TN staring at an avoidable debt-trap

Tamil Nadu will fall into a debt-trap if the state government continues to borrow to pay the old debt without focusing on infrastructure development, attracting real investments in manufacturing, preventing leakage, widening tax base and boosting investors’ confidence, said experts.

"Is Tamil Nadu moving towards a debt-trap? The answer is a resounding yes," said Sriram Seshadri, founder and managing partner, Disha Consulting and formerly partner and managing director of Accenture India, told this correspondent.

Continuing further he added: "Tamil Nadu is borrowing to retire its earlier debt and meet revenue expenditure. The interest outgo is almost one third of the revenue. The cost of borrowing is going up year after year."

According to Seshadri, the state is reckless in giving freebies and subsidies to all and cited the 100 units of free power - by the AIADMK government- to all domestic consumers as one example.

Most of the budgetary allocations are towards revenue expenditure and not much for infrastructure development and the possibility of long-term revenue is absent, he added. He said the state got into the vicious cycle of borrowing to retire earlier debt five years back.

"Thought welfare economy is good, capital formation/infrastructure spending is one which will pave the way for long-term sustenance," said Dr.Gowri Ramachandran, economist and chairperson - Expert Committee on Economic Affairs, Hindustan Chamber of Commerce.

Presenting the state budget for 2023-24 and the Medium Term Fiscal Plan (MTFP), former Finance Minister Palanivel Thiaga Rajan said Tamil Nadu plans to borrow Rs 1,43,197.93 crore and make a repayment of Rs 51,331.79 crore.

As a result, the outstanding debt as on 31st March 2024 will be Rs 7,26,028.83 crore. This constitutes 25.63 per cent of GSDP (gross state domestic product) in 2023-24.

The total revenue receipts of the state, including the central transfers are estimated at Rs 2,70,515.23 crore in Budget Estimates 2023-24 as against the Revised Estimates of Rs 2,45,659.68 crore in 2022-23. The State's Own Tax Revenue (SOTR) for next fiscal is estimated at Rs 1,81,182.22 (Rs 1,51,870.61 crore as per revised estimates for 2022-23) said MTFP. The State's Own Non-Tax Revenue has been estimated at Rs 20,223.51 crore in the Budget Estimates for 2023-24. The state’s share in central taxes is estimated at Rs 41,664.86 crore in budget estimates 2023-24 as against Rs 38,731.24 crore in the revised 2022-23 estimates.

According to MTFP, the grants-in-aid from the central government for FY24 are estimated at Rs 27,444.64 crore. The reduction is due to the stoppage of GST Compensation from June 30, 2022, onwards.

"This has resulted in a shortfall of around Rs 20,000 crores per annum. Further, from the current year onwards, funds for several centrally sponsored schemes are being directly released to the bank accounts of implementing agencies and local bodies or beneficiaries (in the case of scholarships), without being received into the Consolidated Fund of the State," the MTFP notes.

The revenue expenditure is estimated at Rs 3,08,055.68 crore for 2023-24 and the capital expenditure will be Rs 44,365.59 crore.The revenue deficit for 2023-24 is estimated at Rs 37,540.45 crore.

Ramachandran said Punjab, Rajasthan, Kerala, West Bengal, Bihar, Andhra Pradesh, Jharkhand, Madhya Pradesh, Uttar Pradesh and Haryana are the states with the highest debt-burden in India.

"Among the five major south Indian states, Telangana has the lowest debt to GSDP ratio of 25.3 per cent, followed by Karnataka (27.5 per cent), Tamil Nadu (27.7 per cent), Andhra Pradesh (32.8 per cent), and Kerala with (37.2 per cent) is at the bottom of this list," Ramachandran said.

Tamil Nadu had an outstanding liability of about Rs. 4.73 lakh crore at the end of March 2022 on funds raised through the issue of bonds, Ramachandran said.

"About 32.4 per cent, or about Rs 1.53 lakh crore, of the outstanding amounts are coming up for repayment by 2026-27. To bridge the gap between its income and expenditure or, in other words, fiscal deficit, Tamil Nadu borrows from the market through the issue of State Development Loans (SDLs) and other bonds," she added.

"SDLs form a major part of Tamil Nadu's total outstanding liabilities. According to the data shared in Reserve Bank of India's report, SDLs account for about Rs 5.32 lakh crore of the State's total outstanding liabilities of about Rs 7.54 lakh crore estimated at the end of March 2023," Ramachandran remarked.

"Outstanding debt of Tamil Nadu at the end of March 2024 is estimated to be 25.6 per cent of GSDP. Outstanding debt is estimated to increase to 25.9 per cent of GSDP at the end of March 2026," he said.

Widening the tax base, plugging the leakage are some of the concrete measures Tamil Nadu should implement to shore up its finances.

According to Seshadri, increasing the tax revenue does not mean hiking tax rates and other charges are like flogging the dead horse.

The tax revenue will increase only when industrial investments happen in the state.

Seshadri said that industrial investors are losing confidence in Tamil Nadu owing to 'agitation industry' or agitation politics played by DMK and its allies while in the opposition.

The shutting down of Sterlite Copper plant not only erased the investors’ confidence, but also a steady tax revenue of about Rs 8,000 crore to the state, Seshadri said.

When pointed out that it was shut down on pollution grounds and even the Supreme Court had ordered its closure, Seshadri said: "It is the state government that has to see factories do not pollute."

Similarly, DMK allies and other organisations are opposed to projects like nuclear power projects, India-based Neutrino Observatory, Colachel Port and others.

Stressing that widening of the tax base will happen only when industrial investments happen in the state Seshadri said the proposed investment by Hyundai Motor India is only an expansion and modernisation and there has been no major greenfield investment.

The contribution of the high profile committee of economists, formed by the DMK government soon after it came to power, is not seen much as hike rates and charges are no-brainer actions.

Seshadri has good words for the former Finance Minister Rajan who was recently shifted to a different department.

"I would rate Rajan at 8 on a scale of 10 points. He brought in transformational change in the system. He was able to reverse the revenue deficit," Seshadri said.

Seshadri said Rajan had openly voiced about the leakage in the system - for instance sale of liquor out of the state retail outlets- which resulted in huge loss of revenue.

"The leakage in the liquor sales could be about Rs 25,000 crore to Rs 30,000 crore. If this is brought under the system then the government can cut down its borrowings and boost revenue," Seshadri remarked.