“Tamil Nadu Growth To Shrink To -1% Or -2%”
Mamallapuram shore temple, Tamil NaduPhoto credit: Britannica

“Tamil Nadu Growth To Shrink To -1% Or -2%”

The state government’s projections show a fall in GSDP growth of between 9 to 10 percentage points thanks to COVID-19

The state government has projected that GSDP (Gross State Domestic Product) of Tamil Nadu is likely to fall by nine to ten percentage points from 8.1% growth as estimated in 2020-21 Budget to -1% to -2%. This projection is internal and could change if there is another lockdown before the end of the fiscal.

“The expectation in April-May was that the growth rate could fall to 1% or 2%. But now that the lockdown has been more protracted, we are looking at another 3% or 4% swing in the negative zone. So we are expecting growth rate at -1% or -2%,” said a senior official in the state government who requested anonymity.

This comes in the wake of Q1 GDP growth figures released by the Indian government for the country – a drastic fall of -23.9% thanks to the global lockdown.

The state’s debt, according to the Budget in February stood at Rs 4.56 lakh crore. Borrowings this fiscal, say officials, is going to be a lot higher than planned.

“We had originally planned to borrow Rs 59,000 crore – of this Rs 56,000 crore would be borrowed from the open market and the balance would come from external borrowings and from financial institutions like NABARD. Now we have estimated that we will borrow another Rs 35,000 crore. This will increase our open market borrowings to Rs 91,000 crore and take total debt to Rs 94,000 crore. This is less than 2% of GSDP – around 1.75% of GSDP is the reality we are looking at. Of course, if revenues pick up, we won’t have to borrow as much,” said the official.

An Industrialised Economy

Tamil Nadu’s is an industrialised, modern economy. And while in the good times, such economies tend to zoom ahead growth-wise, during times of calamity, like the pandemic, such economies also tend to come crashing down.

“It will probably drop more than that,” said Bengaluru based Professor Narendar Pani of the National Institute of Advanced Studies (NIAS). “National figures are showing a decline of 23.9% in growth. With that kind of a decline, even with agriculture being positive, industrialised economies will still take a hit. Tamil Nadu being an industrialised economy, it is expected that it will take an equal decline. Tamil Nadu has been hit by lockdowns as much as anyone else.”

Although there is no information on Q1 GSDP growth figures for the state to make a comparison with the GDP figures, other economists agree. “Whenever the GDP (Gross Domestic Product) goes up, we will grow faster than that. The reverse is also true, that the state will fall faster when the national GDP goes down. Because Tamil Nadu’s composition of economy is similar to that of the Indian economy.

At the national level, agriculture is around 15% of GDP while in Tamil Nadu it is about 10% of GSDP. Which shows that the state has a highly modernised economy. And although union government had gone in for Unlock, the state, especially Chennai, had continued to remain under lockdown. This will certainly have an impact on revenues.

Not just migrants from other states but even internal migrants within Tamil Nadu have left Chennai – this means that there are huge job losses that we are yet to assess,” said Professor K Jothi Sivagnanam, Head of the Department of Economics at the University of Madras.

But state government officials are more optimistic.

“Usually that is true. We are more in tune with the global economy since we do more exports. When we grow, we grow faster but when the shocks come, they come harder. Agriculture is doing better than expected. That is one plus. Industries in Tamil Nadu have taken advantage of the situation which other industries in the country may not have been able to – in term of manufacturing PPEs etc. But the usual trend of Tamil Nadu falling sharper will not happen,” said the senior official in government.

“There are some positive signs – activity has begun in some sectors like textiles. Construction seems to be doing much better. PPE kits makers and some e-commerce bounce-back is there. There is likely to be a lot of pent up demand that will catch up. The big negative in the first quarter should end up getting negated in the following quarters.

The software sector seems to be able to achieve higher productivity with “Work From Home”. So they don’t really have to go back into offices excepting for the social factor of being in an office atmosphere. The commercial real estate market will take some time to pick up – but they do not want to drop prices.

I would say that activity is picking up. People are looking into other sectors that they can get into. But whether we will get the same demand back, whether the large number of IT jobs and other jobs will come back, we do not know. Maybe they will, maybe they won’t. We don’t know yet,” said the official.

