R1,27,772 crore of which nearly R96,575 crore were tax revenues, consisting of R72,444 crore of own-tax revenues, R24,131 crore of share in central taxes, and central grants of R15,803 crore. The relative shares of own tax revenues, share in central taxes, and central grants will change dramatically for the two states. Revenues and expenditures of the two states will add up to more than the corresponding figures of the combined state.
Andhra Pradesh will get larger per capita transfers via the Planning Commission and central ministries, having been accorded the ‘special category’ status for five years.
Telangana, with its less developed and low per capita income districts (other than Hyderabad) may get larger per capita transfers from both, the Planning Commission and the Finance Commission.
Hyderabad is allocated to Telangana although it will serve as common capital for ten years. Being the centre of economic activities and source of government finance, it will critically define the fiscal prospects of the two states. Its population is large and area limited giving it a population density of 18,480 persons per sq km against a figure of 273 for the rest of Telangana.
The special position of Hyderabad causes considerable complications in working out both own revenues and fiscal transfers. The relative shares in population, called the population ratio in the Andhra Pradesh Reorganization Act, specifically defined in the Act as 58.32 to 42.68 as per the 2011 census, is the key determinant in the division of assets and liabilities and the flow of central transfers.
There will, however, be some important concerns in using this ratio for determining central transfers. Both the Finance Commission and the Planning Commission continue to use the 1971