A 'White Paper on Tamil Nadu Government Finances’ presented by the State Minister for Finance and Human Resources Management, Dr. Palanivel Thiaga Rajan at the Secretariat on August 9, has hit the nail on its head.

The 112-page meticulously documented ‘White Paper’ not only shows the mirror to the ‘steady deterioration in the finances’ of the Government of Tamil Nadu, particularly post 2013-14, and the slowdown in the State’s economic growth rate, but also how fiscal federalism has suffered a big blow.

It is not unusual for governments with large public welfare commitments to run deficits. But what is of serious concern is that for an industrially well-developed State like Tamil Nadu and ranked reasonably high in social welfare indices, the revenue surplus from the years 2006-07 to 2008-09 (during the previous DMK regime led by Kalaignar M Karunanidhi), was not consolidated in the next decade.

Of course, the state took a hit in the wake of the 2008 global financial meltdown and its expenditure commitments jumped with implementation of the Sixth Pay Commission recommendations with effect from June 1, 2009. Later for two years (2011-2013), the state’s revenue was in surplus, but “this improvement turned out to be short lived.” “Since 2013-14 the State has continuously been in revenue deficit.”

‘TRULY ALARMING EVEN BEFORE COVID’

The slide in revenue deficits, a key indicator of the state’s finances, is ‘truly alarming’. A revenue surplus of Rs.1,760 crore in 2012-13, worsened to a revenue deficit of Rs.1,789 crore in 2013-14. This further widened to whopping revenue deficit of Rs.35,509 crore in 2019-20 “even before Covid-19 pandemic struck,” the document reveals.

revenue surplus of Rs.1,760 crore in 2012-13, worsened to a revenue deficit of Rs.1,789 crore in 2013-14. This further widened to whopping revenue deficit of Rs.35,509 crore in 2019-20 “even before Covid-19 pandemic struck,” the document reveals.

“In 2020-21, which was the year of the Covid-19 pandemic, the preliminary accounts indicate that the revenue deficit would be Rs.61,320 crore. This is 3.16 per cent of the GSDP (Gross State Domestic Product), i.e. more than the entire normally permissible fiscal deficit. This leaves Tamil Nadu in an unsustainable fiscal situation,” says the White Paper.

Proportionately, the overall fiscal deficit of Tamil Nadu has been ballooning, as “the logic dictates”, it notes with irony. The fiscal deficit increased to Rs.92,305 crore in 2020-21, as per preliminary accounts, which is 4.43 per cent of the GSDP, well over the three per cent limit under the Tamil Nadu Fiscal Responsibility Act, 2003.

Several factors accentuated this steep downtrend. The takeover of the debt of the State electricity utility, TANGEDCO, under the Union Government’s ‘UDAY’ programme, was a major contributor to rising debts.

While fiscal deficit limit was adhered to in some years, it was “by postponing certain items of expenditure”. These included subsidies to the Tamil Nadu Civil Supplies Corporation, State Transport Undertakings (STU), and Cooperatives to the subsequent financial year.

“This meant that expenditure was not actually controlled, but commitments were built up and the deficits were hidden. The overhang of such postponed expenditure was partly cleared in 2019-20 and 2020-21 when “This meant that expenditure was not actually controlled, but commitments were built up and the deficits were hidden. The overhang of such postponed expenditure was partly cleared in 2019-20 and 2020-21 when

“This meant that expenditure was not actually controlled, but commitments were built up and the deficits were hidden. The overhang of such postponed expenditure was partly cleared in 2019-20 and 2020-21 when.

Other parameters like State’s Own Tax Revenue (SOTR) as a percentage of GSDP (falling from 8.48 per cent in 2006-07 to 5.46 per cent in 2020-21), Tamil Nadu’s overall tax to GSDP ratio hitting a new low in 2018-19 at below national average, are “extremely serious issues”. These sliding trends set in even before GST was introduced from July 1, 2017.

While the switch to the 2011 population by both the 14th and 15th Finance Commissions adversely affected Tamil Nadu vis-à-vis share in Central Taxes, sharp reduction in corporate income tax rates in the 2017-18 Union Budget hit TN further.

