State facing serious revenue problem: Tamil Nadu Finance Minister Palanivel Thiaga Rajan
In a free-wheeling discussion with TNIE that touched on social justice, federalism and the State’s potential for growth, the 55-year-old former international banker said it’s time for a “rethink”.
Tamil Nadu has been staring at a grave revenue problem for a couple of years. “We are borrowing to pay interest and salaries. We are not able to cover even non-discretionary expenses without borrowing. If this is not fixed, you have a broken system, and we will be stuck in a vicious cycle,” Tamil Nadu’s high-profile Finance Minister Palanivel Thiaga Rajan told The New Indian Express in an exclusive interview recently. In a free-wheeling discussion that touched on social justice, federalism and the State’s potential for growth, the 55-year-old former international banker said it’s time for a “rethink”. Pointing out that 100 years of social justice in TN had resulted in a far lower Gini-coefficient (an increase in the Gini coefficient suggests that income is more unevenly distributed) than in any other large rich state in India, he argued that it is not inconceivable for the State to “do a Singapore here in 30 years”.
Tamil Nadu dreams of a $1 trillion economy by 2030. Is this a realistic target? How will the maths add up?
It is not unrealistic. If you take the five-year term from 2006-11, we had real growth (CAGR) of 10.15%, after taking out the effects of inflation. To make this a $1 trillion economy from the current nearly $300 billion, we need to grow at a rate of about 12% to 13% annually in notional terms (including inflation). That is an achievable target. Let’s not forget that for a growing economy like India, the inflation is likely to be 5-6% or more.
Referring to the delay in payment of GST compensation to States, unilateral decisions such as imposition of cesses and surcharges, you recently said distrust in the Centre-State relationship had set in. Four years after GST was brought in, where do you stand today? Many States believe they were short-changed and their voices muzzled…
First of all, the power of States has been steadily reduced and that of the Centre, steadily increased. Whether it’s education, taxation, one-nation one-ration-card, or any other policy, the administrative scope of States has seen a dramatic reduction. This is the exact opposite of what the former chief minister of Gujarat, (Prime Minister) Narendra Modi, argued in favour of, when he was still a CM. Whatever he argued against then is being implemented by his government at the Centre now in a very vigorous manner.
When the topic of honouring the compensation clause in the GST law arose, the Union government was perceived by the States as less than fair. Of course, no one saw the pandemic coming, nobody is that prescient. The compensation model is designed to cover idiosyncratic risks and not for systemic risks. If one State, or even a few, has a failure or disaster, then the rest of the economy covers the gap through the collection of cess. In fact, in the first two years, the cess collected was greater than the collective pay-out. So clearly, the system works for idiosyncratic risk.
The pandemic was an instance of systemic risk, which the compensation mechanism was not designed to accommodate. However, the Union government retains 100% of direct taxation power plus the bulk of the indirect taxation after GST. Under these circumstances, it could surely have taken a magnanimous approach and arrived very quickly at the solution that they arrived at eventually – half in direct payment and half in loans which will be repaid by the Centre. Though this solution is not ideal, it is not a bad outcome. Some issues remain unresolved (differences in the 14% calculation, for example). But this solution could have been arrived at much more smoothly, avoiding much of the ill-will expressed during the process.
New Delhi has flatly denied the allegation that the GST Council is losing the essence of cooperative federalism. What is your take?
I don’t need to argue it. I just need to compare the words of Gujarat CM Modi versus his actions as a PM. These are directly opposite. If you believe the CM was for federalism at that time, then what he is doing now is against federalism.
We are ready to work closely with the Centre in every way possible. We don’t see them as a BJP government or Congress government. It is the government of the union of India. Of course, we follow the words of Kalaignar (late DMK patriarch M Karunanidhi): We extend our hand in cooperative friendship as we both work for the people, but we will raise our voice for our rights.
The fuel politics between New Delhi and States recently had drawn attention. There were reports that the fuel prices may drop by Rs 20-30 per litre. But then, an impression was created that no government wants to kill the last available goose that lays the golden egg…
The first problem of taxation in petrol/diesel is that it is confounded by variability in oil prices. The other problem is the rate of taxation between the States and the Union has changed dramatically between 2014 and now. The third problem is the pump price and its effect on the economy. It has a direct impact on inflation, and earnings of people, etc.
