TN should stick to growth with welfare

In his preface to ‘The General Theory of Employment, Interest and Money’, John Maynard Keynes, remarked that “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.”

As PTR Palanivel Thiagarajan assumes office as the new Finance Minister of Tamil Nadu the relevance of these profound words is much more amplified. There is a huge expectation on the new Finance Minister to turn things around as highlighted by the media.

But the reality is that, this juncture poses some major challenges for the Finance Minister as it could turn out to be the tipping point for growth stimuli or a catalyst for the slide down, which started with the Covid crisis.

The challenge arises due to a number of issues.

First, given the magnitude of growth contraction for the current fiscal year, turning things around in one stroke seems unrealistic. Changes in economic policy would have to weave in a slew of measures to be administered over a period of time depending on the state of the economy.

Second, the resource position of the government forces it to walk on a tight rope offering no luxuries for ‘experiments’ as some of the newly elected governments did in the past.

Third, the pace and manner of some of the major reforms by the Centre during the last one year, especially in agriculture and labour have generated much controversy, undermining the scope for policy changes at the State level.

Adding to all this is the mixed signals on the current economic recovery, such as sluggish employment growth and increased GST collections.

The uphill task then, is to maintain a set of fine balances to avoid the ‘make or break’ situation that could arise in the economy. Four such balances could determine the growth trajectory in the coming years.

The ‘welfarism’ balance

First is the balance between ‘welfarism’ and fiscal prudence. The Centre has adopted a model of ‘new-welfarism’ as termed by former Chief Economic Advisor Arvind Subramanian, which prioritises “subsidised public provision of essential goods and services, normally provided by the private sector, such as bank accounts, cooking gas, toilets, electricity, housing, and more recently water and also plain cash”, over provision of public goods such as basic health and primary education.

However, this new model benefits the end user only if the economic environment is conducive for income growth.

The Centre’s overreliance on the ‘new welfarism’ model with its heavy dependence on the general economic environment has put the States in a bind as it is difficult to roll back these welfare schemes which need continuous outlays not only from the Centre, but also from the States, irrespective of their fiscal position.

Given the limited avenues for raising revenues at the sub-national level, especially in the current scenario and widening fiscal deficit of the State, a reprioritisation of the current welfare model could be worthwhile.

The additional burden of expanding health care facilities and vaccinations amidst a muddled vaccine policy, coupled with the State’s limited resources to continue the vaccination drive, necessitates such a relook. Second, for getting the State’s finances right there is a need for a balance between enhanced expenditure commitments and borrowings.

The strain in public finances of the State is evident from the following three indicators.

Scope for revenue raising

First, the resource mobilisation efforts needs closer scrutiny as the growth of the State’s own tax revenue (SOTR) and gross state domestic product (GSDP) shows divergent trends.

In 2016-17 SOTR, grew at 6.7 per cent and GSDP at 7.42 per cent, but in 2019-20 SOTR grew at only 1.3 per cent while GSDP grew at 13.79 per cent, indicating the existence of more room for higher tax effort.

Second, the State’s own tax revenue as percentage of GSDP fell from 6.6 per cent in 2016-17 to 5.79 per cent in 2019-20, which calls for concentrated efforts on revenue mobilisation. Third, interest payments as share of total revenue receipts has doubled from 10.96 per cent in 2012-13, to 20.8 per cent by 2020-21. So the State has been ‘ever greening’ its loans, that is, borrowing more to finance its legacy debt servicing commitments, by financing its fiscal deficit through fresh market loans. This calls for a re-examination of expenditure commitments as well as resource mobilisation efforts.

Third, is the need for a balance between investments and employment growth.

Although the State attracts high volumes of private investments, both domestic and foreign, the pace of employment generation still lags, especially if one considers the demographic profile. The balance here has to be between labour augmenting investments and high tech-high skill demanding investments.

While entry into global value chains through these investments is important, it is equally essential to strengthen inter-sectoral linkages especially between agriculture and industry. An approach to this could be by linking the small and big firms in identified key sectors, which in turn might create local production networks and generate employment as well.

However, strategies to increase the low female work participation rates would also reduce their dependence on government welfare schemes.

Fourth is the balance between growth stimulation and delivering development at a time of distress. The pandemic and resultant job losses have compressed demand in the economy.

Hence there is an immediate need to stimulate demand and growth, through higher capital expenditure, which was attempted in the last budget.

This needs to be sustained with continuous monitoring of the employment generation resulting from such expenditures and to ensure the timely completion of such projects to avoid cost overrun.

In this endeavour the State has also an important role in delivering development, rather than waiting for growth to trickle down. This approach requires active State involvement to focus on key development indicators and improve them on a mission mode.

The State’s macro policy has to focus on ‘growth with welfare’ for which Tamil Nadu has been an example in the past. The pressures of competitive federalism often tempt States to focus more on static efficiency gains, which gives them short term advantages.

Given the scale of distress caused by the pandemic and the lingering uncertainties, the Finance Minister has a tough balancing act, which requires deft policy changes synchronised with real time data.

The writer is professor of economics at IIT Madras. The views expressed are personal

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