As Chandrababu Naidu rang the bell at the Bombay Stock Exchange on Monday morning, everyone around him was all smiles. It was a historic photo-op moment with the ‘Amaravati Bond 2018’ getting listed on the Exchange. The intention was to raise funds to build Amaravati, Andhra’s greenfield capital city, by tapping the capital markets. While the bonds were issued for Rs 1,300 crore, they were oversubscribed 1.53 times, thereby raising a total of Rs 2,000 crore worth of funds.

Critics point out that we should scratch the surface for warts to show. Former Expenditure Secretary to the government of India, EAS Sarma, says this move will only push Andhra Pradesh into a severe debt trap. The Visakhapatnam-based Sarma points to the high rate of interest of 10.32 per cent that will have to be paid quarterly, over the period of a decade. This will translate to Rs 1,573 crore to be paid as interest alone. Compare this with the Greater Hyderabad Municipal Corporation bonds that were subscribed for an interest rate of 8.9 per cent earlier this year, or even the Pune Municipal bonds that were issued for 7.5 per cent.

“It is not just this Telugu Desam government, but even future governments will have to bear this burden,” says Sarma. “The Andhra government is giving a sovereign guarantee for the repayment with interest. It means we, the people of Andhra, are being used as a shield to give a higher rate of interest. World over, the experience with building new cities is not a happy one. In this case, it is a real estate-driven project, where the returns will not be constant. From where is Andhra going to get money to service the interest?’’

On paper, the CRDA plan is to use this corpus to create infrastructure in Amaravati. In an election year, it is in the process of calling for tenders worth Rs 48,115 crore. To raise this money, it also plans to float bonds worth Rs 750 crore targeted at retail investors, raise Rs 20,000 crore from HUDCO, another Rs 10,000 crore from public sector banks, Rs 7,000 crore equity from the state government, Rs 6,000 crore from the World Bank and about Rs 2,500 crore from the Centre in the form of a grant. Given the minimal support from the Narendra Modi government, from who the TDP withdrew support this year, Naidu has no option but to tap the market. 

Critics point out that Andhra is already under a debt of Rs 1.9 lakh crore, which is 28 per cent of the state GSDP. The primary worry is how will a cash-strapped state service this huge a debt burden?

“They are throwing good money after bad money,” says IYR Krishna Rao, who worked as chief secretary under Naidu from 2014 to 2016. “A good functioning capital city can be built with Rs 5,000 crore. But Naidu wants to build a mega city for Rs 50,000 crore—that is the problem.”

The Andhra government says there are several other states in a worse financial position than Andhra. It claims HUDCO charges 10.35 per cent for three years which means the CRDA had borrowed money at lower interest from the market when compared to the central government undertaking.

“CRDA has with it a huge land bank, which after the development of infrastructure, will be a source of wealth,” says C Kutumba Rao, Vice Chairman of the Andhra Pradesh Planning Board. “With plans to levy user and development charges, CRDA will generate an income of up to Rs 500 crore every year from 2019 onwards.”

The concern from a governance point of view is that the Amaravati focus will mean funds will be diverted from other regions and sectors. It could eventually mean lesser resources for the more backward Rayalaseema and north coastal Andhra regions and limited funds for health, education, and other social welfare programmes. For a state that was divided after Telangana felt discriminated against, it is like making the same mistake all over again by risking regional imbalance.

“More than 62 per cent of the amounts borrowed by Andhra Pradesh during 2018-19 will go towards payment of interest alone. This will leave no room for genuine development activity. Eventually, Andhra’s credit rating will come down,” says Sarma.

The Andhra establishment disputes the charge, celebrating the ‘Amaravati Bonds’ as the largest bonds issue in India from a local city authority.

“In the last four decades, all municipal bonds from all cities put together raised Rs 1,800 crore. Would established names have bought into our bonds scheme if they doubted Amaravati’s ability to take off? The fact that they did shows the brand equity of Amaravati,” says Kutumba Rao.

In his earlier tenure as CM of united Andhra Pradesh, Naidu was accused of putting all his eggs into the Hyderabad basket, happy to announce himself as the creator of modern-day Hyderabad. Naidu sees Amaravati as another opportunity to create history. The difference is that Hyderabad, when Naidu burst on the scene, was already 400 years in existence, while Amaravati is a more audacious start-from-scratch project. Andhra’s fragile economy would not be able to bear the cost of a failure.