Published Date: March 20, 2017
Hon’ble Speaker, I’d like to now continue my remarks in English to use the time allocated to me most efficiently. I want to cover only three topics during my brief remarks:
1) My concerns about the availability and quality of financial data from the Finance Department
2) Some Macroeconomic indicators which suggest that the Government may be facing a looming crisis, AND
3) A few suggestions for concrete steps that the State should undertake to improve the situation
Availability & Quality of Tamil Nadu’s Financial Data
You may recall that during my remarks on the Amended Budget last year, I commented on the Government missing its Budget targets for Commercial Taxes and Capital Investments. To analyze this issue in greater depth, I tried to find the detailed Financial data on the Government’s website. To my surprise, I found that there was no Financial data published after September 2011! There is highly detailed (to the granularity of line items within Departments) data from 1987 through September 2011, but none after that. In a Democratic Republic, it is not fitting that such data is only available to MLAs or Government Officials, but not available to all citizens who want to understand how their elected Government is performing. Therefore, I request the Hon’ble Finance Minister, who has very recently assumed this portfolio, to correct the mistake of his predecessor and ensure that all Financial data starting from September 2011 – up to and including those contained in this current budget – is published on the Government’s website as soon as possible.
Without recourse to online data, I collected copies of old budget books from various sources, and the analysis of the collated data showed significant deterioration over the last 3 years on a few dimensions:
1) Forecasting: Increasing variation between the Forecast prepared under the MediumTerm Fiscal Plan (as required by the TN Fiscal Responsibility Act (TNFRA) of 2003), and the Budget (B.E.) presented by the Hon’ble Finance Minister in the subsequent year
2) Execution: Increasing variation between the Budget (B.E.) presented by the Hon’ble Finance Minister for a Fiscal Year, and the first Revised Estimate (R.E) of actual performance presented during the next year’s Budget Session,
3) Estimation & Closing Accounts: Increasing variation between the Revised Estimate (R.E.) presented and the Final Account (F.A.) posted a year later.
I say these weaknesses have developed only in the last 3 years because I have analyzed many years’ data, covering both DMK & ADMK regimes. To avoid accusations of playing politics, I will state only one example of each here – Strong abilities (2012-2013) & Weak ones (2015-2016) – both from within the last ADMK regime. But there are many such examples of strong abilities (prior to 2014) and weak ones (after 2014) – and I will provide such examples as part of my package to be delivered to you this evening.
1) Let us consider just one measure – State’s Own Revenue Receipts for the year 20122013 (please refer to Table 1) where the entire variance between Projection & Final Account (F.A.) is roughly about + 3.5% of the Projection. This gap can be further explained as:
a. The variation between 1-year in advance Projection & Budget Estimate (B.E) is around 3% of Projection (Budget is higher than Projection – State Gains)
b. The variation between Budget Estimate (B.E.) and Revised Estimate (R.E.) is roughly 3.5% (R.E. even higher than B.E. – State Gains even more)
c. Finally, the variation between Revised Estimate (R.E) and Final Accounts (F.A.) is roughly -3% (F.A. lower than R.E. – State loses some of the upside, still finishes better than projection by roughly 3.5%)
2) Now let us consider the same measure – State’s Own Revenue Receipts for the year 2015-2016 (please refer to Table 2) where the entire variance between Projection & Final Account (F.A.) is roughly around - 20% of the Projection. This gap can be further explained as:
a. The variation between 1-year in advance Projection & Budget Estimate (B.E) is around -6.25% (State Budgeted to get less than Projected)
b. The variation between Budget Estimate (B.E.) and Revised Estimate (R.E.) is roughly another -9% (State seems to have gotten even less than Budgeted)
c. Finally, the variation between Revised Estimate (R.E) and Final Accounts (F.A.) is roughly another -6% (F.A. is even worse than R.E. – State has lost at each stage)
Let me state this another way, the variation between the Revised Estimate and Final Accounts for 2015-2016 are not just large, but also impact the quality of the performance noticeably. Consider the Revenue Accounts for 2015-2016, which went from a Projection of Rs. 783 Crores Surplus, to a Budget Estimate of Rs. 4,616 Crores Deficit, to a Revised Estimate of Rs. 9,481 Crores Deficit, to a Final Account of Rs. 11,985 Crores Deficit! Also, based on the Revised
Estimate (R.E.) roughly 64% of the Fiscal Deficit was used to finance Capital Investment, and only 36% was to cover the Revenue Deficit. However, the Final Account (F.A.) now shows that while the Fiscal Deficit was largely unchanged at around Rs. 32, 650 Crores, only 58% of this Fiscal Deficit was used for Capital Investment (since that number was revised down by roughly Rs. 1,650 Crores), and 42% was used to cover the Revenue Deficit (which was revised up by almost Rs. 2,500 Crores)!
