Andhra Pradesh's decision to fund new capital with 'Amaravati bonds' has garnered interest, but may prove costly for debt-ridden state

The Amaravati bonds issued by the Andhra Pradesh Capital Region Development Authority (CRDA) witnessed an overwhelming response from institutional investors. The bonds were oversubscribed by 1.5 times on the electronic bidding platform of the Bombay Stock Exchange (BSE). The CRDA issued the bonds to raise funds for construction of Capital city of Amaravati.

Enthused by this response, the CRDA is working out the modalities to issue them for retail investors as well. It plans to raise as much as Rs 10,000 crore through this crowd funding exercise.

However, many questions remain on Chandrababu Naidu government's capital model and the manner in which it is generating funds for the construction of the capital. The government seems to be confused between a Greenfield capital and a big city with huge economic potential. This may result in a high cost burden as the economy cannot be transplanted to Amaravati. Besides, the bonds have a high interest rate on them, resulting in greater debt servicing burden. The state is already starved of cash, with high revenue deficit due to what they call arbitrary bifurcation, while it's also facing mounting debt burden. The debt-funded infrastructural development may not generate resources needed to finance this debt.

The capital-centric model of development will further accentuate regional disparities resulting in discontent in the backward districts.

File image of Chandrababu Naidu. AFP

File image of Chandrababu Naidu. AFP

But, Chandrababu Naidu has to embrace such a model of development for the residuary state of Andhra Pradesh as it was his political promise. As written earlier on The Economic and Political Weekly in July 2014, "The capital city, Hyderabad, was the bone of contention. An urge for development prevailed over the concern for welfare schemes. Building of infrastructure in the new state and setting up of a new capital city dominated the political discourse. This was the context in which elections were held in the Seemandhra region in 2014."

Capitalising on this emotional sentiment of the people of Seemandhra region (which now constitutes the residuary state of Andhra Pradesh) for a capital city, Naidu promised a capital which is far superior to Hyderabad, something even Delhi will feel jealous of. This promise was in fact critical in catapulting him to power after a gap of a decade. The capital city discourse was integral to the political management of Chandrababu Naidu.

But reality is otherwise. Hyderabad was not built in a year, or even a decade. It has over four centuries of history. It was one of the major cities of the country, even at the time of Independence. It is possible to construct an administrative capital, but it is just not possible to transplant an economy of Hyderabad's size.

The last four years of work on the ground are testament to this. Barring a few temporary buildings, nothing significant can be  noticed if one makes a trip to Amravati.

Now that elections are round the corner, Naidu is again trying to whip up the capital sentiment. Earlier, the Andhra Pradesh government launched an initiative called 'My Brick — My Amaravati'. As part of this, e-bricks were sold to people across the world.

Now, the government is issuing retail bonds to generate funds from people. Calling the capital Amravati as people's city, Naidu wants to establish an emotional connect between the people and his dream for a greenfield capital city.

In fact, such a capital-centric model of development in the united state had created regional disparities fanning sub-regional sentiments that ultimately led to the bifurcation of the state, and subsequently, a burning feeling of being let down in the Seemandhra region. But Naidu's government failed to learn from this experience. There is already discontentment in the Rayalaseema and North Coastal Andhra regions, which are backward compared to South Coastal Andhra Pradesh where Amravati is located.

Besides, several questions still remain on the crowd funding model adopted to emotionally involve people in the capital discourse.

The CRDA authorities termed the issuance of Amaravati bonds the "biggest ever in the country since Independence" by an urban local body. According to AP CRRDA commissioner Cherukuri Sreedhar, in the entire market, bonds floated by other municipalities add up to just Rs 1,800 crore. Amaravati is the only green field capital in the country to have floated bonds.

However, retired chief secretary of the government of Andhra Pradesh, IYR Krishna Rao, questions how will the already-cash-strapped-government be able to service the debt. Critics fear that this may lead to additional fiscal burden on the residents of Amaravati in the form of higher user charges for public services they enjoy. This would make Amaravati an elite city rather than a people's city as is being touted.

Rao further stated that the Greater Hyderabad Municipal Corporation (GHMC) bonds issued recently were subscribed for an interest rate of 8.9 percent, and that last year's Pune Municipal Bonds at 7.59 percent while an interest rate of as high as 10.32 percent is to be paid on Amravati bonds, resulting on higher fiscal burden.

Besides, the funds generated will be used to build infrastructure development in the new capital. But such infrastructure may not generate immediate and adequate fiscal resources to finance the debt servicing.


Updated Date: Aug 18, 2018 18:59 PM

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