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Vol. XXIX No. 22, March 1-15, 2020

TN Budget Ignores the Basics

by A Special Correspondent

After the introduction of GST, States have lost the individual power to determine indirect tax rates, except on alcohol and petroleum. When GST stabilises and States become confident of GST as a dependable revenue source, alcohol and petroleum may also pass into the ambit of GST. With the rate of indirect tax revenue thus predetermined, resource management efficacy is the challenge for State Finance Ministers.

The overarching concern is the growing revenue deficit which accounts for about 40‑50 per cent of net borrowing (numbers are rounded off for ease of reading). This rise of deficit from Rs. 16,000 crores in 2016-17 to Rs. 25,000 crores, breaching the budget estimate of Rs. 14,000 crores in 2019-20, is disturbing. The 2019-20 rise is more than the Rs. 4,025 crores of revenue deficit still to be received from the Centre. Consequently, outstanding debt mounts to Rs. 4.56 lakh crores by end of March 21. All this erodes the credibility of fiscal numbers now presented.

The Medium-Term Fiscal Plan lists out assumptions that lead to reduction of revenue deficit to Rs. 11,000 crores by 2022-23. A simple simulation shows that as long as nondiscretionary expenditure is raging at 10 per cent or higher than inflation, revenue growth must outdo it by a minimum 12.5 per cent per year from today to neutralise the revenue deficit by 2024-25. If revenue growth is only 10 per cent, expenditure rise must be contained at 5-6 per cent per annum or lower. More need not be said as the tightening fiscal choke is already being discussed widely in the public domain.

As increased revenue is dependent on economic growth, containment of revenue expenditure through stringent priorities and extraction of better results from existing investments is the line to be pursued, apart from better compliance. That calls for a critical examination of the bill for subsidies and transfers, which is estimated to be at Rs. 94,000 crores compared to previous year’s Rs. 82,000 crores. The allocation includes expenditure for various ongoing welfare schemes like food subsidy, power subsidy, scholarships, housing schemes, social security pensions and agricultural loan/interest waiver. A selective reversal of subsidies that have little economic or social impact and minimum voter alienation, could have been carried out to signal the government’s concern. In moderate doses over 2-3 years, this approach would have helped in reducing the deficit. However, it is too much to expect the ruling party to have done it, with elections ahead. This should have been done in the last 2-3 years; as it is, the administration has missed the bus. This underlines the importance of a longer-term visionary approach that moves towards development, reconciling electoral inevitabilities and fiscal sustainability.

As regards the fiscal deficit, that it is maintained at 2.84 per cent within the norm of 3 per cent, is not the whole picture. Keeping it within limit is at the cost of a shrinking fiscal space for discretionary expenditure. In value, fiscal deficit has ballooned from Rs. 44,000 crores in 2019-20 to Rs. 59,000 crores in 2020-21. By bigger borrowing and assuming an optimistic estimate of revenue growth at 14 per cent, some elbow room has been created. The Finance Minister has opted for this route to be able to maintain a capital expenditure of Rs. 38,000 crores on projects and schemes. If such expenditure does not lead to give-aways but to building productive infra structure and development, it could drive growth and increase tax flow.

It is notable that the government has selected some good schemes in the Agriculture and Rural Development sectors. These are: larger devolution to local bodies, encouragement of micro irrigation through capital subsidies, upgradation of irrigation, kudimaramatthu (a traditional practice, but neglected, of keeping tens of thousands of local tanks and water bodies desilted), the Mission on Sustainable Dryland Agriculture (which has a commendable track record of covering 25 lakh acres so far) to cover 7.5 lakh acres more in 2020-21, and the project to establish 8 agro-processing clusters.

The overall Agriculture budget of Rs. 12,000 crores, however, seems relatively small compared to Rs. 34,000 crores for, say, School Education, considering that it is the engine of growth for the State. The schemes announced, reinforced by the Central Budget’s massive allocation and the 16-point approach to agricultural development, might rev up its engine.

On infrastructure, allocation has been raised substantially from Rs. 4500 crores to Rs. 5,500 crores. More importantly, through appropriate legislative amendments, government has introduced a legal arrangement by which landowners can give their land for building infrastructure without losing their right on it and share the benefit of the increased value of the land on account of the infrastructure. This measure is significant for speedier acquisition of land for building bridges and highways reducing implementation time. Imaginative policy changes do not require money and do make a difference to economic impact.

Both School Education and Health have received substantial increases of 18 per cent and 26 per cent. A good part of the former, about 70 per cent, goes for salaries. In School Education particularly, the divergence between output and outcome has been glaring. Tamil Nadu has been topping the lists for infrastructure, but the ground reality is that the teaching standard in government schools is poor due to ill-qualified, untrained and unmotivated teachers. The government could have saved a good part of the additional allocation and focused upon extracting better outcomes from existing infrastructure. We may be pouring more money into an inefficient system needing major repairs.

Chennai city’s needs are now to be covered by a billion-dollar World Bank assistance. It covers projects that we have been hearing about for quite some time. These are: Integrated Parking Management, flood mitigation works, comprehensive solid waste management, remediation and reclamation of landfills in Kodungaiyur and Perungudi, a waste-to-energy plant, recycling of sewage for purposes other than drinking and Adyar and Cooum river development including revival of the estuary. Chennai has waited long and wants speedy implementation.

Although individual project selections may be good, meaningful continuity and coherence as part of a vision is missing in the presentation. The Budget should be an unfolding vision, made more interesting with details of outcomes during the year and target dates for completion of proposed projects, instead of being a drab laundry list.

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