Based on this track record, we must assume that the Revised Estimates (R.E.) supplied for the current year 2016-2017 along with this Budget are poor indicators of where the Final Account (F.A.) will end up – with the only guarantee that the performance will be much worse than currently stated. Such an outcome would also explain some otherwise strange patterns between the Estimates at Half Year (published February 1st 2017) and the Revised Estimates published here – where some trends stay completely unchanged, and some change like night and day! In the interest of time and collegiality, I will leave those for other Hon’ble Members to address during their remarks as part of this debate.
I therefore reiterate the request I made the former Hon’ble Finance Minister Thiru OPS in July last year. Please set a target for accuracy for the Finance Department with respect to Forecasting, Execution, and Estimation & Closing Out Accounts. They must re-discover the skills they had for many years up until 2014-2015!
Signs of Macroeconomic Problems
Let me now turn to the Financial Health of our State, and some worrying trends (please refer to Graphs 1 – 3 for these details):
1) For the past few years, the State’s Revenue Receipts have been growing below the level of economic growth as defined by Gross State Domestic Product (GSDP) growth. 2) Within Revenue Receipts, the State’s Own Tax Revenues (SOTR) have been growing the slowest of all streams 3) Within Revenue Expenditures, Interest Payments are growing fastest of all categories
I make no attempt to politicize this issue, as the entire 5-year period – covering both nonproblematic and problematic periods – was under one (ADMK) administration. However, because of these trends, we have 3 major problems:
1) The State’s Revenues have dropped from around 15% of GSDP in 2011-2012 to just under 11% last year (R.E.) and is forecast to stay around this level for this year (B.E.) and the next couple of years after that (as stated in the MTFP). (Please refer to Graph 4)
2) To cover this growing Revenue shortfall, the State has been forced to increase borrowing to enable spending, leading to rapid increases in deficits and net debt. The overall Debt to GSDP ratio declined form roughly 28% when the TNFRA was implemented in 2003-2004, to a low of around 17% in 2014-2015, before climbing
rapidly back to almost 21% this year (2016-2017 R.E.) and is on track to head back up to 22.5% by 2019-2020 (as stated in the MTFP). (Please refer to Graph 5)
3) As an ex-Investment Banker, I am certainly not against Debt per-se. And as I have said before, it is appropriate that developing countries finance growth with debt – within reason. But what worries me much more as I stated last year, is the increasing burden of interest payments – which if not controlled, can lead to the vicious cycle of a Debt trap – where we are borrowing largely to pay ever-increasing interest. It is worth noting that Annual Interest Payments amounted to almost 20% of Annual Revenue Receipts when the TNFRA was implemented in 2003-2004. That was gradually brought down by both DMK & ADMK regimes, to a low of just under 11% in 2012-2013. But it has since risen to almost 15% (2016-2017 R.E.) and is slated to jump to over 17% in the next 2 years per the MTSB presented with the Budget. (Please refer Graph 6).
The worst part is, these 2017-2018 estimates are even before including the impact of the implementation of the 7th Pay Commission guidelines. Incidentally, the lack of a provision for this impact on Salary & Pensions in the current budget (with a statement that the effects are provisioned for in the next 2 years starting 2018-2019) is itself quite curious, as the Hon’ble Chief Minister has given the relevant Committee a deadline of June this year to finalize their work. Does this imply that despite the committee finalizing the increments by June 2017, incremental payments will not happen till the 2018-2019 Fiscal year? But if so, surely the accrued dues will be much higher assuming the TN Government uses a retrospective effect date anywhere close to the Central Government’s? However, I will leave that also for someone else to debate in detail.
Suggestions for New Approach
I would like to conclude my remarks instead with some concrete suggestions for how we can improve our situation as a State. It is easy to criticize others, and especially to criticize the Government if one is in the opposition. However, as I said before, I am not here to practice adversarial politics. As a concerned citizen and as the elected representative for Madurai Central, I am duty-bound to make concrete suggestions for how we can improve our situation.
We must first admit that we have a serious Tax Revenue problem. In developed economies, annual Tax Collections are around 20% of the Economy (as measured by GDP/GSDP). We used to be at around 15%, but are now headed for 10%. We must solve this problem first, because the Government cannot spend what it doesn’t earn indefinitely – or it will fall into a Debt trap. There are at least 2 aspects of Government Policy in the last few years that could have made this situation worse:
1) The increase in State Commercial and other Tax Rates. There is a classical model of Overall Tax Revenues as a function of Tax Rates called the Laffer Curve – which I have attached a copy of as Figure 1. This principle drove much of US President Ronald Reagan’s policies when he successful overcame Stagflation (High Interest Rates and Low Growth) along with the Federal Reserve Banks’ then Chairman Paul Volcker. It shows that raising tax rates above a certain level can lead to a reduction in overall Revenue. This kind of model is particularly relevant to us because we are one State amid many neighboring states, and there is plenty of room for Location/Tax arbitrage. Also, the ominous shadow of Corruption can easily occupy the space between high tax rates and tax-avoidance.
2) The steep increase in Guideline Values of Land across the State. Similar to the Laffer Curve effect, but this time in conjunction with an otherwise cooling real estate market, this action may have contributed to an overall decline in transactions – which will result in not just lower revenues for the State, but also less/slower economic activity due to a reduction in the number of transactions.