When Chief Minister MK Stalin, the opposition leader in 2018, said (at the time) petrol/diesel should be brought into the GST fold, his aim was to pass on the reduction in the crude oil prices to the people. You must remember that the oil price was falling for four-five years from above $100 to as low as $30-35. Every time the price fell, the Union government kept hiking the tax. The previous State government, however, did not change the tax till 2018. But in 2018 and 2019, they changed it twice. So, the CM was railing against the fact that none of the decreases in the oil price was passed on to the end consumer. The Centre became more and more unfair and unjust. They kept on increasing taxes.
In 2014, the entire union tax was less than Rs 10 per litre. And the bulk of it was excise duty which is shareable with States. Two blatant transfers took place in the last two Union Budgets – in effect they shifted the tax entirely out of the excise, and changed it to cess. They also raised the absolute level so many times between 2014 and now. Today, we are in a position where petrol tax is Rs 32.90, of which Rs 1.40 (around 4%) is excise and remaining 96% is cess and surcharge. Diesel is no better.
The Centre has not only ramped up the tax but also taken nearly 100% for itself. So, if you look at even the States like UP and Madhya Pradesh, their share from each litre of petrol has dropped dramatically. TN used to get about 14-15 paise from every litre, now we get 2-3 paise from the Union’s devolution of Rs 32.90. UP may get around 13-15 paise. So that is the remarkable difference.
The third point is that because the oil price has now moved up to $60-70 and above, pump prices have hit levels that we have never seen before (above Rs 100).
It is true that at the 45th GST Council meeting, no State was in favour of the inclusion of petrol and diesel into GST. The council took up the issue on the basis of the Kerala High Court order. So, in a meeting that lasted several hours, this item took only five minutes. It was only for compliance. The Centre may have wanted to have States be the ‘deniers’. But I understand that BJP-ruled States were the first to oppose the move. To be fair, the Finance Minister said the council decided it is not the right time (to cut taxes or move it to the GST fold) with an overwhelming majority of States (against it).....
We are ready to consider moving from VAT to GST if the Centre is ready to remove the cess and surcharge on oil, and move it back to excise. If included in GST, Tamil Nadu will face about a 6% reduction in tax rates. Two-third of TN’s budget is generated internally and only one-third comes from the Union, unlike in many other States, for which 60-70% comes from Delhi. Tamil Nadu is one of the States that can withstand the revenue loss.
You had promised a cut in both petrol and diesel tax in the State elections. In your first budget, you reduced tax only for petrol. Any plans for a cut in diesel price?
The overwhelming (number of) users of petrol are two-wheelers. We wanted to give the reduction where there is a multiplier effect immediately.
As far as diesel is concerned, there is a problem. Some deserve a cut in taxes and some others, clearly not. If we could identify who is buying diesel, we could decide who to tax at what level. When the identification technology is available, we can make even point-of-sale taxes progressive and fair. If we have a system like in Singapore with a unique RFID for each vehicle, I can bring in a model to discriminate the discount levels between users.
For users like government buses and fishermen, we have already increased the diesel subsidy. For private buses and mini buses, we have deferred the government tax payments. We do not want to cut diesel prices of big farmers who own hundreds of acres of land. So, we need a mechanism to check the data and find who is a small farmer. There is no social or economic justice in cutting the diesel price for people using big SUVs.
We also discussed internally that if there is a cut in diesel prices, there will be a direct impact on the logistics companies and transportation of goods, and hence a potentially desirable downward impact on retail prices. But if diesel charges go down in TN, will Amazon or Reliance Fresh cut their delivery charges or product prices? The pan-India players are unlikely to cut any prices. And they are the “price-makers”, not the small merchants. At best, they may do more of their overall fuelling in TN. That is all. So, a cut in diesel prices will have only a small chance of resulting in a reduction of retail prices.
The pandemic and a battered economy have created a mess for almost every State in the country. Tamil Nadu, for instance, needs more cash than usual this year to spend on welfare and to boost industrial activity. Contrary to expectations, you did not announce any new taxes. How are you going to fund the shortfall?
