With the exact impact of the COVID-19 pandemic on Tamil Nadu’s economy yet to be known this year, the State government may have to increase its borrowings for managing its fiscal health.
According to the 15th Finance Commission’s recommendations, the fiscal deficit has to be within 4% of the Gross State Domestic Product (GSDP) for 2021-22. If the State government goes beyond its planned borrowings, the fiscal deficit is bound to go up, for which it has to seek the Centre’s approval. As per the Interim Budget presented by the previous AIADMK regime in February, the plan was to borrow ₹84,686.75 crore, by keeping the fiscal deficit at 3.94% of GSDP.
The DMK government, which has completed barely 25 days in office, may not be in a position to mobilise additional resources through new taxes, higher user charges and drastic reduction in revenue expenditure. It will only be left with the option of increasing its borrowings. There is one way by which the government can reduce its borrowings to some extent, if it comes forward to take up reforms in the power sector, as the 15th Finance Commission has allowed an additional borrowing of 0.5%. But the power sector reforms are like a “hot potato” for political parties in Tamil Nadu, where free power supply to farmers has been in vogue since 1984.
On Monday, Chief Minister M.K. Stalin discussed issues concerning the finances of the government with Finance Minister Palanivel Thiaga Rajan and officials.
After the introduction of the Goods and Services Tax (GST), the overall tax domain has largely shifted away from the reach of the States. Stamp duty and registration, sales tax and excise on liquor and the motor vehicles tax are the three broad components of the State’s Own Tax Revenue (SOTR), and though the government can make use of them for increasing revenue, the principle of limitation also operates vis-à-vis the components.
Under normal circumstances, there will be a certain amount of increase in revenue even in the absence of a hike in taxes or charges. But with the second wave of the pandemic, a fall in revenue looks imminent. For example, as per the Budget Estimates worked out by the government prior to the outbreak of the pandemic in March 2020, the SOTR for 2020-21 was expected to be about ₹1.34 lakh crore. [It was later revised to ₹1.09 lakh crore]. As per a provisional estimate, the revenue netted last year was about ₹1.06 lakh crore. This meant that the gap was about ₹28,000 crore. It remains to be seen whether the State would see a similar drop in revenue this year as well if the pandemic continues.
Also, any new government would like to convey to the people that it is serious about implementing its electoral promises, which would, naturally, lead to an increase in revenue expenditure. For example, the current government has almost completed the distribution of ₹2,000 to each ration cardholder. It has to carry out yet another round. In total, the provision of ₹4,000 to all ration cardholders as a form of cash support for people hit by the pandemic will cost nearly ₹8,300 crore.
Expenditure can be reduced in a limited way by weeding out some schemes that may not be relevant. According to an expert, there is enormous scope for improving the efficiency of tax collection, which can shore up revenue.
