“Looking beyond the white paper, any incoming Chief Minister will have many things to ponder about,” says Dr Kalaiyarasan, a faculty member in Economics at the Madras Institute of Development Studies (MIDS), at a talk organised by the think-tank Chennai International Centre.
Tamil Nadu generates about 75 per cent of its total revenue from its own sources and the rest comes from transfers by the centre through tax devolution and grants. Following the introduction of the Goods and Services Tax (GST), states are left with relatively few independent tax handles. Today, Tamil Nadu’s principal own-tax revenues comprise State GST (SGST), excise duty on alcoholic beverages, value-added tax on petroleum products, stamp duty and registration fees, motor vehicle tax, and a few other.
Understanding the Revenue Problem
The white paper points to the collapse in revenue generation. Total revenue receipts as a share of GSDP has fallen to 8.3 per cent. This implies that the state collects substantially less in revenue for every rupee of economic output it generates. The state’s own tax revenue to GSDP ratio has declined to 5.45 per cent. “Part of the problem is not only about leakages and corruption. It is also due to the federal structure of fiscal transfer to states,” points Kalaiyarasan.
Tamil Nadu’s share in central taxes has declined to 4.097 per cent. Out of the total tax the centre collects, 41 per cent is supposed to go to the states. But the effective transfer is only 36-38 per cent. According to Kalaiyarasan, Tamil Nadu’s fiscal concerns lies in the asymmetric federalism prescribed by the constitution. He argues that the state is disadvantaged by the finance commission’s formula for horizontal tax devolution. One of its key criteria is income distance, the gap between a state’s per capita GSDP and the average per capita GSDP of the three richest large states. Since the formula is designed to allocate a larger share of central taxes to poorer states, relatively prosperous states such as Tamil Nadu receive a smaller share of the divisible tax pool.
Challenges with Federal Funding
At 32,000, Tamil Nadu houses the highest number of factories in the country. It has a strong manufacturing and services base. However, it has one problem that bucks the historical trend. “The state got into electronics in a big way in the last five years. But the electronics industry does not generate as many jobs as the automobile sector used to. Our industrial composition has changed structurally from labour intensive to capital intensive,” highlights Kalaiyarasan.
This has triggered a job-creation problem, especially for the state which boasts of a gross enrollment ratio of 50 per cent in higher education. Added to this are increase in share of contract workers and an ageing population. “If someone becomes a chief minister, what are the instruments available to actually intervene and make the changes? That’s the issue now,” points Kalaiyarasan. An added challenge is the global uncertainty, AI and its impact on the job market. According to Kalaiyarasan, all this leads to another question of political legitimacy of growth. “If I have delivered double-digit economic growth and I am not getting a political return, what is my incentive? So, instead, I do welfare and attract voters,” he points. With little leeway, most states are coming up with some kind of cash transfer schemes which are also termed as compensatory transfer. These are unsustainable in the longer term. Clearly, politicians have a lot to think about in this regard.