Expectations from the revised Budget for 2021-22 presented by the Tamil Nadu government were high since this is the Dravida Munnetra Kazhagam (DMK) government’s first Budget after 10 years of being out of power. The Budget needed to stand out and reflect the ideological commitment of Dravidian politics. But did it succeed? Perhaps, but not in all respects. It could have addressed the pandemic-induced economic crisis more directly, which is important since Tamil Nadu’s economy has seen a decade of stagnation, slipping in its unique trajectory of high growth and relatively equitable development.
In the run-up to this Budget, State Finance Minister P.T.R. Palanivel Thiagarajan released a white paper, a comprehensive analysis of the State’s financial status and its economic condition. While the white paper offered a diagnosis of the ailing economy, the revised Budget was to provide prescriptions to revive the economy.
As is by now well acknowledged, the pandemic has affected the urban poor, informal workers, and small businesses disproportionately, leading to declining wages and job losses. Tamil Nadu has been particularly badly hit by the pandemic. A study by Azim Premji University suggests that Tamil Nadu was among the worst-hit States in terms of the lockdown-induced economic distress leading to disproportionate job losses.
Let’s first look at the positive aspects. The Budget has made allocations for many promises made in the DMK’s election manifesto. This is laudable. The reduction in the effective rate of tax on petrol by ₹3 per litre is certainly a relief to many. Similarly, schemes such as nine new SIPCOT parks in industrially backward areas and the establishment of Tidel Parks in Tier-II and Tier-III towns are welcome steps in building industrial infrastructure across the State. So are measures such as strengthening public education. The Budget promises to improve the quality of teaching in government schools as enrolment in government schools fell from 76% of the total student population in 2012 to 53% in 2020. Learning outcomes, it says, will be accorded the highest priority.
Following the DMK’s historical legacy of federal assertion, the Budget’s proposal of establishing an advisory council to develop a Federal Fiscal Model, ostensibly to propose a new road map on revenue and taxation, including the Goods and Services Tax, again is welcome.
Economic recovery
However, the Budget’s prescriptions fall short of what the diagnosis in the white paper requires, particularly with respect to revenue mobilisation. The proposed property taxes mentioned in the white paper are missing in the Budget document.
Besides the nitty-gritty of numbers, what is important is to offer a robust path for the economy to recover. As the white paper has shown, the State’s fiscal position is poor, particularly with rising revenue deficits and unsustainable public debt coupled with falling expenditure which has affected productive investment and the development sectors. The share of development expenditure in total disbursal was 62.9% in 2011-12 as against all States average of 63.1%. This came down to 57.5% in 2018-19 which was substantially below the all-States average of 62.9%.
The ability of government intervention in any economy lies in its fiscal capacity, the size of government, measured by its ratio of revenue/ tax to the GSDP. The ratio of total revenue receipts to the GSDP has been declining. It was 12.49% in 2006, peaked at 13.35% in 2008-09, and came down to 8.7% in the year of pandemic. The most alarming figure is the falling tax GSDP ratio from 8.48% in 2006-07 to just 5.46% in 2020-21, a decline of 3.02 percentage points.
If we look at the disaggregated figures, the only receipt which has not come down during the period analysed in the white paper is tax collection from TASMAC, a public sector network of liquor shops. It was 1.22% in 2006-07 and 1.40% in 2019-20. Such a trend is really disturbing given the fact that it is the poor who disproportionately contribute to such tax revenue.
Union aggression
While the State’s ability to levy tax has come down, its revenue mobilisation was further hindered by Union government policies. One, the State was hit the most by the declining share in a divisible pool of Union taxes, particularly after switching to the 2011 Census base from the 1971 Census by the 14th and 15th Finance Commissions. Its shares in the divisible pool came down from 6.6% during the 10th Finance Commission to 4.02% during the 15th Finance Commission. To put it differently, the State is paying a penalty for controlling its population growth.
Two, with the arrival of GST, not only has the State lost its ability to generate revenue, but is also losing revenue from other sources. For instance, the Union government has imposed a cess on petrol and diesel which are not shared with the State governments.
There are some sectors which ought to have received immediate attention. The Micro, Small and Medium Enterprises (MSMEs), a key sector in the State’s inclusive growth trajectory, are in trouble now. Given their degree of informality as well as demand and supply constraints, MSMEs suffered the most during the lockdown while the companies listed in the stock market are doing relatively better. Many of them were charged the same rate of interest even during the pandemic. While the Budget mentions a tripartite agreement between MSMEs and their creditors to reach an agreement on restructuring loans, there is no comprehensive package for them.
Similarly, the Tamil Nadu government was appreciated for its proactive measures during the second wave of the pandemic, including its COVID-19 assistance package to ration card holders, but the Budget does not have any specific programmes for the informal workers and urban poor. On August 3, 2021, a parliamentary standing committee recommended the institution of an urban employment scheme at the national level. While a similar scheme had a passing mention in the Budget, Tamil Nadu could have set a model by instituting one. Labour Welfare Boards for informal workers are in a shambles. Revitalising these boards would go a long way protecting informal workers.
Finally, fiscal deficits matter only as numbers. What matters most is the strategy of revenue mobilisation efforts and expenditure priorities. The excessive focus on fiscal deficits and public debts in the time of a pandemic is undesirable. Instead, the focus ought to be on shoring up demand and enhancing people’s purchasing power. Experiences from the world over suggest that the path to recovery is well-timed stimulus. Tamil Nadu is no exception.
Kalaiyarasan A. is Assistant Professor at the Madras Institute of Development Studies and Research Affiliate at South Asia Institute, Harvard University
