The curse of competitive populism

This is not the first time Tamil Nadu’s finances are precarious. And, this is also not the first time a White Paper has been brought out to highlight it. The State’s finances is prisoner to a culture of competitive populism and both the Dravidian parties — the DMK and the AIADMK, which have been in power for the last five decades, are primarily responsible for it.

In fact, the DMK captured power in 1967 after its leader CN Annadurai promised 4.5 kg of rice for one rupee (he later scrapped the scheme due to its financial burden). This policy of sops for political gain has since taken a monstrous proportion.

In 2006, to regain power, the DMK under M Karunanidhi promised voters free colour TV sets, gas stoves and 2 acres (to 5 lakh landless farmers). The DMK swept to power and the scale of victory was attributed to the promises made by the party. This entrenched the culture of freebies in the State.

Not to be outdone in this game, AIADMK leader J Jayalalithaa promised a lot more in the 2011 elections-free mixies, grinders, fans, laptops and milch animals among other things. She won the mandate not just in 2011 but 2016 as well.

Heading into the 2021 elections, things got worse. When DMK leader MK Stalin in January promised, if elected, to waive gold, education and farm loans, the AIADMK government under Edappadi K Palaniswami went one step further and waived farm loans worth ₹12,110 crore. When Stalin announced a monthly payment of ₹1,000 to woman head of a family, the AIADMK responded offering to pay more — ₹1,500 per month.

Poll promises

The DMK won the elections but in a bid to regain power after 10 long years, it promised quite a lot. It has already implemented some of its promises like reducing milk prices by ₹3 per litre (cost to exchequer: ₹700 crore), free bus travel for women (₹1,200 crore), Covid relief of ₹4,000 to 2.07 crore ration card holders (₹8,300 crore), waiver of loans taken by self help groups from co-operative banks (₹2,756 crore) and reduction of petrol prices by ₹3 per litre (₹1,160 crore).

A lot more remain to be fulfilled. This includes: ₹1,000 per month to women head of a family (this alone can cost up to ₹24,000 crore), Cooking gas subsidy of ₹100 for one cylinder, waiver of gold/education loans and balance reduction in fuel prices (the DMK had promised a ₹5 reduction in petrol and a ₹4 cut in diesel prices). Chief Minister Stalin has said that all the promises will be honoured.

The unenviable task before him is to balance what his government’s White Paper has said and fulfilling his costly promises. The White Paper made it clear that “business-as-usual cannot continue” and called for “once in a generation” reforms to revive State’s finances.

As a leader who appears keen on re-imagining the way politics is practised in the State (some are already call him a Statesman), Stalin can be the harbinger of change by building a consensus among political parties to end the practice of offering freebies and sops with an eye of swaying the voters. He must also take the lead in explaining to the people that these sops and unsustainable subsidies come at the cost of more important expenditure the State has to make in ensuring quality health, education and other services.

Such an exercise will be crucial as his government starts taking tough measures, which are inevitable, to revive TN’s finances.

The first step should be to charge reasonably for the services the government provides, at least to those who are economically well off. Today, rich and poor domestic consumers alike get a subsidy of ₹18,735 crore a year for the electricity they use.

This pushed up the overall power subsidy in FY21 was ₹21,350 crore. With the State not reimbursing the subsidy in full, the power utility is forced to borrow to keep its operations going. Over the years, its financial position has deteriorated such that it cannot borrow without the State government guarantee.

Same is the case with State Transport Undertakings and water utility. Today, the guarantees the State government has given is at an historic high of ₹91,818 crore (4.72 per cent of GSDP) and 95 per cent of it is to power and transport undertakings.

Without increasing the tariffs, these utilities will ultimately fail to repay the debt and the guarantees will devolve on the government adding to its already high debt burden.

Target subsidies

Similarly, the food subsidy needs to be more targetted. The 2.07 crore ration card holders include people who are not necessarily poor but nevertheless avail all benefits. For instance, 99.7 per cent of them received the ₹4,000 Covid relief that the government gave. The economically well off need to be weaned out to cut the food subsidy.

That apart, State’s Own Tax Revenues (SOTR) needs to be increased. SOTR’s share of total revenue has declined by almost 10 percentage points in the last seven years. When the AIADMK government tried to raise the Property Tax, DMK created a furore forcing a roll back. DMK government can now expect a payback if they raise property or any other tax.

Leakages in SOTR is estimated at 0.75 per cent of GSDP (₹14,000 crore), efforts should start immediately to plug them. State PSUs have to be reformed. The government gets nil return on equity for its investments in PSUs worth ₹38,212 crore.

The government should also need to take steps to promote economic growth. Higher the growth, higher the revenues and there is more money to spend on welfare measures without hurting the State’s finances.

There have been attempts in the past to charge more for services the government provides and reduce subsidies. They were invariably rolled back after a political uproar or one bad election outcome.

That is why a political consensus is critical among, at least, the leading political parties. Otherwise, one can expect the next non-DMK government to present another White Paper even as TN’s finances continues to oscillate from bad to worse.