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The current DMK government in Tamil Nadu had severely criticised the previous AIADMK government over the ballooning of the state’s debt over the years. When it came to power after a decade in the Opposition, the DMK government released a White Paper on State finances that said that “a serious cause of concern for Tamil Nadu over the past decade has been the slowdown in economic growth from the peak level reached in 2011-2012. There has been a steady deterioration in the finances of Government of Tamil Nadu particularly, post 2013-14.”
During the last two financial years (2020-21 and 2021-22), Tamil Nadu topped among the major states with the highest gross market borrowings of loans, all in the name of state development. During the financial year 2021-2022, the DMK government borrowed a net loan amount of Rs. 87,000 crore mainly to fulfill its poll promises of freebies and vested interest agendas. Further, the DMK government has planned to get loans, all in the name of state development, of Rs. 90,116.52 crore during the current financial year 2022-2023.
Tamil Nadu’s debt to GSDP ratio will touch 31.0% by 2026-27 from 25.7% in 2019-20. According to RBI data, Tamil Nadu indicated that it would borrow Rs 23,500 crore (26.07%) in the first quarter (April-June) of the current financial year 2022-23. Clearly, the DMK government is not very different from the AIADMK.
Even after a year of assuming power, the DMK government has not moved an inch from the previous regime of the AIADMK government and its own legacy of freebies and increasing the state’s debt irrespective of the economic growth achieved. As it said in its white paper, Tamil Nadu continues to be in an unsustainable fiscal situation. Where are the reforms that will correct the course?
During the last two financial years (2020-21 and 2021-22), Tamil Nadu topped among the major states with the highest gross market borrowings of loans, all in the name of state development
The Union government has stipulated for states to borrow loans through open markets by the issue of state development bonds only up to 3.5% of Gross State Domestic Product (GSDP) and an additional 0.5% of GSDP after undertaking reforms in the state power sector. The fixed GSDP varies for the year as per norms of the 15th Finance Commission. Tamil Nadu’s borrowings were marginally higher than the mandated limit this year.
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The state has the highest interest payments every year for past loans. Among major states, Tamil Nadu’s interest payment to revenue receipts is 21% of GSDP (2021-22) which is the second-highest in the country after Punjab. For the current financial year 2022-23, the committed expenditures (interests’ payments, salaries, and pensions) accounted in the budget is about 67% for Tamil Nadu, which is not a healthy economy at all. And the remaining mere 33% of budgeted expenditures is not enough for development projects, especially for physical infrastructure, health care, and the safety and security of people.
The key power sector reforms proposed by the Union government were metered electricity consumption against total energy consumption including agricultural connections; subsidy payment by Direct Benefit Transfer (DBT) to consumers; payment of electricity bills by government departments and local bodies; installation of prepaid meters in government offices; and use of innovations and innovative technologies. Implementing them would have provided the state leeway to borrow an additional Rs 7,054 crore in 2021-22, which is 0.5% of GSDP. But the DMK government is refusing the above structural reforms. States like Andhra Pradesh have already completed the reforms and are availing the additional borrowing for the developmental projects.
The latest RBI report (released on June 16, 2022) on the state’s fiscal risk analysis has pointed out that the power distribution companies in the states like “Tamil Nadu, Madhya Pradesh, Rajasthan, and Punjab are most vulnerable to a possible bailout while Gujarat, Assam, Haryana, and Odisha are relatively insulated from this risk”.
The RBI report estimated that in the case of Tamil Nadu’s power distribution companies, TANGEDCO, the pre-bailout and long-term debt would be Rs.1,24,413 crore, where the equity amounts to Rs 72,411 crore.
The RBI study assumes that 75% of long-term debt would be Rs 93,310 crore. Even in the post-bailout case, the long-term debt would be Rs 31,103 crore, and the equity is estimated at Rs 41,937 crore.
The CAG report on Tamil Nadu’s power sector companies (TANGEDCO) had heavily and strongly recommended undertaking structural reforms to revive the energy available for the economy to support. The state government did not heed the recommendations of CAG, which asked the states to review and restructure the debts to reduce the interest cost; submit tariff petitions to TNERC regularly; and calculate the AT&C losses accurately as per the methodology prescribed by CEA to have better control over it. Under-reporting of AT&C loss in the range of 2.24% to 3.41% during 2015-2020 period had resulted from energy loss of Rs 6,547.25 crore.
The latest RBI report (released on June 16, 2022) on the state’s fiscal risk analysis has pointed out that the power distribution companies in the states like “Tamil Nadu, Madhya Pradesh, Rajasthan, and Punjab are most vulnerable to a possible bailout while Gujarat, Assam, Haryana, and Odisha are relatively insulated from this risk”
Thus, the current DMK government regime will perpetuate the “substantial deterioration in the overall fiscal balance of Tamil Nadu” in years to come. One of the major culprits for the deterioration of state finances as the DMK government’s own white paper recorded is “the deteriorating financial situation of the PSUs has resulted in a scenario where they cannot borrow without a guarantee from the Government.”
As it is, the state government is struggling to correct its past agitationist record against every major development project which ranges from national highways to mega industrial corridors and nationally important projects. The investment climate has not recovered.
The state finance minister has mentioned in the Policy Note-2022-23, that state “Finance Department is collaborating with the International Monetary Fund to bring about reforms in Public Financial Management in the State, notably in budget formulation and fiscal risk management”. There is no transparency in the state government’s collaboration with IMF for “fiscal risk management”.
(The author is an economist and public policy expert)
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