TN budget keenly watched for reforms

Tamil Nadu has a debt of about ₹5.77 lakh crore; With the conclusion of the urban local bodies elections and the impact of COVID-19 subsiding, the government may have the leeway to go for reforms and revenue augmentation

Updated - March 18, 2022 09:59 am IST

Published - March 17, 2022 05:49 pm IST

State Finance Minister P. T. R. Palanivel Thiaga Rajan

State Finance Minister P. T. R. Palanivel Thiaga Rajan | Photo Credit: Special Arrangement

The Tamil Nadu Budget for 2022-23 to be presented on Friday would be keenly watched for measures to fix the State’s stressful financial situation with a debt of about ₹5.77 lakh crore. With the conclusion of the urban local bodies elections and the impact of COVID-19 subsiding, the DMK government may have the leeway to go for reforms and revenue augmentation.

After returning to power last year, the DMK government released a White Paper on the State’s finances. “Business-as-usual cannot continue, and our approach must fundamentally change if we are to break out of this vicious cycle of increasing debt and interest costs. On the other hand, this is an opportunity to effect ‘once in a generation’ reforms, many of which should have been undertaken years ago by any responsible government,” it noted.

What ails the Finances?

Tamil Nadu has been a welfare State, and a substantial part of its revenue is allocated towards social schemes. For instance, in the revised budget estimates for 2021-22, the expenditure under subsidies and transfers is estimated at ₹1.04 lakh crore in 2022-23, based on the commitment towards the schemes, including those related to State public undertakings, mainly in the power and transport sectors.

Besides, a major part of the expenditure goes towards payment of salary and pensions. Tamil Nadu is estimated to have spent about 66% of its revenue on payment of salaries, interest and pension in 2021-22. But the average of all other States is about 55%, said Saket Surya, a senior analyst at the Delhi-based independent research institute PRS Legislative Research.

According to the 15th Finance Commission report, Tamil Nadu moved from a “revenue-surplus” to “revenue-deficit” State after 2012-13. Revenue deficit implies revenue expenditure is higher than revenue receipts. According to the White Paper, during 2017-18 and 2018-19, while the average revenue deficit for all States and Union Territories was 0.1% of the Gross State Domestic Product (GSDP) in both years; for Tamil Nadu, it was 1.5% and 1.4% respectively. Comparator States such as Maharashtra, Gujarat and Karnataka recorded revenue surpluses in both years.

Mr. Surya said Tamil Nadu’s revenue deficit increased from negative 0.18% of the GSDP in 2013-14 to 1.44% in 2018-19. “The State’s revenue receipts have not grown on a par with the growth in revenue expenditure. Tamil Nadu’s own tax revenue to GSDP ratio has worsened from 7.5%-8% during 2011-14 to 6%-6.5% during 2017-2022. This implies the State has seen a decline in its ability to harness tax from its economy on its own,” he added.

Since the revenue has not kept pace, Tamil Nadu has to fund the revenue expenditure through borrowings. In recent years, the State has been the top borrower through issue of bonds known as State Development Loans. Tamil Nadu has so far borrowed ₹75,400 crore in fiscal 2022, 13% lower than the ₹87,000 crore in the same period last year. It is followed by Maharashtra, West Bengal, Karnataka and Uttar Pradesh as the top borrowing States.

“Tamil Nadu’s outstanding liabilities have seen a significant rise, from 17.4% of the GSDP at the end of March 2012 to an estimated 31.6% of the GSDP at the end of March 2022. This has led to an increase in the interest payment burden. Tamil Nadu is estimated to spend 21% of its revenue receipts towards interest payment in 2021-22, a significant increase from 10% in 2011-12,” Mr. Surya said.

The situation also leads to the State government having limited scope to increase its capital expenditure, which goes towards creation of assets such as schools, hospitals and roads and bridges and helps to improve economic activity and create jobs. From 2015-20, Tamil Nadu spent 18% less on capital outlay than what has been budgeted during 2015-20, according to PRS Legislative Research.

The previous AIADMK government defended the borrowings. One of the reasons cited was that spending on social schemes was helping to narrow the gap between the rich and the poor and as the economy grows the repaying ability also goes up.

Green shoots

The revised budget has estimated revenue deficit for 2021-22 at ₹58,692.68 crore, which is higher than ₹41,417.30 crore projected in the interim budget estimate for 2021-22. As a result, the fiscal deficit (the difference between total revenue and expenditure) is pegged at ₹92,529.43 crore in the revised budget estimates for 2021-22, which excludes ₹8,095 crore received as back-to-back loan in lieu of GST compensation.

Finance Minister Palanivel Thiaga Rajan has said the State will bring down its revenue deficit in 2021-22 and hinted at measures to plug revenue leakages. As the COVID-19 impact is wanning, Tamil Nadu’s revenue situation has been improving. As per the provisional figures from the Comptroller and Auditor-General (CAG), Tamil Nadu’s total revenue was ₹1,33,872.67 crore in 2022 (till December 2021), 66.11% of the budgeted amount. This is also higher than the ₹1,23,128.63 crore during the pre-COVID-19 period of April-December 2020.

Within the revenue receipts, the State’s Own Tax Revenue (SOTR) was ₹81,105.92 crore at the end of the third quarter of 2022, which is higher than the pre-COVID-19 level of ₹73,729.56 crore for the same period of 2020. The revenue expenditure increased by a muted 1% to ₹1.5 lakh crore in the same period.

The SOTR accounts for over 70% of the State’s total revenue and includes the State GST, value-added tax (VAT) on petroleum products and stamp duty and registration fees and liquor revenue. The State annually generates revenue of over ₹30,000 crore from liquor in the form of excise duty and VAT.

With the GST compensation period expiring in June 2022 and the Centre refusing to extend it, the State will see a further revenue loss. With most taxes subsumed under the GST, there is a limited scope for increasing the tax revenue streams. Recently, the State increased excise duty on liquor to boost revenue. The revenue was also helped by higher devolution of taxes from the Centre.

As per the revised Union Budget estimates for 2021-22, Tamil Nadu will get ₹30,355.63 crore in tax devolution, higher than the ₹27,148.31 crore projected in the earlier estimates. N.R. Bhanumurthy, Vice-Chancellor of Dr. B.R. Ambedkar School of Economics University, Bengaluru, pointed out that while Tamil Nadu’s fiscal position was weak, in some other States it was more stressful.

He said Tamil Nadu could look at increasing the non-tax revenue streams, besides rationalising expenditure across schemes and having a mechanism to measure the impact and returns generated from capital expenditure.

Non-tax revenue comes from charges levied on services provided by the government and includes the interest charged on loans advanced by the government for various purposes.

The Finance Minister has spoken about looking at revenue from mining. “While the GST has subsumed a number of taxes, Tamil Nadu is a relatively open economy and will benefit from a higher SGST collection with the economy picking up. The State has set up a committee to revise the real estate guidelines and once the new guidelines are implemented, the stamp duty and registration fee collection will rise significantly. The State has already hinted at this being one of the sources to raise its own tax collection,” said Vidya Mahambare, professor of economics, Great Lakes Institute of Management.

The DMK government has its task cut out: to bring the finances back to shape and fulfill the party’s election promises, the key among them being ₹1,000 a month in aid for the woman family head. While an overnight solution would not be feasible, the measures to be announced in the budget and in the course of the years to come is something to watch out for.

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