August 22, 2021

TN: White Paper on State Finances & the Budget

Venkatesh Athreya

THE governor’s address to the Tamil Nadu state assembly, delivered soon after the formation of the DMK government following its massive victory in the assembly elections held last May, indicated that the government would place in the public domain a White Paper detailing the fiscal situation of Tamil Nadu in order to enable the members of the legislative assembly and the people to understand the true status of their government’s finances. This promise has been fulfilled, with the finance minister of Tamil Nadu, Palanivel Thyagarajan, known popularly as PTR, releasing the White Paper on August 9 at a press conference in Chennai, prior to the presentation of the state budget on the floor of the assembly on August 13.


The White Paper (WP hereafter) examines the trends in the finances of the government of Tamil Nadu between 2006-07 and 2020-2021. Of this period, the DMK was in government from 2006 to 2011. The AIADMK was in government from 2011 to 2021 with Jeyalalithaa as the chief minister from 2011 to 2016 December when she passed away, and Palanisamy thereafter. The WP, drawing on official data on state finances and budgets, notes that the financial situation of the state government had worsened in the period 2011-2021 as compared to the period 2006-2011.

The revenue deficit of the government of Tamil Nadu, which is the difference between revenue receipts (made up of state’s own tax revenue, central transfers and non-tax revenues of the state government) and its revenue expenditures (these are expenditures that do not create physical assets) has been widening over time, both in absolute terms and as share of the gross state domestic product (GSDP). The WP notes: ‘As a percentage of GSDP, the revenue deficit has increased from 0.18 per cent in 2013-14 to 1.95 per cent in 2019-20.’ This figure rose further to 3.16 per cent of GSDP in 2020-2021, the year of the Covid pandemic. The WP asserts, on the basis of these numbers, that Tamil Nadu is in an unsustainable fiscal situation. It draws the same conclusion by highlighting the fiscal deficit numbers for the state. It does not, however, question the logic of the Fiscal Responsibility and Budget Management (FRBM) Act at the national level, and the corresponding restrictions placed on the level of the fiscal deficit as share of GSDP.

Successive governments of Tamil Nadu have had to finance the rising revenue deficits by borrowing. The WP notes that, as a result, the overall debt of the government of Tamil Nadu has been rising rapidly, especially over the last five years, both in absolute terms and as a share of GSDP. Between 2006-07 and 2010-11, the ratio of government debt to GSDP remained fairly stable, declining from 18.37 per cent in 2006-07 to 16.68 per cent in 2010-11. The ratio remained stable through the period from 2011-12 to 2015-16, between a low of 15.36 per cent in 2011-12 and a high of 17.94 per cent in 2015-16. However, since then the ratio has increased sharply, jumping to 20.83 per cent in 2016-17 and further to 24.98 per cent in the revised estimates for 2020-21 and to 26.69 per cent as per the estimates of the interim budget for 2021-22 presented by the previous government in February last.

The revenue receipts of the state government as a share of GSDP have declined steadily from a peak of 13.35 per cent in 2008-09, falling below 11 per cent in 2015-16. It has declined further to 8.70 per cent in 2020-21, and has averaged less than 10 per cent for the period 2016 -2021. The WP notes that the State’s own tax revenue (SOTR) has declined as a share of GSDP from 8.4 per cent in 2013-14 to 5.8 per cent in 2019-20 and further to 5.4 per cent in 2020-21. It points out that non-tax revenue as a share of GSDP has declined, averaging only 0.71 per cent between 2016 and 2021 as against 1.02 per cent between 2006 and 2011 and 0.81 per cent between 2011 and 2016. Another important source of state revenue, namely the state’s share in central taxes, has also declined from nearly 1.95 per cent of GSDP between 2006 and 2011 to 1.67 per cent thereafter.

The revenue expenditures have continued to grow. For the entire period from 2006 to 2021, the rate of growth of revenue expenditures at 12.71 per cent per annum has been distinctly higher than the rate of growth of revenue receipts at 9.92 per cent, with the result that the revenue deficit has been widening as a share of GSDP.

The WP correctly points out: The increasing proportion of cesses and surcharges levied by the government of India which are not sharable with the states is a serious source of concern. The proportion of cesses and surcharges has gone up 50 from 10.4 per cent in 2011-12 to 20.2 per cent in the Revised Estimates for 2019-20. These cesses and surcharges are not shareable with the states.  (Italics added).  The WP also draws attention to the increasing share of grants in aid component in central transfers to Tamil Nadu as a process that undermines the fiscal and policy autonomy of the state government. It also notes the failure of the union government to pay GST compensation due to the state.