The impending implementation of GST gives us both the impetus and the opportunity to fundamentally review and overhaul the entire Tax Structure, and I would urge the Hon’ble Finance Minister to consider creating a Task Force of Officials, Elected Representatives, and Professional/Industry Group representatives to take up this review in a non-partisan manner. The clear and quantifiable goal must be to ensure Revenue growth is higher than GSDP growth (as in the past) and that Revenue Receipts reach a minimum of 15% of GSDP within a few years.
Restructuring of Debt
This Budget estimates that the Net Debt of the State will be Rs. 3.14 Lakh Crores by this yearend, (which will almost certainly be well exceeded in the Final Accounts), almost triple the roughly Rs.1 Lakh Crores as of March 31st 2011. While this is an alarming rise in the level of Debt, it may not be destructive by itself at this level (around 21.25 % of GSDP).
What is much more problematic is the magnitude of our Interest Payments, which are set to eat up 20% of our Revenue Receipts soon. While fixing the Revenue-Growth problem will alleviate this somewhat, we cannot afford to wait too long for improvement and flexibility. This is especially true as our net interest rate appears to be around 8% today, when the Global Rate Curves are still at historic lows – in fact hovering around 0 – 1% in much of the developed world. What happens when interest rates rise around the world – which will most likely happen soon absent an unexpected Global Recession, which would of course be even worse for us.
The Hon’ble Finance Minister has mentioned how the UDAY scheme left us with an unexpected additional debt load. That should be the trigger to look for a counteractive one-time restructuring as well. Therefore, I urge the Hon’ble Finance Minister to undertake a detailed study, with the appropriate support, of how we can bring down our Annual Interest Payments –
either through innovative re-financing of the overall debt to lower the effective interest rate, or even the possibility of reducing the overall debt load through asset sales or other innovative methods (which would yield the corresponding benefit of eliminating the interest payments on the debt repaid).
VAT on Petrol & Diesel: Fairness in Taxation / Growth Impact of Taxation / Maintaining Optionality for uncertain times
I want to address one final important issue here – and that is the complex question of fairness in Revenue Generation, which also touches upon the question of whether certain taxes hinder growth more than others, and which also includes some features of retaining optionality for dealing with unexpected difficulties/circumstances.
As you well know, the Central Government has basically been using large increases in the Excise Duty on Diesel and Petrol to manage its Finances over the past three years. The consequence of this is that the price of Petrol & Diesel at the pump today, is roughly where it was during the last few years of the UPA regime of 2009 to 2014 – despite the average price of Crude Oil in those days being over USD 100/Barrel, while the last 3 years have seen an average price closer to USD 50/Barrel (or less than half the 2011 to 2014 average).
This policy of the Central Government has 3 distinct negatives:
1) Excise is a form of Indirect Tax, which is always regressive, unlike Direct Taxes such as Income Tax which are progressive (richer people pay higher tax rates). Regressive taxes are inherently unfair as poorer people will pay more of this tax as a % of their income, compared to richer people.
2) Diesel, and to a lesser extent Petrol, form a large portion of the input costs of various industries and trades – such as farming, fishing, small traders (transportation costs), etc. – which are central to our Economy. As such, higher prices on these products will either cut into the earnings of these trades/sectors, and/or be passed on as higher prices for products such as vegetables or milk – contributing to inflation.
3) By keeping Taxes so high on these products when Crude Oil is still in the USD 50 to 60 /barrel range, the Government is leaving itself no room to adapt if Crude Oil goes back to USD 75 or 80, let alone the USD 110 of 2013. If that happens, the Government would find itself with a dilemma: Allow the prices for these critical inputs to rise to previously unseen levels, OR give up Revenues already accounted for in the Budget. I attach a graph showing Crude Prices over the last few years (please refer Graph 7) and an analysis of the dilemma between record-high prices vs. sacrificing budgeted revenues for your consideration (please refer Table 3).
Our Hon’ble Finance Minister has also recently adopted this approach by hiking the VAT on Diesel & Petrol. Considering these concerns, I urge him to include these issues in the mandate
of the Revenue Task Force I suggested earlier, and try to come up with an overall Revenue Generation Model for the State which improves fairness, has the least impact on input costs and inflation, and allows room for the Government to deal with any future increases in the price of Crude Oil. I would also suggest that innovative approaches such as Progressive Indirect Taxes, which have been successfully implemented by the pioneering policy standout of Singapore, be considered as options during this strategic review.
Having made these suggestions, I will go one step further and say that I am happy to help the Hon’ble Finance Minister with the implementation of these or any similar approaches to try and improve the State’s Financial Position, despite being an opposition member. As my Party’s Working President and this House’s Opposition Leader Thalapathyiar has stated, we are not here only for partisan politics. We want to function as a responsible and constructive Opposition in keeping with the best traditions of Democracy.
With that, Hon’ble Speaker, I will conclude my remarks. I thank this house for the opportunity.