The paper attempts to show that adherence to fiscal policy rules not only makes the state government move towards long-term fiscal sustainability, but also helps in reorienting its expenditure. It states that, in order to bring in balance between financial rectitude and welfare optimization it is essential that subsidies are channelized to targeted groups while monitoring important risks such as interest rate, expenditure on irrigation projects and scholarships. Further, it contends that institutional integrity and political will are critical in achieving the objectives set out in Fiscal Responsibility and Budget Management (FRBM) Act.

Andhra Pradesh achieved a revenue surplus of Rs. 2,066 cr at the end of the financial year 2008-09. This surplus when contrasted with a deficit of Rs. 3,595 cr at the end of the financial year 2001-02 summarizes the turnaround in the fortunes of Andhra Pradesh (AP) state finances in this decade. What needs to be probed and analyzed is a set of factors contributing to such a dramatic change. Fiscal Responsibility and Budget Management (FRBM) Act, 2005 is cited as the most important factor whose implementation is central to the improvement of fiscal management in the state. Riding on the reform agenda set in motion in 2001 through the Medium-Term Fiscal Reform Framework (MTFRF) and benign regime of central transfers under Twelfth Finance Commission (TFC), the state's finances have entered a new phase whose dynamics need to be understood thoroughly to project the economic growth of the state during the current Eleventh Plan period. It also needs to be tested whether the state can weather the lower growth trajectory forecast for the current and coming fiscal years.

This paper proposes to analyze the factors contributing to primary surpluses during the last four years, the current expenditure pattern, the strength of the economy to weather economic downturn, impact of fiscal correction on welfare spending and the volatility of expenditure in election years. The basic framework of FRBM Act and the TFC is utilized for looking at the issues arising out of the fiscal situation.

Applied Economics Journal, Fiscal Responsibility and Budget Management, FRBM, Medium-Term Fiscal Reform Framework, MTFRF, Twelfth Finance Commission, TFC, Fiscal Reforms Strategy, Value-Added Tax, VAT, Public Sector Enterprises, PSEs, Fiscal Management, Monetary Policy, Externally-Aided Projects , EAP.