The Hindu Editorial Analysis- 30th May 2025 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

​​​The case for a special fiscal package for Andhra Pradesh

Why in News?

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 in deep financial trouble, and there is a strong case for the Finance Commission to provide the State with special assistance. When Telangana was carved out of Andhra Pradesh in 2014, the remaining Andhra Pradesh requested ‘special category’ status to cope with the loss of Hyderabad, a major tax revenue source. Despite a promise from then Prime Minister Manmohan Singh in Parliament to support this request, the law that facilitated the State's division did not grant special category status to 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:
• State(s)Package TypeRemarks
• Odisha
• Koraput-Balangir-Kalahandi Plan
• Politically driven, discretionary plan
• Madhya Pradesh & Uttar Pradesh
• Bundelkhand Special Package
• Targeted support for backward region
• Bihar
• Pre-election Special Package (2015)
• One-off package given before elections

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)

• Original State
• New State Created
• Effect on Per Capita Own Revenue
• Uttar Pradesh
• Uttarakhand
• Uttarakhand gained revenue; loss for Uttar Pradesh was small
• Madhya Pradesh
• Chhattisgarh
• Chhattisgarh gained revenue; loss for Madhya Pradesh was small
• Bihar
• Jharkhand
• Jharkhand gained revenue; loss for Bihar was significant
• Andhra Pradesh
• Telangana
• Telangana gained revenue; loss for Andhra Pradesh was very high

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.