Tamil Nadu may witness highest fiscal deficit of the millennium for FY21, but that is mainly due to huge revenue shortfall on account of Covid-19 pandemic, says a report of India Ratings & Research.

“As per the revised estimates (RE) of FY21, Tamil Nadu would be witnessing the highest fiscal deficit in this millennium. However, given the adverse impact of Covid-19 pandemic on the economy, this is not surprising as revenue receipts clocked a sharp decline without a commensurate reduction in revenue expenditure,” it said.

As per the vote-on-account (VoA) budget by the Tamil Nadu, which goes to polls early next month, the fiscal deficit increased sharply to 5.4 per cent of gross state domestic product (GSDP) in FY21 (RE) against the budget estimate (BE) of 2.4 per cent (FY20: 3.2 per cent).

A notable shortfall in revenue receipts compared with FY21 (BE) contributed nearly 66 per cent of the slippage in fiscal deficit.

In line with the trends observed in other states and at the national level, FY21 fiscal slippage mainly originated from the revenue side.

Revenue receipts were lower by ₹386.75 billion than FY21 (BE). This worked out to be 65.58 per cent of the slippage (₹589.77 billion) in the fiscal account in FY21 (RE) over FY21 (BE). The shortfall in the state’s own tax revenue (SOTR) was 39.95 per cent of the fiscal deficit slippage in FY21 (RE) followed by state’s share in central taxes (16.63 per cent).

TN’s share in central taxes in FY21 (RE) was lower by ₹98.10 billion than FY21 (BE). Apart from a slower growth in the divisible pool of central taxes due to the Covid-19 pandemic, a marginal reduction in TN’s share of the same also contributed towards the decline.

TN is one of the eight states which have a lower share in the divisible pool of central taxes as per the 15th finance commission (FY21-FY26) award. The state’s share in central taxes reduced to 4.08% in the 15th award period from 4.10% in the 14th Commission period (FY16-FY20).

Meanwhile, TN’s revenue expenditure was higher by ₹172.16 billion in FY21 (RE) than the budgeted ₹2,294.79 billion for FY21. Its revenue expenditure excluding interest, salary and pension increased to ₹1,230.95 billion in FY21 (RE) as compared to ₹988.86 billion In FY21 (BE) and ₹922.62 billion in FY20.

The increase was mainly due to the state government’s response to Covid-19 pandemic, which entailed expenditure on 100 per cent reverse transcription polymerase chain reaction (RT-PCR) tests (₹133.53 billion); special public distribution system and cash support (₹31.65 billion); Pongal gift hampers to mitigate Covid-19’s impact, and cyclone and heavy rainfall (₹56.05 billion). The fiscal impact due to these measures alone is estimated at ₹221.23 billion in FY21 (RE).

Together, these constituted 128.5 per cent of the increase in revenue expenditure over BE, and 37.51 per cent of the fiscal slippage in FY21 (RE).

However, a surprising positive development is the higher-than-budgeted amount of capital expenditure (capex) incurred by the state government, amid the pressure on revenue under adverse economic conditions.

Generally, state governments resort to cuts in capex to control slippage in the fiscal deficit. Capex in FY21 (RE) came in 8.72 per cent higher than FY21 (BE) and 58.65 per cent higher than FY20. An increase in the capex would enhance the state’s productive capacity and hence be supportive of medium- to-long-term growth prospects of the state economy, it said.