The Lede
Grim Outlook For Tamil Nadu
Tamil Nadu

Grim Outlook For Tamil Nadu

Sandhya Ravishankar

Sandhya Ravishankar

As the State government is set to unveil its first Budget under a GST regime, experts anticipate sharp declines in income and growth with impending drought adding to woes

It has been at least four years of misery for the Tamil Nadu economy and experts feel that this situation is likely to continue into the next couple of years.

A state that was once topping the charts in all indicators, especially growth rate and investments, has been sliding unstoppably for the past few years, with no stem in sight for the fall.

A number of factors are compounding the misery of Tamil Nadu’s economy and its people, forcing a domino effect on jobs, incomes and livelihoods of the seven crore population of the southern state.

Budget 2018, to be unveiled on March 15, will showcase this in a subtle way. The figures of the previous year, financial year 2017-18, are as follows.

FY 2017-18 Amount (In Rs Cr)
Total Revenue 1,59,363
Total Expenditure 1,75,293
Revenue Deficit 15,930
Total Outstanding Debt 3,14,366

*Source: Budget 2017, Tamil Nadu Finance Department

GST and the Centre

Tamil Nadu protested against GST as the state’s revenues would come down as a result. Under the GST regime, states that are net exporters and whose economies are robust, tend to be given the short shrift. Backward states which are net importers are the gainers in terms of funds.

Anticipating the GST regime, revenues from commercial taxes that the state gained in the last fiscal year were projected at Rs 77,234 crore in Budget 2017. This is against Rs 67,522 crore in the previous financial, 2016-17. This estimate is likely to have been lower than expected.

“Everybody knows that under GST, the State tax revenue will go down,” said Professor Jothi Sivagnanam, Head of Department-Economics, Madras University. “The declining trend of GST collections continues month on month. Input credit has also not come so far. If that happens, then the GST revenue for the State will go down even further,” he said.

Another reason for the state getting less funds from the Centre is the strange manner in which the Union government has put a number of funds under the head of surcharge and cess, which now constitute 15 percent of the overall general shareable tax pool of the Centre. This means that the quantum of funds available from the Centre as a share of taxes due to the State has itself shrunk to 85 percent.

The Fourteenth Finance Commission has short-changed the State even further – Tamil Nadu’s horizontal share since 2015-16 has come down to 4.023 percent from 4.969 percent, from the general shareable tax pool. From the service tax pool, it has come down to 4.104 percent from 5.047 percent.

Apart from this, according to the 2015-16 Budget of the State – “The vertical tax devolution to the States has been enhanced from 32 per cent to 42 per cent of the divisible pool. Inspite of this increase in vertical tax devolution, the overall gross transfers to States as a proportion of the Centre’s gross revenues, is expected to continue at 49 per cent, a large decline from 53 per cent in 2011-2012.” Various schemes and grants to the State have been discontinued. All of these put together translate to a loss in income of around Rs 35,485 crore over four years, from financial year 2015-16.

“The Finance Commission’s formula is heavily skewed towards the backward states. The Tamil Nadu government’s share of funds from the Centre has been heavily reduced in the past three years,” said Sivagnanam.

Drought After Drought

The State is headed into yet another drought year in 2018 and as summer has just begun, many parts of the state are already facing drinking water crises. A drought impacts life and economy immediately and heavily, from lack of drinking water to lack of irrigation and water for industry.

In fact, in his Budget speech for 2014-15, the then Finance Minister O Panneerselvam had stated – “The prolonged period of economic stagnation at the national level and a severe drought, dragged down the growth rate of the Gross State Domestic Product (GSDP) in real terms to 3.39 per cent, during 2012-2013.”

While funds are aplenty for State government to formulate effective drought preparedness measures and to deploy these schemes on the ground, not much has been done in that direction.

“Now we do not have the luxury of taking time to think of long term policies,” said Arivudai Nambi of the World Resources Institute, an expert on water resources and climate change. “As far as the government is concerned, it is doing things on a very ad hoc basis. Long term perspective on drought planning and drought preparedness is missing. Institutional memories of handling drought, being prepared, investments for that, are not being utilised. It has not come together in a coherent forward-looking multi disciplinary manner of approach. We need to revisit policies and allocations and see what worked and what did not work,” he said.

