“The fiscal situation of the State is dire ,” said the White Paper on Tamil Nadu Government’s Finances released by the State Finance Minister Palanivel Thiagarajan on Monday. “The decline is the worst in the last five years. No other major/developed State has had such a decline, which started even before the start of the coronavirus pandemic,” he added while speaking to reporters after releasing the paper.

The White Paper blamed this situation in part due to extraneous circumstances but said that substantial cause was due to structural flaws in governance which have not been rectified in a timely manner. The Covid pandemic, it said, has greatly exacerbated the situation and highlighted how vulnerable Tamil Nadu currently is. There are no buffers left. No fiscal headroom that will allow for delay, it added.

Declining economic growth

The report, in excess of 100 pages, focussed in detail at both revenue and expenditure apart from growth of the State's GDP. It said that Tamil Nadu's economic growth has been in a decline ever since it touched a peak in 2011-12 and the decline accelerated after 2013-14.

State's revenue deficit was ₹61,320 crore (3.16 per cent of state GSDP) in FY21. Its fiscal deficit was ₹92,305 crore (4.43 per cent of GSDP). In FY07 the fiscal deficit was just ₹3,956 crore. The ratio of revenue deficit as a percentage of fiscal deficit was 14.94 per cent in 2011-16 period but as of FY21 it has ballooned to 66.43 per cent.

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The State was revenue surplus in five out of seven years in the 2006-07 to 2012-13 period. Since then, it has registered only revenue deficits. Consequently, debt has shot up. In 2006-07 the State's debt was ₹60,170 crore (18.37 per cent of GSDP). In FY21 it has jumped to ₹4,85, 502 crore (24.98 per cent of GSDP).

It is not just the expenses that have gone up. State's ability of raise revenues too has declined, said the report. Revenue receipts as a share of GSDP have fallen to 8.70 per cent in FY21 as against 13.35 per cent in FY09. The report also touched upon the guarantees offered by the State, GST compensation, fall in revenues from sale of fuel and returns from State PSUs.

The White Paper made it clear that the government's approach must be to fundamentally change the policies if the State has to break out of the vicious cycle of increasing debt and interest costs. It also said that this is an opportunity to effect “once in a generation” reforms, many of which should have been undertaken years ago by any responsible government.

Findings

With the State's interim Budget due on Friday, the paper laid out some steps that needs to be taken to restore the State's finances. Interest costs needs to be contained in order to minimise or reduce the revenue deficit and that will require the government to bring its debt relative to GSDP under control. 'In any democratic country it is difficult for the Government to drastically cut spending. Much less so when a newly elected Government has promises to fulfill, that will require significant additional spending. So, revenues will have to be raised in an equitable manner, as debt will otherwise balloon, and interest payments will overwhelm the Budget,' it said.

“In the last three to four years the government has resorted to borrowing for even non-discretionary expenses like salaries, pension and interest payments which were for many years in the past met out of the regular revenue receipts of the government. This practice must be stopped,” it added.