A loan waiver rain and a State fiscal capacity drought

The Government of Tamil Nadu, in early February, announced a waiver for farm loans from cooperative credit societies to the extent of ₹12,100 crore. There is now a clamour to include the farmers’ loans from banks as well in this scheme and the Dravida Munnetra Kazhagam (DMK) has also promised to waive farm loans and jewel loans within certain limits.

The DMK has also announced that it would waive educational loans from banks and loans of self-help groups from cooperative societies if voted to power in May 2021. It could likely be followed by a series of loan waivers for weavers and small traders, interest subvention, subsidised electricity and a host of open ended subsidies in the election manifestos. (A waiver of jewel loans from cooperative societies up to eight grams was also announced, citing novel coronavirus pandemic distress, but given its scale, it does not come under the purview of this article.)

What is of interest is the fiscal capacity of the Tamil Nadu government to implement these schemes and the opportunity costs of such schemes.

There has been special interest in the media to discuss the implications of the speech of the Tamil Nadu Finance Minister, on February 23, introducing the Interim Budget 2021-22 ( The Budget speech is only a statement of intent, as the real Budget is the passage of finance and appropriation bills in the Assembly followed by the assent of the Governor.

It is obvious that the vote-on-account, probably for the first two months of the fiscal 2021-22, passed after the presentation of the Interim Budget 2021-22 alone needs to be considered for any practical purpose. That vote-on-account is not in the public domain; however, it is only a simple two-month projection of revenue and expenditure based on the Budget 2020-21 passed in the Assembly last year.

Therefore, any discussion on the Finance Minister’s speech introducing the Interim Budget 2021-22 shall remain an academic exercise and a political discourse to affect the full Budget for 2021-22 that will be presented by the new government after the 16th Legislative Assembly election is held.

No support to PSUs

In this context, delving into the fiscal indicators and finding out the fiscal capacity of the Government of Tamil Nadu to finance subsidies in the ensuing years are apt. The opportunity cost of squeezing the Budget to finance subsidy is the lack of direct budgetary support to public sector undertakings (PSUs) that provide public utilities.

Subsidies increase revenue expenditure, and without corresponding increase in tax and non-tax revenue for the government, the revenue deficit should naturally increase. Though every year the government claims that the revenue deficit ratio and fiscal deficit ratio are within statutory limits, the desirability and sustainability of debt have yet to be examined.

Revenue deficit ratio

The farm loan waiver announced in 2016 has been provided the funds in the subsequent five Budgets. In spite of this, the revenue deficit ratio was around 1.5 in the three-year period, 2017-20. During the same period, the all States’ average revenue deficit ratio was around 0.4, it was a near revenue balance in Karnataka and Telangana, and it was more than 2 in Kerala and Andhra Pradesh.

The cause for the elevated revenue deficit ratio in Tamil Nadu has been the increasing primary deficit ratio from 0.9 to 1.3. Primary deficit is the revenue deficit net of interest payments and the implication is that the government is unable to contain recurring expenditure such as subsidies and other discretionary expenditures within the limits of recurring non-debt revenue. So, the primary deficit ratio is the leading indicator for the revenue deficit ratio to follow and increasing primary deficit is the surest route to higher revenue deficit and unsustainable debt servicing in future. In the immediate pre-COVID-19 period, the trends in the revenue account summarised in the two deficit ratios show that there is little fiscal room to increase expenditure for new schemes.

Obviously, the next question is this: what is the possibility for increasing the recurring revenue? When we move to a rule-based fiscal policy that includes harmonisation of commodity taxation and restriction of deficit ratios, higher economic growth and tax elasticity alone can help us. But this is a long-term solution and politics suffers from short sight in economic policy visualisation.

Moreover, the trend in Tamil Nadu’s own tax revenue has not been buoyant in recent times and COVID-19 has further reduced tax buoyancy. We have little hope in the central government’s benevolence to support Tamil Nadu, if we believe the Finance Minister’s lament about declining central transfers both in the share in central taxes and grant-in-aid — tied or untied.

Extra-budgetary transactions

What is the opportunity cost of this public benevolence? We need to examine the extra-budgetary transactions for this.

In general, PSUs offer public utilities, which otherwise should be directly provided by the government. It is important that the government provide adequate direct budgetary support to PSUs if they price the public utilities below the unit cost.

The adequacy and quality of public utilities depend on the financial health of these PSUs. But in the absence of direct budgetary support, we can fix the financial sickness of PSUs to be a symptom of a fiscal tumour. For instance, in 2017-18, (the latest year for which we have the data), the total stock of borrowings of PSUs was ₹1,67,844 crore, interest payment was ₹14,043.03 crore, while incurring a loss of ₹17,423.56 crore. A case in point is the example of the Road Transport Corporations, which incurred a loss of ₹5,503.36 crore and interest payment of ₹1,017.83 crore over the borrowings of ₹7,160.91 crore.

Almost all the PSUs should have incurred massive losses and amassed unserviceable debt during the COVID-19 period — and this will accelerate in the couple of years to come.

If we add to this the PSUs borrowings and interest payments to the government’s debt and interest payments, the fiscal situation is unnerving.

The lack of fiscal space and opportunity cost of expenditure profligacy of the State show that politicians only think ‘in the long run we are all dead’ and ‘let us achieve short-run electoral victories by showing the low hanging fruits of subsidies’ modes.

R. Srinivasan is Professor, Department of Econometrics, University of Madras

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Printable version | Apr 23, 2021 1:47:21 PM |

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