Nambi warns that a drought has the capacity to debilitate already vulnerable and struggling economies. “Drought has different facets. When you start at a low base, your vulnerability impact is far more. Livelihood security is not there, and poverty will increase and get compounded when a drought happens,” he said.

Sivagnanam feels that the Centre is at fault as far as irrigation goes. “Major irrigation is the responsibility of the Centre and they have not been doing anything for Tamil Nadu since the First Five Year Plan,” he said. “They have shifted to batting for the gallery – like providing farm loan waivers. Minor irrigation is the last mile connectivity of irrigation and the State government is responsible for this. The State has done a decent job of working on minor irrigation but this will not be of any use unless major irrigation works are carried out. The State government is responsible for inputs like subsidised electricity, seeds and fertiliser, which it has done very well,” he said.

But the fact of the matter is that the State is facing drought of varying degrees over the past four years. Groundwater levels have depleted severely, affecting drinking water as well as irrigation. Consecutive deficit monsoons and changing rainfall patterns have failed to recharge groundwater, fill up reservoirs or feed rivers. As a result, the State has nowhere to turn this summer and does not appear to have a plan to weather the coming disaster.

Political Turmoil & Industry Shying Away

Since 2011, when the late J Jayalalithaa took over as Chief Minister and subsequently fell ill, industry has been shying away from Tamil Nadu. An inaccessible Chief Minister who did not meet industry leaders or listen to grievances, was followed by a ruling party in turmoil, both of which kept investments away.

This is evident from the data issued by the Reserve Bank of India’s regional office which was tabled in Parliament by the Union Ministry of Commerce and Industry – Foreign Direct Investment inflows into Tamil Nadu had dropped by 50 percent in 2016-17 alone. No new large industries have come up in the state and economic growth therefore, has taken a hit.

The State government maintains that the Gross State Domestic Product has grown from 4.85 percent in 2012-13 to 7.94 percent in 2016-17. But the revenue deficit figures tell the story – a revenue surplus state in 2014-15 has now become a revenue deficit state in the past couple of years. In 2016-17, the State overshot its fiscal deficit limits – 4.58 percent of the GSDP as against the mandatory 3 percent limit set by the Fiscal Responsibility and Budget Management Act of 2003.

Tamil Nadu is also in deep debt, which is only increasing. The total outstanding debt of the state was Rs 3,14,366 crore in 2017-18. Of this, TANGEDCO (Tamil Nadu Generation and Distribution Corporation), the state power utility alone, contributed a debt of Rs 22,815 crore, which was taken up by the State government. Almost all State-owned corporations and units are running into large losses and debts, especially the TNSTC (Tamil Nadu State Transport Corporation).

“Revenue is declining marginally due to fall in growth rate,” explained Professor Sivagnanam. “Due to demonetisation, registration revenue has come down since the real estate sector has been hit badly. Three years back, we had revenue surplus and a fiscal deficit within FRBM norms. This year, the deviation will be very sharp. We will see higher revenue deficit and fiscal deficit,” he said.

Tamil Nadu’s Governor Banwarilal Purohit said as much in his address to the State Assembly in January this year. “Though there is a concern about increasing revenue deficit due to slow growth in revenue receipts, the state is firmly on the path of containing fiscal deficit and debt to GSDP ratio within the norms,” he said.

So what should the State government focus on, in Budget 2018?

“Growth has to be accelerated but investments are not coming to Tamil Nadu, especially in the manufacturing sector. And this is largely due to political reasons,” states Professor Sivagnanam. “The service sector has been affected due to the global financial crisis. This poor situation will continue for a while until you revive growth. Agrarian issues must be addressed urgently because we are in a crisis – we are in our fourth consecutive year of drought,” he added.

Nambi reiterates Sivagnanam’s view that a sense of urgency must be shown by the State government, if it has to tide over the crisis that appears to be going out of its hands, especially in connection with the looming drought. “Allocations are made without looking at the ground reality. Each drought has its own peculiarities. We have a standard set of measures – we go and distribute goods and money. That is only temporary. But a two-pronged approach is important – one should be long term and the other is a short term set of measures. We also have to change the attitude of ‘let us deal with it when it comes’,” he said.

For now, the state will continue to rely on its all-weather friend – TASMAC, the Tamil Nadu State Marketing Corporation – which holds the monopoly over retail sales of liquor in the State, to help tide over a crisis.