A healthy ‘white paper’ beginning

A healthy ‘white paper’ beginning

Tamil Nadu’s analysis of its financial situation is erudite and honest and could help steer the State back on track.

The Finance Minister of Tamil Nadu, Palanivel Thiaga Rajan, on Monday, unveiled a 112-page ‘White Paper’ on the fiscal situation of the State. It is perhaps a first in recent times that a State government in India has published an erudite and honest analysis of its economic and financial situation, which is laudable.

The lowdown

But for citizens of the State, it was not good news. The report essentially said that the State is deep in debt, with falling revenues, rising expenditure and declining investment. The average family in the State pays roughly ₹1 lakh in all taxes every year to the State and the Union government and receives ₹1.6 lakh worth of subsidies and services (health care, transport, education, water, power, etc.) every year. The gap between revenues and expenditure is funded through loans and the State carries a consolidated debt of ₹2.6 lakh per family.

Tamil Nadu Chief Minister M.K. Stalin has an onerous responsibility to pull the State out of this dire financial situation that has been made even worse by the COVID-19 pandemic. As the White Paper surmises, the only solution is for the State government to raise more revenues and be more efficient in expenditure. But that is easier said than done.

Any State government raises revenues through tax and non-tax sources, with typically more than three-quarters coming from direct and indirect taxes. But after the introduction of the Goods and Services Tax (GST), elected State governments in India do not have the powers to raise income or sales tax revenues on their own and are beholden to the Union government. These constitute the bulk of tax revenues.

Under State control

Taxes on property, fuel and alcohol are the only remaining domains that are under the direct control of the State government. But the Narendra Modi government has already burdened the average Tamilian with ₹32-₹33 of cess on petrol and diesel, which it collects for itself and does not share with the State government. It is thus virtually impossible for any State government to levy any more fuel taxes on people. So, realistically, the only immediate option available for Mr. Stalin to raise additional revenues is through property taxes, which is what the White Paper justifiably alludes to.

Property taxes are progressive and fair since they do not impact the poor as much as the rich. The White Paper argues that there is gross under-collection of property taxes by the urban local bodies due to non-revision of property tax rates, improper assessments and under-valuation. The 2016-17 Economic Survey of India authored by the then Chief Economic Advisor to the Modi government and a current member of Stalin’s economic advisory council, Arvind Subramanian, had a detailed chapter on property taxes that used innovative techniques of satellite imaging of built-up areas of buildings in a city and estimated that in urban cities such as Chennai, there is a potential to collect four to seven times more in property taxes than is being collected today. The White Paper acknowledges such ‘a large untapped potential of property tax collection’ so vociferously, that it repeats this phrase multiple times.

Focus on local bodies

More encouragingly, the White Paper also highlights the importance of the devolution of powers to local bodies. The ‘Kerala model’ of efficient social welfare and disaster handling is much touted by policy economists. Much of it is owed to the robust local body governance infrastructure of Kerala. As the White Paper illustrates, it is no coincidence that Kerala has the highest allocation of expenditure for local body councils among all the States of India. Tamil Nadu ranks second and enabling local governments to garner additional resources through more property taxes will further strengthen local body administration in Tamil Nadu. Beyond improving property tax collections, there is not much else that the Tamil Nadu government can do to raise revenues on its own in a GST regime, save for some disinvestments over the longer run.

COVID-19 has dented economic growth severely in Tamil Nadu and the rest of the country. Such crises typically call for an expansion of government spending to propel an economic recovery through what economists call a ‘Keynesian multiplier’ effect. Surprisingly, growth in Tamil Nadu’s revenue expenditure has been declining over the last five years while capital expenditure has been reasonably steady.

Issue of subsidies, GST spoke

The White paper raises concern over the large amount of subsidies incurred in power, water and transportation. While there may be some room for efficiency gains in subsidy expenditure through better targeting, it may perhaps be a bit risky to cut subsidies or expenditure drastically during a pandemic-induced economic crisis. COVID-19 has not only ravaged most economies across the world but also sharply exacerbated inequalities between the rich and the poor, within countries and across. Poor people have suffered far more than the well-to-do and it is the poor that benefit the most from subsidies.

If any, most economists argue for greater capital expenditure by the government to tide over the current precarious economic situation. Higher public investment in infrastructure has been the time-tested economic cure for such crises. Expenditure management will call for a deft balancing act by Mr. Palanivel Thiaga Rajan to improve expenditure efficiency without sacrificing the positive ‘multiplier’ impact of government expenditure.

The real bugbear in India’s fiscal federalism has been GST. It is now safe to conclude that GST has been a political, economic and administrative disaster, with none of the touted economic benefits coming to fruition and fracturing Union-State relations in the process. The White Paper is absolutely correct in questioning the future of GST and raising genuine concerns over its viability. The only case for GST to continue now seems to be similar to the Churchillian case for democracy — ‘it is the worst except for all other forms’. Ironically, it was Mr. Stalin’s father, M. Karunanidhi, as the Chief Minister of Tamil Nadu in 2009 who objected to the introduction of GST and warned of a ‘daring leap of faith about its potential’ in a letter to then Prime Minister, Dr. Manmohan Singh.

Since the time of Chief Minister Kamaraj in the 1960s, Tamil Nadu has been the torchbearer of inclusive economic development in the country, with its unique model of generous State welfare, copious private investment and efficient public services. The White Paper clearly articulates how the last few years have been an aberration, causing Tamil Nadu to veer off that track. Chief Minister Stalin and his government have an enormous and an arduous responsibility to steer the State back on track. They are off to a sincere start, and hopefully, Mr. Palanivel Thiaga Rajan will be able to release a Pink Paper’ in 2025 to showcase Tamil Nadu in the ‘pink of economic health’.