“The fiscal situation of the State is in dire circumstances” according to the White Paper on Tamil Nadu Government’s finances released by State finance minister Palanivel Thiaga Rajan on Monday. “The decline is the worst in the last five years. No other major/ developed State has had such a decline, which started even before the start of the coronavirus pandemic,” he told reporters after releasing the White Paper.

The White Paper blamed this situation in part due to extraneous circumstances but said that substantial cause was due to structural flaws in governance which have not been rectified in a timely manner. The Covid pandemic, it said, has greatly exacerbated the situation and highlighted how vulnerable Tamil Nadu currently is. There are no buffers left. No fiscal headroom that will allow for delay, it added. With State Budget due later this week, the Paper did give indication that the State will be forced to boost revenues to curb its deficits.

‘Business-as-usual cannot continue, and the government’s approach must be to fundamentally change its policies if the State has to break out of the vicious cycle of increasing debt and interest costs,’ it said.

Interest costs (daily interest payment of ₹180 crore) needs to be contained to minimise or reduce the revenue deficit and that will require the government to bring its debt relative to GSDP under control. ‘In any democratic country it is difficult for the government to drastically cut spending. Much less so when a newly elected government has promises to fulfil, that will require significant additional spending. So, revenues will have to be raised in an equitable manner, as debt will otherwise balloon, and interest payments will overwhelm the Budget,’ it added.

‘Growth declining’

The 112-page report said that Tamil Nadu’s economic growth has been in a decline ever since it touched a peak in 2011-12 and the decline accelerated after 2013-14. State’s revenue deficit was ₹61,320 crore (3.16 per cent of GSDP) in FY21. Its fiscal deficit was ₹ 92,305 crore (4.43 per cent of GSDP). In FY07 the fiscal deficit was just ₹3,956 crore. The ratio of revenue deficit as a percentage of fiscal deficit was 14.94 per cent in 2011-16 period but as of FY21 it has ballooned to 66.43 per cent.

The State was revenue surplus in five of the seven years in the 2006-07 to 2012-13 period. Since then, it has registered only revenue deficits. Consequently, debt has shot up. In 2006-07 the State's debt was ₹60,170 crore (18.37 per cent of GSDP). In FY21 it has jumped to ₹ 4.85-lakh crore (24.98 per cent of GSDP).

It is not just the expenses that have gone up. The State’s ability to raise revenues too has declined. Revenue receipts as a share of GSDP have fallen to 8.70 per cent in FY21 as against 13.35 per cent in FY09.

To a question on how long it will take to restore State’s finances, the minister said, “we can do it in five years, he said adding extraordinary reforms will be required to pull the State out of the financial strain.

Reactions

C Rangarajan, former Governor of Reserve Bank of India, told BusinessLinet hat the preparation of a White Paper is a good effort. It does point out to the directions in which the government must move by increasing the share of its own revenue to GSDP, and the need for reducing the deficit and bringing the debt level to manageable levels.

Gopal Srinivasan, Chairman, TVS Capital Funds, tweeted that fiscal transformation will happen if the will of those in power is shown by stopping schemes like free power and lax fiscal management. “I believe the will exists,” he said.

The AIADMK tweeted that when the party was in power for the last ten years, it did not increase electricity charges and transport rates. It asked whether the White paper is hinting on the DMK planning to raise both in the forthcoming Budget.

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