Fiscal challenges for the new TN government

Saket Surya | Updated on April 06, 2021

The fisc Under pressure   -  Bloomberg

The State will need to work towards bringing down its debt level in the coming years

The new Tamil Nadu government that will take charge after the elections will have certain impending challenges with the financial management to deal with.

While the State has adhered to key targets under its Fiscal Responsibility Legislation on fiscal deficit (3 per cent of GSDP) and outstanding liabilities levels (25 per cent of GSDP) in the recent years (between 2011-12 and 2018-19), some of the other indicators show a deterioration. Due to the economic slowdown in 2019-20, the finances of many States saw a deterioration. Tamil Nadu’s fiscal deficit was 3.24 per cent in 2019-20, higher than the 3-per-cent limit.

States’ revenues comprises revenue from their own sources and transfers from the Centre in the form of devolution and grants. Tamil Nadu is among the States which earn a higher portion of its revenue receipts from its own sources. During 2015-21, own sources of revenue comprised 69 per cent of revenue receipts of Tamil Nadu, higher than the average of all States (54 per cent).

The majority of the State’s own revenue comes from the state's own tax sources such as SGST, sale tax/VAT, and State Excise Duty (about 89 per cent). However, the State’s tax earnings have been growing at a slower rate than its GSDP in recent years, decreasing from 7.9 per cent of GSDP in 2011-12 to 6.5 per cent in 2018-19 (5.8 per cent of GSDP in 2019-20). So the State’s dependency on Central transfers and borrowings for is likely to have increased. Tamil Nadu’s own tax-to-GSDP ratio in 2018-19 was lower than comparable States such as Telangana (7.5 per cent) and Maharashtra (7.1 per cent).

The State has required GST compensation in all the years since the introduction of GST, which amounted 3 per cent in 2018-19. With GST compensation set to be discontinued after June 2022, the State may see a gap in its revenue level.

Between 2013-14 and 2018-19, the State’s revenue deficit widened from 0.2 per cent of GSDP to 1.4 per cent of GSDP (1.9 per cent of GSDP in 2019-20). In comparison, the State had a revenue surplus of about 0.2 per cent of GSDP in 2011-12 and 2012-13. This implies that the State’s revenue receipts have not been enough to meet its revenue expenditure and the growth in revenue receipts is unable to keep up with the increase in revenue expenditure.

A sustained revenue deficit means that a portion of the revenue expenditure is now being funded through borrowings. This has adversely impacted the ability of the State to undertake capital expenditure.

Since the extent of borrowing in a year has a limit under the Fiscal Responsibility Legislation, a lesser portion of borrowing could be channelised towards capital expenditure. Capital expenditure declined from 2.9 per cent of GSDP in 2011-12 to 1.9 per cent of GSDP in 2018-19 (except in 2016-17 due to the impact of the UDAY scheme).

Discom pain

Tamil Nadu’s state-owned power distribution Tangedco’s poor financial situation has been a continued area of concern. The State’s financial support to Tangedco has further stressed its finances. Under the UDAY scheme, the State government had to take over loans of its discoms worth ₹22,815 crore during 2015-16 and 2016-17. This led to an increase in outstanding liabilities as well as interest payments of the State.

Continuing losses post-UDAY led to the building up of outstanding dues of Tangedco to generators and transmission companies. Under the liquidity infusion scheme for the power sector announced under the Atmanirbhar Bharat Abhiyan in June 2020, the State government has provided a guarantee on loan worth ₹30,230 crore to Tangedco for clearing its dues.

As of March 2021, Tangedco made a loss of ₹2 on every unit of power supplied. This means Tangedco may need another round of bailout from the government . The 15th Finance Commission has recommended allowing an additional borrowing worth 0.5 per cent of GSDP during 2021-25 as an incentive to States for undertaking power sector reforms. This presents an opportunity for the State to consider broader reforms in the power sector.

According to revised estimates for 2020-21, the State is estimated to observe a higher fiscal deficit (5 per cent of GSDP) in 2020-21 and its outstanding liabilities are set to rise from 22.84 per cent in 2019-20 to 26.58 per cent in 2020-21.

In the vote on account budget presented in February 2021, Tamil Nadu had estimated a fiscal deficit of 4 per cent of GSDP in 2021-22 with its outstanding liabilities to rise to 28.18 per cent of GSDP. These fiscal deficit levels will lead to higher spending towards debt servicing in the coming years. Bringing down the debt level of the State in the medium term would also have to be a key target going forward.

The writer is an analyst in the research team at PRS Legislative Research

Published on April 04, 2021

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