Dr. Palanivel Thiaga Rajan, further points out in the White Paper how the levy of surcharge on personal income tax commencing from the 2013-14 Union Budget and major changes in the tax structure on petroleum products by the Government of India, hiking the non-shareable cess but sharply cutting Union excise duties shareable with States, have all seriously jammed ‘resource flows’ to Tamil Nadu.

There are other concerns, some at the State level adding to the mess, like non-revision of property tax by local bodies, power tariffs static for past seven years, losses of State public sector undertakings (PSU), grants-in-aid from the Union Government showing ‘very high volatility’ and so on, besides huge pending GST compensation from Union government.

All these factors have contributed to the drag down in the State’s growth rate- with its average growth rate slipping from 9.37 per cent during 2006-11 period to 6.70 per cent during 2019-20, before dramatic Covidinduced lockdowns plunged Tamil Nadu’s growth rate further. Compared to Karnataka, Kerala and Maharashtra, even the otherwise robust services sector growth in Tamil Nadu has declined.

PLAN BODY ABOLITION, BIGGEST BLOW TO STATES

A flawed GST has deprived States of their revenue raising autonomy, even as the White Paper draws attention to deeper structural issues. It is true that since the 14th Finance Commission award, the overall divisible pool of Union taxes went up to 42 per cent from 32 per cent.

“But the actual gross flows did not increase and may have in fact reduced. This was because the system of Plan Grants and Normal Central Assistance from the Union to the States were completely given up with the abolition of the Union Planning Commission,” the White Paper contends.

“Even as non-discretionary flows are reduced, discretionary flows have increased, leading to a reduction of State autonomy, contrary to the principles of federalism as such grants can be unilaterally changed by the Union Government,” rues the document, reflecting on the deeper structural issues that have further weakened state finances.

During the media interaction after presenting the White Paper, Dr. Thiaga Rajan made it clear that the report was not an attempt to dilute or abandon DMK’s election promises made to the people, citing the fiscal crisis. “We have to change the way we raise revenues” and shift their productive use for welfare of the ‘many’, not just for a ‘few’, he stressed, alluding to the ‘Dravidian Model’ of inclusive growth.

Exuding optimism in fixing these issues to a “large extent” over the next five years, Dr Thiaga Rajan based it on hard facts like Tamil Nadu having large assets, a good industrial base, goodwill of the people and the Tamil diaspora and Chief Minister M.K. Stalin’s keenness for radical change.

TOWARDS A CONSOLIDATION BUDGET FM’S FIRST E-BUDGET LAYS STRONG FOUNDATION FOR A FULL BUDGET

Unfazed by the sheer magnitude of the second wave of Covid-19 when the DMK returned to power in Tamil Nadu in early May this year and the already precarious fiscal position, State Minister for Finance and Human Resources Management, P.T.R.Palanivel Thiaga Rajan has braved a consolidation project for the second part of 2021-22 fiscal.

“Our primary ambition for this revised budget is to lay the strongest foundation for the full budget for the financial year 2022-23, which this Government will present in about six months,” the Finance Minister said presenting the revised budget for 2021-22 in the Assembly on August 13, the first budget of the new DMK Government led by M.K. Stalin.

He said while it was important to arrest and reverse the “dismal record of fiscal mismanagement of the past decade,” this task would need sustained efforts over at least two to three years. In the same breath, Palanivel Thiaga Rajan emphasized that the Chief Minister “has also clearly established the model for this Government’s approach.”

“Transparency, engagement with society, inputs from experts and decisive action” are the four key components of this model streamlined by the Chief Minister. “This approach was very evident in the Government’s response to the second wave of Covid-19, and the universally recognized results have proven the value of this model,” Thiaga Rajan said.

Projecting a much greater revenue deficit of Rs.58,692.68 crore in the revised budget than the interim budget projection of Rs.41,417.30 crore, with its logical consequences for the State’s overall fiscal deficit, Thiaga Rajan was still optimistic of keeping the latter (at 4.33 per cent of Gross State Domestic Product- GSDP), within the overall norms prescribed by the 15th Finance Commission.

Given the current constraints, the Finance Minister had to scale down the capital expenditure marginally in the revised budget, weeding out ‘half-baked’ projects mooted by the previous (AIADMK) government at the last minute, and adding some innovative schemes by the new government.