State & Centre Lock Horns Over GST Compensation

Tamil Nadu chief minister Edappadi K Palaniswami has spelt out, at least twice, to the Centre that the state expects the union government to borrow and compensate states for GST loss. The Centre, however, has refused this option outright and asked states to borrow and meet their own needs.

The Lede had earlier reported about how the Karnataka government was the first in the country to choose one of the two options for borrowing that has been provided to states by the union government.

Mamallapuram shore temple, Tamil Nadu
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“Tamil Nadu’s stance is – whatever is the shortfall, you (the Centre) borrow it and give us. Pay us whatever you are supposed to pay from April to November and we can adjust the rest later,” reiterated the senior official.

“The Government of India though says that it already has large borrowings and that the G-Sec (government securities) rate is what influences the yield curve for all other borrowings including state government borrowings. We think that reason is not very strong,” explained the official.

And economists too agree that the Centre’s stand on this issue of GST compensation is far from acceptable.

The GST Compensation Issue
The GST Compensation Issue

“By law the Centre should compensate the states,” said Professor Narendar Pani. “It is a legal requirement that the Centre should compensate by whatever means. Responsibility for making good that compensation lies with the Centre. It is not just a breach of law but a breach of trust because many states agreed to the GST only due to this.”

Professor Jothi Sivagnanam says that this act by the Centre goes against the Constitution.

“The compensation for GST shortfall is a statutory one. This is where the union government has lost the trust of the states. You are going back on a Constitutional commitment, how can you do that? They (Centre) can borrow and pay it back from future cess which is going to be paid by the tax payer anyway.

The Centre can get money from RBI and monetise it. They can borrow from RBI using the special window, at a lower interest rate, and compensate the state governments. They can sell PSU stake and make good the amount. The union’s revenue sources are wider – various taxes, foreign loans, RBI etc.

States have very limited fiscal autonomy under the GST regime. That is why the union govt says - don't worry, we will compensate you for any shortfall over the next five years. That was the only reason state governments accepted, because there would be no loss of revenues. It is not as if the union government is giving any money from its own pocket, they are collecting Cess from tax payers for this compensation,” he reiterated.

Professor Pani suggested that since the union government had, itself, breached its own law, the states were not likely to be empathetic.

“It depends on how states react. If the Centre does not pay, it is in effect breaching that law. Which means the law is no longer sacrosanct. So states can say - alright, we will do without you, and without GST. GST was brought in by that law after a lot of tamasha. If you’re now saying that the law is no longer sacrosanct, we don’t have to follow it, the states could also say alright, we will also not bother. I don’t know how states will react but this is a possibility. If the law is no longer being followed by the Centre, I don’t know how it can be imposed on the states. It is only a logical observation,” he said.

As for the Centre’s reasoning for not borrowing to provide the GST compensation to states, Professor Pani said the rationale did not support their argument.

“The Centre’s borrowing is not likely to be international. It will be within the Indian market. The centre has the option of monetising the debt, which the states don’t have. Debt will have a greater impact on the state governments than on the Centre,” he said.

Tackling The Recession

Most economists suggest that the economic recession could last at least a year. The only solution for this situation, they say, is for the Centre to spend heavily on big ticket projects.

“A lot depends on what is done by the (union) government. At the moment nothing is being done. State governments don’t have the option to spend large quantities. When the economy itself has shrunk, the Centre needs to step up. The Rs 20,000 crore package was, in reality, only around 1% of the GDP. Ideally 10-15% of the GDP in actual numbers needs to be spent to stimulate the economy,” said Professor Pani.

“The only way out of this recession which is going to be deep, long and painful, is for the Centre to spend money. But union government is not ready to spend money. Tamil Nadu government is willing to spend but we do not have the money. Around 30% of our resources come from the union government,” explained Professor Jothi Sivagnanam.

The expert panel, headed by former RBI governor C Rangarajan, set up to provide a roadmap for Tamil Nadu out of the pandemic-induced crisis, is expected to hand in its report soon. It was set up in May and was given three months to provide solutions to the state.

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