The Hindu Business Line : TN Budget: Politically adroit, yet fiscally responsible

While the Tamil Nadu Budget incorporates the schemes the Chief Minister had unveiled in his manifesto, its estimates have not violated any of the limits laid down in the fiscal responsibility legislation. Blending compassion with fiscal prudence, the Budget will hopefully ensure a prosperous future for the State, says S.VENKITARAMANAN.

THE TAMIL NADU Chief Minister, Mr M. Karunanidhi, and the State Finance Minister, Mr K. Anbazhagan, have clearly calibrated poll promises to be in alignment with the State's expected revenues.

When the Tamil Nadu Chief Minister, Mr M. Karunanidhi, unveiled his manifesto, some commentators went to town attacking him for alleged fiscal irresponsibility. "He was exceeding all limits," felt the "experts". As it happens, however, they were wrong. The Budget that the Finance Minister, Mr K. Anbazhagan, presented recently to the Tamil Nadu Assembly, incorporates the schemes the Chief Minister had unveiled, but the Budget Estimates have not violated any of the limits laid down in the fiscal responsibility legislation. This is, indeed, remarkable and reflects the prudence that generally marks the Chief Minister's actions. Mr Karunanidhi had clearly calibrated his promises to be in full accord with the State's expected revenues.

The fiscal deficit in the Budget for 2006-07 stands at 3 per cent of the State GDP, that is, within the limits set by the fiscal responsibility legislation. The figure compares with 3.28 per cent in 2003-04, 4.36 per cent in 2002-03 and 3.3 per cent in 2001-02. This shows that there has been a conscious effort to contain the fiscal deficit in spite of increased commitments to expenditure made in the manifesto. There has been full provision for all expenses associated with the various schemes. A substantial part of the fiscal deficit is still rightly directed to investment, not giveaways.

The scheme for waiver of cooperative loans has been initiated. The Budget shows that Government will have to take over the entire debt liability of Rs 1,668 crore owed by the cooperatives to Nabard. To this end, a provision of Rs 435 crore has been made this year.

In addition, to make good the loss caused to cooperative banks on account of this decision, a provision of Rs 1,000 crore has been made. For the balance, the coming year's Budget will bear the cost. There is also the burden on reduction of interest to 7 per cent from the current year. What is remarkable is that these costs have all been absorbed in the revenue account without hurting the fiscal responsibility ceiling on revenue or fiscal deficit.

Safeguards against default

An objection can be raised about the spill-over from the write-offs of cooperative loans. It is difficult to shake off the resulting bad habit of not repaying loans drawn from cooperatives. This habit may soon extend to loans drawn from banks also. It is to be hoped that Government will devise guidelines so that the farmer is discouraged from becoming a habitual defaulter.

Ultimately, no banker will be enthused to lend for agriculture if there is a risk that the farmer will default, although the Government promises to bear the costs. If continued in perpetuity, the programmes will discourage the expansion of lending by both cooperatives and other bankers, as they will become too dependent on Government support for loan recovery.

The Chief Minister is far too experienced a statesman to set at risk the future of the Tamil Nadu farmers, if he finds the decision to write off the loans leads to a fall in bank credit. The Tamil Nadu Government's approach is obviously designed to prevent the tragedies that various other States have witnessed in the form of farmers' suicides in view of their crushing debt burden.

The answer obviously lies not only in reducing the burden of loan repayment but also enabling more remunerative prices to producers by improving the market structure. For a solution to farmers' problem, one has to look beyond a write-off of loans.

Marketing initiatives

As the Budget speech indicates, the State Government has obviously expanded the Uzhavar Sandai Scheme, which is designed to meet the objectives of creating an efficient market. There has to be a further exploitation of the looming revolution in retail trade where corporates, both national and multinational, are entering the agricultural marketing scheme offering a ready market at reasonable prices - reasonable both to the farmer and the consumer.

One hopes the State Government will be responsive to such initiatives in modernising the general marketing scheme, as Punjab and West Bengal have already done.

The Budget for 2006-07 shows that the Government has spared no pains to make the investments in various sectors meet the Plan objectives. The investment outlays in the Budget show a healthy increase. But even more important is to enhance business confidence so that corporate inflows complement Government investments. The Budget has struck a blow in this direction by promising to introduce VAT — a measure eagerly sought by corporates.

In this context, the Chief Minister may do well to revisit some of the initiatives he had implemented in his earlier tenures at the State's helm. Public-private partnerships are the way to go, as he demonstrated during his earlier years. Perhaps, he can invite some of the corporate chiefs to participate in a State Industrial Development Council, where they can contribute both ideas and resources to help revive the State's industrial climate.

This needs constant interaction between the political, bureaucratic and corporate executives. Other States have shown that such an approach may yield some results in the present liberalised environment that nurtures business investments. It may also be a signal to reaffirm to corporates that the State Government encourages corporate investments.

While steps in this direction have been initiated, there is need to further involve, besides local corporate chiefs, foreign and NRI businessmen in these discussions.

Taxes, fuels, and infrastructure

The Budget shows that the State's tax-GDP ratio has been at a robust level. It has shown a tendency to rise over the years. Ultimately, however, the ratio depends on the efficiency of the tax system and its compliance.

The introduction of VAT was expected to result in increase in revenue. The State, however, proposes to demand full compensation for the loss, if any. But in the long run, once the die is cast in favour of VAT, the State has to ensure that leakages, potentially inherent in the VAT system, are reduced to the minimum. This needs a drive to educate the trader as well as the tax collector. Hopefully, the Government will mount an active campaign for this.

A significant initiative in the Budget speech is the announcement regarding bio-fuels. It shows the visionary zeal of the present Government. That is surely the way to go, given the sky-high prices of crude and gas. The Government, however, needs to interest Indian corporates, both in the public and the private sector, in this initiative. For it involves considerable investments in R&D and in blending facilities. It also necessitates the Centre's sympathetic cooperation.

The State has been proving itself a destination of choice to the investor in the knowledge industry. It is well-known that jobs that come from the IT sector go mostly to the educated and well-skilled.

The State needs to concentrate on attracting manufacturing industries. For this, it needs to strengthen infrastructure, particularly power, roads and support facilities. The Budget has initiated various steps, indicated as part of the State Plan, in this regard. There is need to implement an even more ambitious Plan.

The Tamil Nadu Budget for 2006-07, which blends compassion with fiscal prudence, will hopefully mark the beginning of a successful journey to a bright and prosperous future for the State.

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