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Tamil Nadu's economic agenda -- Time for `power'ful decisions

N. Ramakrishnan

THE AIADMK is back in power in Tamil Nadu and Ms Jayalalitha has assumed charge as Chief Minister. When she gets down to business in the next few days, she will realise that she has a heavy agenda ahead of her as far as the State's finances are concerned . Delaying decisions on issues affecting the financial health of the State will only push Tamil Nadu further into the morass. The problems are known, so are the solutions. But what is needed is the political will to implement the solutions. Will Ms Jayal alitha have the will and the inclination to take tough decisions, ones in which even her own allies are bound to oppose her, not to mention the Opposition?

Quick decisions on these issues become all the more important as competition among the southern States is intense. Moreover, all eyes will be on the new government and it needs to act fast if it is to remain in the race with Andhra Pradesh and Karnataka to attract investments, especially in the knowledge-based information technology and biotechnology sectors.

True, the AIADMK has come to power highlighting the plight of industries traditional to Tamil Nadu -- textiles and the small-scale units -- and promised measures to revive them. Another of its planks was the falling prices for farm produce and the impact on farmers and farm labourers. Some of the measures needed to set right the State's finances will definitely run counter to its election promise. But the Government has to decide whether it will let the finances deteriorate further or take immediate correctives to revive the State's economy.

A revenue deficit of about Rs 4,000 crore, mainly because of the unlimited subsidies, will be one of the first, and important, problems that would have to be tackled. The Centre has asked the States to achieve zero-revenue deficit by 2005. If Tamil Nadu is really serious about this, it has two options. One, increase revenues. And, two -- this is more important and calls for a lot of political will -- reduce expenditure. The letter can be achieved by cutting down subsidies, targeting them better and e nsuring that they reach only the deserving.

Tamil Nadu's revenue deficit is estimated to be 2.7 per cent of the State GDP which, according to experts, is ``quite all right''. But the worrisome part is that this deficit is caused mainly because of the subsidies -- on the public distributi on system, transport, power -- and a plethora of welfare schemes. In 1999-2000, the State's revenue deficit, as a percentage of revenue receipts, was 22.48. This no doubt compares favourably with States such as West Bengal (70.67 per cent), Maharashtra (38.86 per cent) and Kerala (28.4 per cent), but poorly vis-a-vis Gujarat (19.04 per cent), Andhra Pradesh (15.61 per cent) and Karnataka (12.01 per cent).

Given that Tamil Nadu is one of the most heavily taxed States, it will be all the more difficult for it to increase revenues through fresh taxation. Buoyancy in commercial tax collections, the mainstay of the State's revenue sources, aided by some measur es to further tighten the collection machinery, may increase revenues from this source marginally. Last year, the commercial tax collection was about Rs 8,000 crore, with petroleum products and alcohol contributing almost 20 per cent each. In normal time s, tax collection increases by about 10 per cent annually. Therefore, in such a situation, the Government has to seriously look at cutting down on expenditure.

This is what a mid-term appraisal of the Ninth Plan had to say vis-a-vis the States: ``The States need to take some tough decisions such as freeze on new hiring, restructuring of the power sector, increasing user charges at various levels, liquidation or privatisation of several public enterprises, tax reforms and above all better governance. The adjustment process would be painful, but not adjusting would be more so''.

Therefore, attacking the subsidies will appear to be the most pragmatic solution to achieving a phased reduction of the revenue deficit. But this calls for much political will and consensus, both of which appear difficult given the situation in the State . Though the AIADMK has been swept back to power, it is unlikely that tough decisions will be forthcoming within six months. The reasons: Ms Jayalalitha has to seek election to the Assembly within six months. And, local body elections are due in about si x months and Ms Jayalalitha would not like to give her political opponents a stick to beat her with. It is pointed out that if a government does not take what appears to be unpopular decisions within the first six months of assuming office, it is unlikel y to do so at a later date.

To top it, both the DMK, now in Opposition, and the AIADMK, the two main parties in the State, made no mention of the State's finances or what the welfare schemes were doing to the State in their election manifestos. And, given the animosity between the two, it is unlikely that the Opposition will agree to even sit across the table to discuss the State's finances.