Nobody wants to be in this situation where we are nudging up to the borrowing limits set by the Fiscal Responsibility Act of 2003 (TN’s Fiscal Responsibility Act matching the Union’s Fiscal Responsibility and Budget Management Act). But since 2019, the government has subtly enforced its rights under Clause 293 (3) of the Constitution, which says that as long as we owe them any money, we cannot borrow without their consent. Once we cross 3.5% of Gross State Domestic Product (the 15th Finance Commission’s recommended limit which the Union accepted), we need their nod for additional borrowing. Our GSDP is estimated at Rs 21.36 lakh crore. So, 3.5% of it is around Rs 75,000 crore.
Now the reality is that we are facing a revenue deficit of about Rs 50,000 crore.
During 2006-11, the Tamil Nadu government, on an average over five years, spent 12.3% of GSDP on its revenue expenditure, excluding Interest payments. After that, it retained a revenue surplus of roughly 0.32% of GSDP and borrowed 2.18% of GSDP purely for capital expenditure – to a total of 2.50% of GSDP. That kept on sliding, and the previous government only spent about 10% of the GSDP as non-interest revenue expenditure, after borrowing 1.85% of GSDP as just the revenue deficit. Then they borrowed only another 1.85% of GSDP to do capital expenditure. So, not only did capital expenditure come down by almost a third, even revenue spending dropped by a fifth or a sixth. And, about 20% of this reduced revenue spending was financed by debt. It is not a sustainable model. All our problems start with not having adequate revenues as a percentage of the GSDP.
The fact is that the bulk of our expenses – salaries and pensions – are effectively tied to inflation because of the Dearness Allowance increases. Further, the capital spending is linked to building material prices and labour cost, which undergo an increase due to inflation. If your taxes and revenue model is not supporting the inflationary increase, then there is an asset-liability mismatch. Asset is fixed and liability increases regularly based on inflation. How do you cope?
The other issue is fairness. Government salaries and pensions rise through twice-a-year DA increases to cover inflation. But the grant/pension that we provide to widows or disabled people is not linked to inflation. The widows’ pension in the last 10 years remains at the same figure – Rs 1,000 per month. How is that fair? It is a failure of the government that we are not paying them on a basis adjusted to the cost of living.
Under Rule 110 of the Assembly procedure, the previous AIADMK chief ministers announced more than 1,700 projects involving Rs 3 lakh crore in the last 10 years. That is roughly equal to the total budget for this year. It’s grotesque. Most of them did not even come to the GO level, or made insignificant progress. We have documented it well with annual data.
There is a serious revenue problem that needs to be fixed. If it is not fixed, we will be stuck in a vicious cycle. We are borrowing to pay interests and pay salaries. We are not able to cover even the non-discretionary expenses without borrowing.
What is the way forward?
If we were to get the act together on basic balancing, we can fundamentally transform the rate and speed of growth by re-imagining the way we manage our assets and invest. For instance, a lot of our land is lying unutilised. There are many ways we can use it productively without selling it. We don’t need to build something and then worry about a monetisation pipeline.
It is illogical that a government like TN is doing 100% equity financing of the capital assets. For instance, a bus-stand was built in Madurai under the Smart City scheme. Surely, a bus-stand can generate revenues through access fees, shops, parking lots, etc. A special purpose vehicle (SPV) can take care of the asset for 20-30 years and pay up the debt and return the asset to the government. It is a revenue-producing asset. Banks are happy to lend because the cash-flows are linked to future revenues of the SPV. On the other hand, if we were to build classrooms and toilets in government schools, the entire money should be invested as the government’s equity. There is no choice. So, we can scale up our investments manifold by deciding which project to fund completely and which ones to be built as SPVs, and therefore increase our rate of growth.
We are an enormously rich state. The beneficial outcome of 100 years of social justice is that we have a far lower Gini-coefficient (an increase in the Gini coefficient suggests that income is more unevenly distributed) than any rich state. There are only four large rich states – Gujarat, Maharashtra, Karnataka and Tamil Nadu. We have by far lower Gini-coefficient and consequently higher per capita spending, better access to healthcare, lowest infant mortality, lowest maternal mortality, highest average enrolment rate in colleges… you pick any number. We are at the top. If we have managed this outcome with half the potential the State has, it is not inconceivable that we can do a Singapore here in 30 years. We can push per capita income, from the current levels of about $4,000 to about $50,000, equivalent to the Singapore level, by 2050.