Former Tamil Nadu chief minister J Jayalalithaa has left a legacy of public policy that encourages welfare measures like the distribution of many subsidised commodities such as rice in PDS shops, laptops, bicycles, books, notebooks, mid-day meals to schoolchildren and highly-subsidised electricity tariffs, to name a few. She also promised to give mopeds to working women, a mobile to members of self-help groups, etc. Sustaining such largesse from the State would be a challenge for the new dispensation in the government.
The post-Jayalalithaa scenario in Tamil Nadu politics is quite charged. If Sasikala Natarajan is accepted as the general secretary of the AIADMK , it would be the first time that the chief of the ruling party is not the chief minister of Tamil Nadu. With O Panneerselvam as chief minister and Sasikala as AIADMK general secretary, there will be two power centres and they have to be interdependent in running the government and the party. The AIADMK’s governance for the next four years will be a litmus test for both Panneerselvam and Sasikala in their respective roles.
With the BJP in New Delhi, the political relationship with the Centre is tricky and managing it will call for astute political skills . This is specifically required in the sphere of economic policy-making and administration where the AIADMK, of late, has been invoking fiscal federalism and independence of states in revenue mobilisation and expenditure responsibilities.
With regard to recommendations of the 14th Finance Commission and the declining plan grant after the scrapping of Planning Commission, Tamil Nadu has criticised the Centre for declining financial transfers to it. The AIADMK was the only party that stayed away from voting for the constitutional amendment to replace existing commodity taxes with the Goods and Services Tax (GST), arguing that GST takes away the tax powers of the states and would reduce the revenue capacity of exporting states such as Tamil Nadu.
In the next few years, the state government will face many economic challenges. Some of the freebies, which involve substantial public expenditure, were promised in its election manifesto during the assembly polls in May. Finding additional revenue to finance these expenditures would be testing the financial acumen of the chief minster who also holds the portfolio of the finance minister.
The fiscal deficit of Tamil Nadu has been rising in recent times and has been closer to the limits set by the Centre. The fiscal deficit for 2016-2017 is estimated as Rs 40,533.84 crore, which is 2.96% of the gross state domestic product (GSDP). Therefore, raising additional revenue through borrowing is impossible. Further, in the context of implementing the GST and stricter prohibition through a reduction in the number of liquor shops every year (which was an election promise), mobilising additional tax revenue is difficult.
Another way to finance the new expenditures is to reduce the existing expenditures. But that door has also been closed.
Jayalalithaa, in her submission to the Centre on June 14, wanted: (a) substantial changes in the UDAY (Ujwal DISCOM Assurance Yojana) scheme for reforming the power sector so that the debt burden is distributed between the Centre and state, as well as favourable conditions for floating bonds by the state; and, (b) the National Food Security Act (NFSA) to accommodate changes to facilitate Tamil Nadu to continue its distribution of free rice to all households.
Tamil Nadu has accepted the UDAY scheme with a caveat that periodic revision of power tariff will not be done. This has already increased the interest payment of the state government, because as per the UDAY scheme, it has taken over Rs 20,000 crore as loans against the state’s power distribution company.
The acceptance to implement the NFSA drastically reduces the quantum of the subsidised rice and paddy from the Centre to the state. The State has decided to continue with its distribution of free rice to all households and this is expected to increase the public expenditure on food subsidy by Rs 2,730.95 crore, in addition to existing PDS subsidy of ₹2,393.30 crore.
The state’s finances will be further strained by the Seventh Pay Commission. With the general elections due in the next two years, the state government is expected to constitute the 7th pay commission in the state and implement its recommendation. This will also increase the state expenditure. The UGC has already constituted the pay commission, and if its recommendations come into force, Tamil Nadu ,with a large number of State-owned higher educational institutions, would increase the salary grant to colleges and universities from the state government in perpetuity.
The state government now should convince the people about the need to rationalise the existing public expenditure, increase public revenue through higher taxes and user charges. This is a task that requires not only charismatic leadership but also functional efficiency in conducting public policy. This is further riddled with the divided power between the chief minister and party chief.
R Srinivasan is associate professor in econometrics, University of Madras, Chennai
The views expressed are personal