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News stories are floating on social media claiming that Tamil Nadu’s economy is improving ever since the current ruling DMK government assumed power. Also, India Today magazine’s high ranking of Tamil Nadu has further fuelled the story in print and electronic media.
However, the overall ranking of any parameters whether it’s social or economic or combined would give a picture that does not necessarily reflect the sector-specific actual ground realities. In fact, Tamil Nadu’s poor financial health continues to daunt the state economy.
Delhi-based public policy think tank PRS has released a report on December, 12, 2022 on the analysis of state finances in India, which is also equally worthy of debate along the India Today rankings. Also, the RBI released its report on municipalities’ finances on November 10, 2022, urging states to reform and streamline the already deteriorating financial health of urban local bodies.
Many in public debates underestimate the poor financial health of Tamil Nadu’s economy. Merely reducing some percentages of loan borrowings as compared to the previous year, does not help in any way without addressing critical issues. Massive outstanding payments, liabilities and irrational subsidies of the power sector, several loss-making state-owned enterprises (PSUs), public distribution system leakages, the alarming increase of pension and retirement benefits, and the free transportation for women when the Tamil Nadu transport corporations are already making losses put the health of the state’s economy in a poor condition.
Massive outstanding payments, liabilities and irrational subsidies of the power sector, several loss-making state-owned enterprises (PSUs), public distribution system leakages, the alarming increase of pension and retirement benefits, and the free transportation for women when the Tamil Nadu transport corporations are already making losses put the health of the state’s economy in a poor condition
Tamil Nadu’s power sector has a revenue deficit of Rs 4,184.10 crore and fiscal deficit of Rs 18,726.32 crore in the current year, which are foremost indicators of the actual financial health of the state. In Tamil Nadu, the share of own tax revenue has been estimated to have declined to 7.9% in financial year 2021-2022 from 8.8% in 2019-2020.
Indeed, Tamil Nadu’s debt is higher than the average of all states with 7.2% GSDP, ranked 3rd among states in India. Alas, in these areas the state government has not undertaken any significant reforms. The state’s outstanding liabilities were 32% of GSDP for 2021-2022. Similarly, outstanding guarantees of the state government were 4.8% of GSDP for 2020-21. State governments guarantee loan borrowings for State Public Sector Enterprises (SPSEs) from financial institutions, as most of them are loss-making and have poor credit ratings.
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Even before the COVID pandemic struck, Tamil Nadu had faced a revenue deficit continuously from 2015-2016 to 2019-2020. If the state performs poorly in revenue generation, the state would be knocking on the doors for the bailout either from the union government or as loan borrowings from the open market via RBI. Revenue expenditure includes expenditure on salaries, pension, interest, and subsidy. A revenue deficit implies that borrowings of loans are the only way to fund those expenses which do not lead to the creation of assets or reduction of liabilities.
The union government provides grants to states for meeting revenue deficits based on the recommendations of the Union Finance Commission. Tamil Nadu had received Rs 2,204 crore as a revenue deficit grant from the union government for the year 2021-2022 but not beyond that.
Continuous and affordable clean energy and power distribution are a major backbone on which the modern economy can utilise the full capacity of production and services available in the state. Alas, the power sector in Tamil Nadu has been facing several structural and institutional challenges for decades. The power sector subsidies have been a legacy issue since the 1960s.
Now, Tamil Nadu power distribution agencies are the highest loss-making distribution utilities in the country, 7.6% of GSDP among states. Although the state government had taken over the debt of TANGEDCO worth Rs 22,815 crore between 2015-16 and 2016-17 under the UDAY scheme of the union government, TANGEDCO accumulated losses worth Rs 48,491 crore between 2016-17 and 2020-21. The outstanding debt of Tamil Nadu is estimated to be 26.3% of GSDP at the end of the current financial year -2022-23.
Even before the COVID pandemic struck, Tamil Nadu had faced a revenue deficit continuously from 2015-2016 to 2019-2020. If the state performs poorly in revenue generation, the state would be knocking on the doors for the bailout either from the union government or as loan borrowings from the open market via RBI
The PRS report highlights that in 2021, TANGEDCO took market loans of Rs 30,230 crore, with a guarantee from the government of Tamil Nadu to clear its dues to generators and transmission companies (1.2% of 2022-23 GSDP). The total outstanding guarantee of the Tamil Nadu government was estimated at 4.8% of GSDP as of 2020-21. The state government is estimated to provide Rs 28,589 crore between 2020-21 and 2022-23 as grants to compensate for losses of TANGEDCO.
Without this grant, the state’s revenue deficit in 2022-23 would be about 25% lower. The state government has also provided loans worth Rs 1,984 crore during this period from the budget.
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Thus, during the current financial year, the grant provided for funding losses of TANGEDCO is Rs 13,108 crore (budget estimate), and subsidies for affordable power are Rs 9,379 crore which have increased from Rs 8,414 crore in 2020-21. These add up to the total Revenue Deficit of Rs 52,781 crore (budget estimate) for the Government of Tamil Nadu. TANGEDCO has higher Aggregate Technical and Commercial (AT&C) losses of 13.69% among southern states and is also one of the highest among all states in the country. This loss implies a revenue loss of thousands of crores.
Another growing major issue with Tamil Nadu’s financial system is the expenditure on pension and retirement benefits. Pension expenditure has seen an alarming increase over the last three decades. The total pension expenditure was Rs 472 crore in 1992-93, which increased by 7 times to Rs 3,327 crore in 2002-03, 4 times to Rs 13,162 crore in 2012-13 and further by 3 times to Rs 39,508 crore in the current financial year 2022-23.
Moreover, the projected spending on pension and retirement benefits for Tamil Nadu would be Rs 39,243 crore in the next financial year 2023-24 and Rs 42,382 crore in 2024-25. This kind of expenditure, especially in non-development areas, has become a perennial problem in Tamil Nadu.
The state cannot afford doles unless it prepares a strong foundation. About 61% of state expenditures every year go towards programmes that have nothing to do with development or creation of assets.
Due to these mounting unproductive expenditures, there is not much left to spend for capital expenditure for asset creation like physical and social infrastructure development that provides long-term support and services for the achievement of higher economic growth.
In times of general elections, like the upcoming one, both sides play a blame game. But the state’s policymakers must whip the state’s financial health into better shape without passing the buck to the union government, as in the past.
(The author is an economist and public policy expert)
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