Tamil Nadu Finance Minister PTR Palanivel Thiaga Rajan on Monday, August 9, released the much-awaited white paper detailing the fiscal situation of the state. The aim of the white paper is to offer the MLAs and the people of the state an “accurate and detailed statement of the present fiscal position of Tamil Nadu, the challenges posed, and the fiscal risks and vulnerabilities” the state faces.
Calling Tami Nadu’s fiscal situation dire, the white paper states, “Business-as-usual cannot continue, and our approach must fundamentally change if we are to break out of this vicious cycle of increasing debt and interest costs.On the other hand, this is an opportunity to effect ‘once in a generation’ reforms, many of which should have been undertaken years ago by any responsible Government.”
The serious fiscal scenario is in part due to extraneous circumstances, but in substantial measure due to structural flaws in governance which have not been rectified in a timely manner, the first such report by the DMK government after it assumed office in May said. Hitting out at the previous AIADMK government, the paper goes on to note, “Most of our current problems are the result of a lack of proper governance, especially over the last seven years.”
Despite the gloomy picture, the white paper emphasises that the decline is reversible. The paper also aims to address recent speculation that presenting the picture of the state’s finances was an attempt to abandon the DMK’s poll promises. “This report is not an attempt to create a rationale for diluting or abandoning the commitments made to the people during the recently concluded elections,” it states.
Here are the highlights from the white paper.
The white paper begins by explaining the present stressed fiscal situation of Tamil Nadu and the state’s deteriorating financial health. The COVID-19 pandemic has worsened the situation further in Tamil Nadu, it says. The main indicators of the poor financial health of the state, the white paper states, is the year-on-year increase in fiscal deficit and the increased debt burden on the state.
Tamil Nadu recorded a net revenue surplus - when the revenue receipts are greater than revenue expenditure of the state - in five out of seven years between 2006 to 2013. However, since 2013, revenue deficit - when the government’s revenue expenditure is higher than the revenue receipts - in Tamil Nadu has become a recurring phenomenon. The white paper states that in the financial year 2020-2021, the revenue deficit of Tamil Nadu stands at Rs 61,320 crore or 3.16% of the Gross State Domestic Product (GSDP), an important indicator of economic development in the state. This is beyond the permissible limit of 3%, leaving Tamil Nadu in an unsustainable fiscal situation. The current levels of fiscal deficit are unsustainable primarily because a substantial portion of the fiscal deficit is simply to fund the revenue deficit, the paper explains.
However, the white paper says that even prior to COVID-19, the state was seeing a steady year-on-year rise in revenue deficit. For example, the average revenue deficit for all states and UTs was 0.1% of GDP in 2017-18 & 2018-19, but for Tamil Nadu it was 1.5% and 1.4% of GSDP, respectively.
Importantly, the revenue deficit has taken up a huge chunk of the fiscal deficit. The paper states that for term 2016 - 2021, the revenue deficit was 52.48% of the fiscal deficit while it was only 14.94% in 2011-2016.
The Finance Minister also warned that the fiscal deficit financed by other means and not through the public account in the term 2016-2021 was staggeringly high. The white paper states that, traditionally the fiscal deficit “financed by other means” are marginal in percentage. However, in 2016-2021, the Fiscal deficit financed by “Other Means” was 12.68% of the total Fiscal Deficit or ₹39,071 crore real numbers.
The high fiscal deficit, caused by revenue deficit, can only be funded through borrowings and this has increased the debt burden on Tamil Nadu, the paper explains. As per the interim budget estimates of 2021-2022, the total debts outstanding is expected to be Rs 5,70,189 crore by the end of the financial year.
The paper also states Tamil Nadu is now the largest borrower in the open market among all the states in India. In 2006-2007, the overall debt level of Tamil Nadu had reached 18.37% and it was brought down in subsequent years. However, since 2012-2013, the state has seen a continuous rise in the overall debt level and it has now almost reached 25% of the GSDP which was the limit set by the 14th Finance Commission.
