Chandrababu Naidu wants financial assistance for Andhra. Will PM Modi offer easier FDI in tobacco instead?

It is well on the cards that the central government is going to have to offer some carrots to Andhra Pradesh. Chandrababu Naidu’s Telugu Desam Party (TDP), which rules the state, is a key constituent of the National Democratic Alliance (NDA).

Last week, Naidu asked finance minister Nirmala Sitharaman for lifelines from the union budget to steer Andhra Pradesh out of financial difficulties. Its public debt, according to the state government data, increased from 31.02% of its Gross State Domestic Product (GSDP) in 2019-20 to 33.32% in 2023-24. He also sought special assistance for the state’s backward regions, funds for the Polavaram irrigation project and support for the development of the new capital, Amaravati.

The trouble is, if these demands are even partially met, Bihar and possibly other debt-burdened states, too, will start queuing up at North Block to demand financial support. The political configuration of the current Lok Sabha will make those demands more strident.

Sitharaman simply does not have the spending leeway, given the fiscal deficit remains above 5% of GDP. And so, the Modi government must come up with alternative bargains that Naidu cannot decline.

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The first hint that the Modi government may be readying such an alternative came last week. Although Naidu’s discussions with Sitharaman made headlines, more significant was commerce and industry minister Piyush Goyal’s meeting earlier in the week with tobacco farmers in Hyderabad.

This is the Modi government’s first meeting with tobacco farmers and exporters since it joined office in 2014. Goyal assured the farmers that the Centre was ready to waive off the penalties on production of excess tobacco and financial assistance, including interest subvention, as well as help them with digital registration.

Tobacco farmers are among the TDP’s substantial agricultural support base. Naidu is quite sensitive to tobacco prices at state auctions. When prices plummeted in 2003, he severely reprimanded buyers from the industry, and threatened to burn all the stocks of tobacco to ensure better prices for farmers. ITC, a major buyer of tobacco, had promised to hold prices, yet the rates had crashed.

And so, while Sitharaman and her team in North Block engage Naidu in discussions on financial assistance, and dig out alternatives for special status for states from long-forgotten reports like the Gadgil—Mukherjee formula, if not the clincher for a political deal between the two sides, certainly a tactful bargaining chip may actually come from Udyog Bhawan.

A comprehensive FDI policy review is reportedly underway. If FDI in tobacco is liberalised to allow more than just technology transfer, and instead opened up also for plain-vanilla expansion of existing units, or for greenfield ventures as 100 % export-oriented units, the domestic off take from the farmers of tobacco used for cigarettes, will rise, improving their earnings.

The BJP is, of course, opposed to the expansion of the tobacco business, given the inherent health risks. That apart, India is a signatory to the World Health Organisation's Framework Convention on Tobacco Control.

Any liberalisation of FDI in tobacco will have to sidestep the BJP’s traditional position on tobacco. But ensuring stability of the government, and at the same time capping the squeezing of the exchequer by Naidu, requires a hard bargain with the TDP. It’s in the nature of political compulsions to impose compromises and costs.

An unintended beneficiary of a relaxed FDI policy for tobacco would be ITC Ltd and its investors, even though entrenched companies in this sector are protected against competition by entry restrictions. For ITC, liberalising tobacco FDI could shore up market appetite for its shares. Foreign institutional investors such as GIC Singapore, BofA Securities Europe, Citigroup Global Markets Mauritius and others showed up for British American Tobacco’s sale of a 3.5% stake in ITC in March, when there wasn't even a murmur of a possibility of policy changes. A more benign FDI regime will benefit the company whose tobacco business accounts for 37% of its total revenue in FY23, and which is the market leader with over 70% share

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