The burden on the exchequer on account of supplying rice at subsidised prices through the public distribution system is expected to go up from Rs 1,700 crore to Rs 1,850 crore this year. Experts feel that this figure can be cut by half if the subsidy is targeted better. In the last five years, it is estimated that more than 50 lakh people have crossed above the poverty line. Therefore, supplying subsidised rice to only those below the poverty line will help reduce the subsidy burden. Moreover, as the Mi d-term Appraisal of the Ninth Plan points out, the PDS emphasis should be to shift from providing food subsidy to stabilising food prices and assured availability with effective targeting of subsidy.

As important as the food subsidy is the free supply of power to farm pumpsets and subsidised supplies to domestic connections. This has resulted in the losses of the Tamil Nadu Electricity Board (TNEB) mounting to a point where if something drastic is no t done, it may not be long before it finds itself unable to pay salaries or settle its bills. The loss from free supply to pumpsets is estimated to be about Rs 2,000 crore and that due to subsidised domestic supplies, where the tariff starts at 65 paise per unit in a slab system and goes up to Rs 3.05, another Rs 1,000 crore. Of this, the TNEB is compensated only for Rs 350 crore a year through budgetary support -- Rs 250 crore as tariff compensation and another Rs 100 crore as share capital.

The TNEB offsets the losses to some extent by cross-subsidising. That is, it levies a higher tariff on the commercial and industrial sectors. However, this cannot go on forever as milking the industrial consumers any further will not only make the indust ries more uncompetitive, but also result in more of them switching to captive power generation. The way out for the TNEB is tariff rationalisation and charging all users.

Against an average cost of generation of around Rs 3 per unit, the average realisation is only about Rs 2.20 per unit, which means the TNEB loses 80 paise on every unit of electricity it sells. This year, the TNEB will have to buy power from three more p rivate power projects, thus pushing up its cost of power purchase. And, if there is no tariff rationalisation, the losses will mount. As it is, the losses are expected to go up to about Rs 3,000 crore this year from about Rs 2,000 crore last year, mainly due to the higher cost of power purchase, increase in coal costs and railway freight charges, hike in fuel oil prices and annual increase in its wages bill.

Tamil Nadu is one of the States that still supplies free power to farm connections despite there being a consensus at the national level to levy a minimum tariff of 50 paise a unit. The TNEB's problems are further compounded as the growth in industrial c onsumers has been almost flat while the agricultural sector, the non-paying category, has been growing.

The problem for the power sector is that there has been no serious effort to convince the consumers that the free supply of power cannot go on forever. In this connection, experts point out that the government has been quite successful in levying user ch arges for drinking water supply at least in the urban areas. The reason for this, they say, is that the urban consumers are not as politically organised as the farmers.

Ideally, the TNEB would like an annual increase of about 12 per cent in tariff, but in the last five years the tariff has been revised only three times. The last tariff revision was in January 2000 and no tariff revision can be expected for the next few months. Which means the revision will come more than six months behind schedule for the TNEB. There have been occasions when the tariff has been increased by 17-20 per cent and that is what the power sector managers will be hoping for this time too.

Yet another area crying for immediate attention is the transport sector. Time was when Tamil Nadu's public transport system was rated the country's best. However, over the years this has deteriorated such that the State transport undertakings are not in a position to earn enough for routine expenses. The losses are about Rs 700 crore annually and the undertakings are not allowed to revise fares periodically. The net result is that fleet upgradation takes a backseat while the quality of the service has s uffered. The Government should either allow the transport undertakings to charge fares that will help them cover costs, or privatise the sector. Even if full privatisation is not allowed, the Government should allow the private sector to operate services in competition with the public sector, at least in the major cities and towns.

Unfortunately, the AIADMK's election manifesto is silent on these issues. It may be recalled that Ms Jayalalitha, then allied with the BJP, had opposed a proposal by the earlier BJP-led Government at the Centre that would have prevented the free supply o f power to farmers.