In 2020-21, the total outstanding debt is already 24.98% of the GSDP. And although the 15th Finance Commission has relaxed the debt limits to factor in the impact of the pandemic, Tamil Nadu’s overall debt is unsustainably high, according to the paper. In 2019 too, the state’s total outstanding debt was much higher than other states such as Maharashtra, Gujarat and Karnataka.
The worsening deficit situation has led the state to be over-reliant on debt and the public debt is Rs 2,63,976 per family in Tamil Nadu.
The total revenue receipts of the state had dropped after peaking to 13.35% of the GSDP in 2008-2009. The total revenue receipts or TRR has also dropped from 11.41% in 2014-2015 to 8.7% in 2020-2021.
In particular, the State’s Own Tax Revenue (SOTR) has suffered a significant decline. The state’s main source of revenue receipts is the SOTR which has accounted for 70% of the state’s total revenue until 2013-2014. Subsequently, the proportion of SOTR to total revenue has declined, falling to 60.74% in 2018-19 and is currently 62.82% in 2020-21.
The SOTR as a proportion of GSDP is at 5.46% in 2020-21. This is a source of grave concern, the white paper states.
The paper also points out two areas of concern in the falling SOTR to GSDP ratio. Firstly, the state has, since 2011-2021 recorded a steady decline in the SOTR- GSDP ratio and now, the overall decline by almost 3% of GSDP is “disturbing as it represents at current GSDP levels, almost Rs 60,000 crore revenue foregone,” the paper states.
Further, the decline in Tamil Nadu’s SOTR to GSDP ratio is sharper than the average tax to GSDP ratio decline recorded across states during the 2011-2012 to 2018-2019 period. And for the first time in 2018-2019, the state’s overall tax to GSDP ratio was below the national average.
There are many aspects which have led to the decline in the average tax to GSDP ratio in the state. Among them is the Motor Vehicle Tax in Tamil Nadu which has not been revised in the last 15 years. The average revenue from a vehicle in Tamil Nadu is significantly lower than in Karnataka and Kerala, according to the paper. The data from the Road Transport Year Book indicates that although the number of vehicles registered in Tamil Nadu is higher than in the neighboring states, the total revenue as motor vehicle tax has not kept pace.
The rationalisation of electricity tax is also overdue. The paper observes that Tamil Nadu’s system of levying electricity tax allows some categories of users to evade tax. In certain other categories, the specific rate of consumptions is lower than in other states, such as Maharashtra which collects a much larger sum annually as electricity tax.
State needs to tax the rich, not the poor
The Finance Minister highlighted the overall dip in revenue from taxes citing examples of electricity and motor vehicle tax. He also said the states must take a fair, equitable share from successful businesses and direct the money to the poor and towards public welfare.
The paper says that there has been a decline in State Own Tax Revenue from 8.48% in 2006-07 to 5.46% in 2020-21. Further, according to the data provided, Commercial Taxes as a proportion of GDP have also fallen from 5.83% (2006-07) to 5.03% (2015-16 and 2016-17) before the introduction of the GST and have only decreased since, falling to 4.19% in 2020-21.
The power and transport sector undertakings in Tamil Nadu also have mounting outstanding debts. According to the white paper, the deteriorating financial situation of State public sector units (PSUs) has resulted in a scenario where they cannot borrow without a guarantee from the government. Outstanding debt of TANGEDCO, TANTRANSCO (power generation and transmission entities) and State Transport Undertakings is Rs 1,99,572.55 crore put together.
"If the outstanding debt of just the power and transport sector PSUs is aggregated along with government debt, the total amounts to 36% of GSDP, significantly higher than the permissible limit."
State Transport Units (STUs) are making a loss of Rs 59.15/- for every Km operated.
Tamil Nadu lost Rs.2,577 crore since the previous government failed to conduct local body elections on time.
(With PTI inputs)