The WP notes that national and even international factors play a role in determining the economic growth in a state, making references to the 2008-09 global financial crisis and the Covid pandemic. It also correctly states: “At the national level, the economy has been in a secular decline starting with the Demonetization of 2016. The hurried adoption of GST further exacerbated the downturn...” But it also concludes without offering much evidence that: ‘… the lack of fiscal discipline and management, which is beyond doubt, when compared to other affluent States in India, played a significant role in our economic and growth decline.’ It also states: “Most of our current problems are the result of a lack of proper governance, especially over the last seven years, as evident in the data presented in this report.”


The WP declares: Business-as-usual cannot continue, and our approach must fundamentally change if we are to break out of this vicious cycle of increasing debt and interest costs. On the other hand, this is an opportunity to effect “once in a generation” reforms, many of which should have been undertaken years ago by any responsible Government. (Bold in original)

This declaration can be easily misread. There was a concerted effort in the corporate media to read into the WP a call for drastic neoliberal reforms. The chorus needs to be noted.

The WP has performed a useful task in collating available materials on the state of state finances in Tamil Nadu. Its stated commitment to transparency and its desire to promote public debate on the issues at hand are commendable. Yet, one cannot help feeling that while the WP itself is guarded in not putting forward unambiguous and categorical suggestions on how the issues identified are to be tackled, there seems to be an implicit commitment to fiscal fundamentalism and the neoliberal obsession with reducing the fiscal deficit.

The WP does not adopt a critical attitude to the FRBM Act. It does not mount a sharp critique of the many moves of the Union government that seek to restrict the fiscal powers of the state governments. It does not foreground the potential and possibilities of joint action with like-minded state governments in improving state finances by reversing some of these moves. It does not call for accountability in evaluating the numerous concessions given to the corporate sector by state and central governments or propose the presentation of a White Paper that can inform the public of the assumed versus actual costs and benefits of incentives to investment by big business. Surely, these concessions have had and will have impacts on the state of state finances!

The possibility of turning around loss making units in the state public sector through elimination of corruption and clean administration as well as adequate technological and marketing support, as has been successfully demonstrated by the LDF governments in Kerala, is not alluded to in the WP. The principle of cross subsidisation and the recognition that public sector undertakings cannot be evaluated purely in terms of commercial profitability given their social objectives must inform the response of the state government when it addresses some of the issues identified in the WP.  

The issues of government debt and revenue deficits should be understood in a larger perspective. If one looks at the numbers in the WP itself, it is only the figures for 2020-2021 (and, to a lesser extent, for 2019-20) that are way out of line with the numbers for earlier years. The debt to GSDP ratio cannot be viewed in isolation nor merely in terms of the letter of the FRBM Act. Ideally resources should be raised from the rich to finance public spending that addresses the needs of the working people who produce the wealth of the country, but receive a relatively small part of it as wages and incomes, and pay sizeable indirect taxes already. However, the state governments are greatly constrained by the nature of the union-state financial relations and hemmed in by restrictive legislations such as the FRBM Act. These realities need to be recognised, but not necessarily surrendered to abjectly. The task of mobilising the people against the unjust and unequal dispensation is also not to be forgotten!

PTR presented the state budget on August 13. It was more of a holding operation, for the remaining months of the present financial year. But it was a noteworthy budget for not giving in to strident neoliberal demands for imposing tax burdens across the board and an end to “populism”, the neoliberal curse word against all welfare measures! An especially important feature of the budget was the reduction in state taxes on petrol, reducing the price of petrol by Rs 3 a litre, a very bold move considering the financial constraints that the state is facing. This will provide much needed relief to the people. It will also put the union government on the back foot on this important issue. Beyond this, the budget has announced the formation of some committees that will look into issues raised in the WP. In an essentially half-year budget, the minister may not have felt that there is scope for doing much more.

The separately presented budget for agriculture and allied activities was disappointing for the very small increases in MSP for paddy and sugarcane that it announced and for its overlooking many suggestions for the welfare of farmers that had been submitted to the ministry. Also disappointing was the absence of any reference to and measures in support of the agricultural labourers at a time of crisis for the rural economy.