On the contrary, the manifesto promises extending the free bus pass facility to all college, university, polytechnic, vocational training students to travel from their place of stay to their respective educational institutions. Given the losses incurred by the transport undertakings, the promise, if implemented, will be a bigger drain on the exchequer.

However, the manifesto promises measures to raise rice and cotton production. Also, it talks of increasing sugarcane cultivation and utilising the surplus sugarcane and molasses to manufacture alternate fuel for vehicles.

According to published figures, the State's rice production rose from 6,427,358 tonnes in April-February 2000 to 7,105,384 tonnes in April-February 2001 and the area under paddy cultivation from 2,161,218 hectares to 2,082,030 hectares -- an increase in productivity from 2.97 tonnes a hectare to 3.41 tonnes a hectare. Nearly 60 per cent of the State's population is either directly or indirectly involved in agriculture, whereas the sector contributes about 20 per cent of the State's GDP.

Despite a good harvest, the farmers are no better off, say the experts and point out that the Government will have to help farmers look at crops the market wants and those that will bring them higher incomes. Measures will have to be outlined to control input costs and cut post-harvest losses. The same is true for horticulture crops.

The Karunanidhi Government outlined what many believe is a progressive contract farming policy. And, experts feel this is one area that needs a lot of attention. With large industrial houses reportedly keen on entering the sector, farmers are bound to be nefit. However, the Government must ensure that the benefits reach the farmers and are not confined to the companies.

With varied climatic conditions, a range of horticulture crops -- hill varieties to those grown on plains -- can be grown in Tamil Nadu. In this situation, it is essential to educate the farmers on the need to standardise the produce, maintain q uality, move the produce quickly into storage facilities and package it properly.

Yet another area that calls for immediate attention is the number of employees in the government. At present, there are about 13 lakh government employees and the wages bill accounts for 60 per cent of the total revenue receipts. Though there is no offic ial freeze on recruitment, the government does not fill up all the vacancies as and when they arise. Increased computerisation should help prune this strength further.

Another important issue, of which no mention is made in the AIADMK's manifesto, concerns taxation proposals. Over the last five years procedures have been simplified, but all the States, as per a national consensus, are to move over to value-added tax (V AT) from April 2002. The Karunanidhi Government introduced VAT in 1996, but kept the proposal in abeyance when the trade protested. When Tamil Nadu switches to VAT, it will prefer a rate of taxation that is at best revenue-neutral.

The AIADMK highlighted the plight of the small-scale industries in the campaign. However, its promise to evolve with the Centre a policy to reduce the power tariff for small-scale and tiny industries on a par with international tariffs can be termed impr actical. Moreover, there is no need for it to go to the Centre if it really wants to reduce the tariff. It can ask the TNEB to do so, which would only add to the Board's losses.

The Centre has been urging the States to evince more interest in promoting exports. One area the AIADMK Government can act upon is in facilitating exports by helping the small and medium enterprises (SMEs) establish linkages. The SMEs also need to be edu cated on the WTO and how it will affect them. Apart from stating that it will draw up short- and medium-term plans for labourers affected by liberalisation, globalisation, privatisation and WTO proposals, the AIADMK manifesto is mum on the Centre's propo sal to allow large industries lay off workers or close without obtaining government approval.

Concentrating on economic issues does not mean that the government is neglecting the social sector. There is a need to improve the delivery of health care services and increase the number of para-medical staff in government hospitals and institutions. Mo re important, the new Government needs to draw up adequate plans to care for the increasing numbers of those above 60 years of age. The thinking among experts is that the Government must involve the private sector in this, probably by providing incentive s to do so.

Infrastructure is another area the Government needs to focus attention on. It has to set up a road fund to ensure the maintenance of the extensive road network. It also has to decide on restructuring the Tamil Nadu Industrial Development Corporation (TID CO), the industrial promotion organisation, to give it more operational freedom. The Government must also decide whether it wants to disinvest its stake (through TIDCO) and how to go do it transparently. Besides, the gains in information technology and b iotechnology need to be capitalised upon.