Fiscal consolidation will have to be done anyway; but given that the State economy is still just recovering (projected growth rate is 2.20 per cent for the current year) from the impact of successive waves of the Covid-19 pandemic, the “time is not yet ripe” for it, Thiaga Rajan put it in perspective.

However, the revised budget bristles with tightening norms and procedures to pave way for fiscal prudence in future. It factors in suggestions for improvement given by the panel of global experts on the Chief Minister’s Economic Advisory Council. They include issues like old age pension, Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) Scheme, assistance for reviving the MSMEs (micro, small and medium enterprises)’, and steps to minimize the learning losses to students due to the pandemic, a top priority for the new regime besides health.

The DMK Government, while reviving some of its earlier schemes like ‘Anna Marumalarchi Thittam’, ‘Namakku Naame Thittam’, ‘Uzhavar Sandhais’ and so on, has incorporated a recommendation of the former RBI Governor Dr C Rangarajan-headed panel for a “wage employment to the urban poor”, similar to MGNREGEA in the rural areas. Accordingly, a jobs scheme for the urban poor will be implemented on a pilot basis, the Finance Minister said.

STAR ANNOUNCEMENTS

Dr Thiaga Rajan, assured to complete the ‘Crop Loan Waiver scheme’, vis-à-vis loans and agricultural jewel loans by co-operative credit societies, on weeding out irregularities after an investigation. He showed special consideration to Self Help Groups (SHG) in view of the pandemic crisis. For them, he announced a big loan waiver to the tune of Rs.2,756 crore due from all SHGs’, including women SHGs’, to cooperative credit societies.

And of course, the star announcement of his budget was to ease skyrocketing petrol prices in Tamil Nadu by Rs. Three a liter, despite the Union Government being “solely responsible” for the increase in cost of fuel and benefitting tremendously from the increase in taxation on petroleum products at the cost of the States.

“The Hon. Chief Minister keenly feels the pain of the working poor and the middle class. I am happy to inform the House that this Government has decided to reduce the effective rate of tax on petrol by Rs. 3 per litre and thereby provide major relief to the toiling working class people in the State. This measure will result in a loss of revenue of Rs.1,160 core a year,” Thiaga Rajan told the House.

In the context of distorting taxation of petrol and diesel and the Union Government not fully utilizing the cesses and surcharge levied for specific purposes- as pointed out by the CAG report-, the Finance Minister said to address all these issues comprehensively, “the Government will establish an advisory council to develop a Federal Fiscal Model with renowned experts on legislation involving revenue and taxation (including GST).”

BASIC INCOME TO HOME MAKERS

He further assured that the DMK Government’s important scheme of monthly assistance of Rs.1,000 each for housewives, was intended for the ‘genuinely poor’ households in the state. To ensure that the payment of ‘basic entitlement income’ is targeted to the genuinely poor, Government was consulting experts to formulate guidelines to be publicized. The scheme will be effectively implemented once all the ‘eligible households’ are identified, he added.

‘‘The Hon.Chief Minister keenly feels the pain of the working poor and the middle class.I am happy to inform the house that this Government has decided to reduce the effective rate of tax on petrol by Rs.3 per litre and thereby provide major relief to the toiling working class people in the state.

Restructuring of the Commercial Taxes Department, a ‘Samadhan Scheme’ to clear pending dues under TN VAT, making E-procurement mandatory for all procuring entities, emphasis on greater use of Tamil, stepped up allocations for Tamil Development department and archaeological excavations underway at Keezhadi, Adichanallur, Sivakalai, Korkai, Kodumanal and Gangaikondacholapuram, ‘Singara Chennai-II’, are among other key budgetary announcements.

A big basket of new infrastructure projects, including in road/highways/ports development and power generation, is to boost industrial growth and jobs. They include upgrading the entire Chennai-Kanniyakumari Grand Southern Trunk Road into 8-lane highway, promotion of new industrial and software parks, expanding Metro Rail in Chennai and taking Metro Rail facility to Coimbatore and Madurai. These are among the other key initiatives announced by Palanivel Thiaga Rajan.