Registered with the Registrar of Newspapers for India under R.N.I 53640/91

Vol. XXVIII No. 21, February 16-28, 2019

Faster growth needed to overcome fiscal problems

by A Special Correspondent

The tight financial situation of the State, has severely limited the room for discretionary deployment of resources. Till this basic issue is resolved Finance Ministers will have to balance the conflicting pressures of popular expectation and economic compulsions. The Budget delivered on February, 2019 for the fiscal year 2019-20 is one such exercise.

Foremost, the Budget should demonstrate concern in terms of policy choices and specific financial decisions that would expand the present narrow fiscal space, at the least, in stages.

The total revenue is increasing at about 9-10 per cent per year which may seem satisfactory but compared with the country’s growth it does not seem so. The State GDP (GSDP) was 8.03 per cent in 2017-18 (revised estimate), 9 per cent budgeted in 2019-20 but could reach only 8.14 per cent and is predicted at just 8.16 per cent for 2019-20. First, it is a sign of economic stagnation hovering around the 8 level.

Second, when the country as a whole, comprising large parts that are backward, can register 7.3 per cent, it means that the few advanced states have grown much faster making up for the laggards. Tamil Nadu should have been in the fore-runner group clocking close to 10 per cent.

Third, the GSDP being in real terms, in nominal terms, allowing for inflation, the required run rate of 10 per cent is equivalent to, say, 16 per cent at current prices. Correspondingly, revenue growth must be at 16 per cent or even higher because in an enlarging economy more of higher valued goods and services are consumed yielding more tax per unit thereby accelerating tax revenue growth.

Therefore, there is reason to be disappointed with the government’s failure to impart a strong growth momentum. Infrastructure-enabling policies, judicious, “self-paying” incentivisation and improved ease of doing business are aspects that may need critical review. The economy growing at the present rate will be overwhelmed by relentless rise of fixed commitments like salaries.

Outstanding debt has ballooned from Rs.3,14,366 crores in 2017-18 to Rs.3,97,496 crores, a rise of 30 per cent in three years. In the 2019-20 Budget the revenue of Rs.1,97,721 crores, after meeting salaries (Rs. 85,027 crores), subsidies/grants (Rs. 82,673 crores) and interest on borrowings (Rs. 33,226 crores) runs into a deficit with nothing left for loan redemptions. Therefore, borrowing is necessary to meet a part of the interest commitment and repayment of instalments of previous borrowings. So, only a shrunken portion of the fresh borrowing is available for development.

It is fair to say that the Finance Minister’s concern over the state of finances is reflected in the following – a 25 per cent rise in the estimate of State’s own revenue compared to the estimated provision in last year’s budget, containing the revenue deficit to Rs.14,134 crores for 2019-20 from Rs.19,319 crores in the revised estimate for 2018-19, reducing borrowing from Rs. 47,350 crores in 2018-19 to Rs. 43,000 crores in 2019-20 and, finally, despite the pressure, providing for a capital expenditure of Rs.31,251 crores.

The Finance Minister has done a delicate balancing job by using three strategies: using likely revenue buoyancy of indirect taxes to reduce revenue deficit, limiting the sum to be borrowed indicating concern, not cutting capital expenditure under financial pressure and wisely dovetailing the State’s pro-poor schemes with the Central government’s Yojanas getting “more bang for the buck”.

It is, however, disappointing that subsidies and grants are left to remain as high as Rs.82,673 crores which absorb as high as 40 per cent of total revenue. It calls for a critical study to identify outflows that are no longer necessary or would make no significant impact if withdrawn or drawn down. Items like free or concessional supply of power, VAT refund subsidy to industry, marriage assistance scheme and Amma two-wheeler scheme, may offer scope for savings. It may also be possible to save money by screening out fake claimants. The mounting salary costs without corresponding productivity and improvement of service delivery is a difficult problem. The Government showed political will to resist the recent movement of teachers for higher compensation. The same will is needed to go for cutting dead wood in establishment wherever there is scope.

Claim that the government has remained within prescribed limit for fiscal deficit should not lead us to conclude that all is well. For instance, exaggerating for effect, if borrowings are within fiscal limits and all of that borrowing is used for repaying old borrowings and interest, is such “conformity” of any use? Borrowing funds must supplement own resources for capital development and building social assets which facilitate creation of wealth, employment, welfare and tax revenue for more development in a virtuous cycle. In the State budget, the portion of fiscal deficit that goes for these purposes is thinning with time.

The Budget does address problems of congestion, pollution, ease of movement, flooding in rainy season but overlooks the annually repeating water crisis – parking lots for 4 lakh vehicles to relieve congestion and prevent chaotic parking, Oratthur anicut that may offer token support to the City’s water supply and more as defence against floods, a comprehensive solid waste management project, remediation and reclamation of waste landfill dumps and plan for ordering 12,000 BS-VI buses and 2,000 electric buses at a project cost of Rs.5,890 crores, for Chennai and other cities. The provision for 7,964 km of interior rural road network would generate employment.

The Tamil Nadu government has consistently, year after year, been allocating substantial sums to Healthcare and School education. Health gets Rs.12,563 crores compared to Rs.11,638 crores in 2018-19. School Educations gets a sizeable increase over the previous year, that is, Rs.28,578 crores versus Rs.27,205 crores. On the basis of creating infrastructure on these fronts, the State has been scoring high ratings in national surveys by independent bodies. Grass-root surveys, however, present a not-so-good state of service delivery; schools and higher institutions churn out unemployable graduates. Enforcing accountability, close monitoring and, in general, micro-governance are needed to derive good outcome from infrastructure. Teachers, for example, being well paid by current standards, there is no reason why qualified, trained and committed candidates cannot be engaged if the system ensures impartial selection free of corruption.

One justifiable criticism of the budget format by lay citizens is that it does not give an account of the projects that were assigned large sums in previous years. In other words, there is no visible continuity and direction. There were excellent projects for increasing productivity in agriculture, by extending drip irrigation to 35,000 acres under sugarcane, diversification by increasing the area under highly remunerative horticultural crops and innovative supply chain management for perishable commodities to reduce post-harvest losses. Other examples are the restoration of Pallikkaranai marsh-lands and flood control measures for the North and South of Chennai, the latter with an allocation of Rs.3,298 crores. There is no easy means of knowing what happened to them and with what result. It is time the Budget had an annexure to give the status of past projects and their outcomes.

The annual State Budget is increasingly becoming a predictable exercise. The salaries and pensions are known and so are interest payments and loan repayments. Borrowing limits are known or knowable. With the advent of GST indirect sources of revenue are outside the states’ control except the levies on petroleum, diesel and alcohol. In such a situation, it seems to make sense to present a five-year projection, co-extensive with the term of office and annual presentation on progress and corrective measures to be taken. That would have the advantage of holistic continuity and productive allocation of resources.

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