Finance Minister D Jayakumar was facing a gargantuan challenge, even as he prepared to present his maiden budget on Thursday.
The state of Tamil Nadu is staring at a fiscal deficit that is now 4.58% of the Gross State Domestic Product. This figure, achieved in the year of 2016-17, is blatantly against the recommendations of the Fiscal Responsibility Budget Management (FRBM) Act.
In the past, experts have blamed falling tax revenue and increasing expenditure on subsidies for the increasing fiscal deficit. So, when, the Finance Minister announced in the Assembly that the fiscal deficit will be brought back to 3% as prescribed by the FRBM Act, it lead to many questions. Especially considering that the government did not introduce any new taxes in the latest budget.
Jayakumar, in a budget speech that lasted over an hour blamed the breach on the Tangedco's debt that the government has taken over. "The tax revenue growth has been lower than that estimated in the revised budget for 2016-17 due to uncertainty in domestic economy. There is significant drop in state's own tax revenue growth rate, especially in the receipts from stamp and registration charges. The breach in FRBM Act is due to takeover of Tangedco debt of Rs 14,000 crore under the Uday scheme," said the Finance Minister.
Despite not reaching the revenue target last year, the government further announced an increase in estimates of tax revenue to Rs.99,590 crore. This is reportedly a 9.8% increase. Chartered Accountant and Financial expert, Revathi Raghunathan however says that it is possible for the government to achieve these targets.
"There has been a steep hike in Value Added Taxes(VAT) for petroleum and diesel. This in itself will cause a major boost to revenue for the government," says Revathi. The state recently hiked the VAT for petrol from 27% to 34% and for diesel from 21.4% to 25%.
She however did point out that the impending roll-out of the GST could have a negative effect on Tamil Nadu's tax revenue. "Once GST is rolled out, I am not sure how much a manufacturing state such as Tamil Nadu will benefit. For example, if a car is manufactured in Chennai and sold in Bengaluru, the share of GST revenue will be shared between the Centre and Karnataka, where the car is sold," she says.
The Finance Minister in his speech however said that the Centre had agreed to compensate for the losses the state will face in first 5 years of the rollout of the GST.
"The Rs 532 crore that has been allotted to small and medium enterprises could further help boost the state's revenue," predicts Revathi.
Other experts, claim that the increase in fiscal deficit has to been seen in the purview of the changes that have taken place in the economy as a whole.
"Demonetisation, whatever the Centre may say, has caused a major impact in various states. It is natural for the government to have spent more in such a scenario. In addition to this, the state is facing a major drought. The government will have to spend more to ensure its farmers do not suffer," says Venkatesh Athreya, an economist.