Sanjay Krishnan: A delicate balancing act

It was a crucial test for Andhra Pradesh Chief Minister Y S Rajasekhara Reddy. Six weeks ago, he swept to power on a populist platform with sweeping promises of free power for farmers and and a focus on the rural poor.

But last week it was global automobile giant BMW which came calling, seeking reassurances about the new government. It's now fairly certain that BMW will put up its assembly plant in Hyderabad.

It was the same story a few weeks earlier when Volkswagen came calling and went back with a fistful of freebies "" even more than Chandrababu Naidu had offered. Also, in recent weeks Mukesh Ambani, chairman, Reliance Industries, called on Reddy.

According to the chief minister, Ambani promised to build a refinery in Kakinada that will be even bigger than the one in Jamnagar.

Rajasekhara Reddy knows that he's performing a tough balancing act. He was elected on a promise of bettering the lot of rural Andhra Pradesh. But he can't neglect the big businessmen and the infotech czars who come calling all the time.

Bear in mind that Andhra Pradesh is the state that sends 29 Congress MPs to the Lok Sabha "" that's 20 per cent of the Congress' strength in the Lok Sabha. So, everyone from Sonia Gandhi and Manmohan Singh downwards has already figured out that Andhra Pradesh will be crucial for the Congress in coming years.

This is the state where the Congress must prove that it is a party with a difference and where it must put the Common Minimum Programme to work. Or, to put it another way, it's the testing ground where the Congress must demonstrate that economic reforms can also have a human face.

The stakes are high for all the political parties. The Telugu Desam Party, despite its pro-business orientation, left the state in an economic mess.

The Congress would like to show that it can bail the state out of its economic troubles "" and ensure that its curtains for the TDP for a long time to come. The Congress has been out of power for a decade and it's determined that it won't be turfed back into the wilderness again.

Despite his populist approach to politics, Rajasekhara Reddy has played a cautious game so far. He doesn't want to create fear or uncertainty about the state's industrial policy. One signal of his intentions came when he boldly went ahead with the previous government's decision to privatise four co-operative sugar mills.

Rajashekara Reddy stepped carefully once again when he carried out a large-scale administrative reshuffle soon after taking over the reins of government.

He left the Industry and IT departments untouched, sending out a clear signal about continuity. He's being particularly careful about the fast-growth IT sector

It was the same story when Volkswagen's senior executives turned up to check on the new government's intentions and whether it would stick to commitments made by Chandrababu Naidu.

The meeting lasted only 15 minutes and in that time Rajasekhara Reddy promised them a written assurance that the Government would stick by all the earlier commitments. Also, he told them to keep in close touch with the Industry minister and secretary if they needed anything else.

Reddy isn't only focusing solely on foreigners and the IT industry. In an effort to strike a rapport with businessmen in the state, he recently met around 90 top industrialists at a specially convened meeting.

That was followed by a trip to Mumbai where he met top CEOs and tried to persuade them to invest in the state. At a nuts-and-bolts level, the chief minister is also drafting a revival package for sick units and also working on a cluster policy for small-scale industries.

Rajasekhara Reddy doesn't have a track record of being a strong administrator. But, unlike Naidu who concentrated all powers to himself, the new chief minister has started well and on an entirely different note. He has allowed the both the ministers and bureaucrats plenty of space to work independently.

That's one side of the picture. At another level Reddy is doling out freebies at an alarming pace and on a scale that the state can ill afford. Take a look at some of the freebies that have just gone on offer:

Treatment at government medical hospitals has been made free

Payment of Rs 50,000 towards one time settlement for loan repayments taken by farmers from both public sector banks as well as private money lenders

The Government is looking at a proposal to offer loans at 3 per cent interest to women self-help groups

The Government has waived power arrears of about Rs 1,100 crore from farmers

The state will offer free power to farmers and this is likely to cost the state exchequer about Rs 430 crore annually

This fiscal generosity would be unnerving at any time. But the fact is that Chandrababu Naidu was hardly a model of fiscal rectitude. His government had already borrowed heavily and left the state exchequer with a staggering debt of Rs 57,588 crore as per the revised budgetary estimates on March 31.

That means the state's total debt is equivalent to 32.37 per cent of the gross state domestic product. When Naidu took over the reins of the state in 1994-95 the total debt was around Rs 14,000 crore. In his nine year rule the state's borrowings went up more than four times.

If that isn't enough Andhra Pradesh has a fiscal deficit of Rs 7,426 crore and total expenditure of Rs 41,355 crore, while the state's revenue receipts amount to only Rs 35,178 crore.

Interest payments and the fiscal deficit are roughly 4 per cent each of the state's GDP, which is around Rs 1,77,883 crore, calculated at current prices.

It must also be said that Naidu's government was far ahead of Reddy in the business of doling out freebies. Naidu was also famous for announcing several attractive election eve schemes and discontinuing them after the elections on pretext or another.

In an early preparation for the elections, Naidu last September announced 1 crore sops for the electorate, but ironically he could not complete the freebie spree as he decided to go for early elections to the Assembly.

But Reddy has costly ideas that are still in the pipeline. He talks about investing Rs 46,000 crore in irrigation and agriculture-related areas. This is in stark contrast to the Rs 900 crore that the TDP government spent last year on irrigation.

But, state revenue department officials are sceptical whether "" assuming the Government can raise or service such a vast sum of money "" it would be able to channel it in the right direction.

Some of Reddy's other ideas could also run into trouble. He has publicly stated that the Rs 430 crore power subsidy shouldn't be a problem because the Government is planning to re-negotiate with suppliers to bring down tariffs on a retrospective basis.

It should be borne in mind that power generated by private producers in the state is selling for around Rs 2.28 per unit compared to over Rs 3 in most parts of the country.

But the private sector power generators are not as scared of the government as they once were. The new Electricity Act allows them to generate power anywhere and sell anywhere. They are confident about selling power to neighbouring states like Karnataka at around Rs 2.50 per unit.

This apart, private power players point out that the actual power subsidy bill is much bigger and is about Rs 1,500 crore and not Rs 430 crore as is being made out by the Congress government.

The TDP government under Naidu had slowly started collecting user charges from farmers and the government had managed to collect Rs 430 crore in the last fiscal, before the TDP was booted out of power. Reddy's populistic 'free power to the farmer' move has ensured that fledgling reforms on the power front are back to square one.

Additionally, because of the announcements made by the chief minister lending institutions are jittery and some power projects now may not achieve financial closure now.

Manmohan Singh talked about creating a second green revolution in Andhra Pradesh and ensuring that all segments of the population are part of this economic transformation. That's an extremely ambitious goal. But if it works, the state will be a model for the entire country.