The Hindu : Fiscal consolidation

Online edition of India's National Newspaper
Monday, Mar 24, 2003

Opinion

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Fiscal consolidation

TAMIL NADU SEEMS to be emerging from the deep fiscal crisis that had enveloped the State over the past five years. This has been made possible due to a series of reforms and fiscal consolidation measures implemented during the past two years. As a result, an optimistic Finance Minister, C. Ponnaiyan, has presented a budget that has provided for an annual plan outlay of Rs. 7,000 crores, compared to the Rs. 5,750 crores for the current year. This substantial increase is based on the assumption that the World Bank will be releasing its first tranche of Rs. 1,000 crores this year from an economic restructuring loan. But the 2003-04 budget projects an overall deficit of Rs. 1,295.15 crores and an additional resource mobilisation of Rs. 430 crores, leaving an uncovered deficit of Rs. 865.15 crores — significantly more than the Rs. 640-crore deficit during the current year. If the State has been able to breathe more freely now, it is because of the austerity measures taken already such as the pruning of subsidies, the suspension or withdrawal of certain benefits enjoyed by Government employees and also because of buoyancy in revenue collections. Having stayed the course of reforms, Tamil Nadu may be one of the first to come out of the fiscal mess that most States got into during the past five years — following the implementation of the Fifth Pay Commission recommendations.

The Finance Minister has not just projected a Rs. 40,000-crore Tenth Plan outlay, but set a growth target of eight per cent. To provide a fresh impetus to infrastructure development, the Government must formulate a viable and pragmatic plan to forge a Public-Private Partnership to mobilise the resources and get some projects off the ground. In addition to the infrastructure cess announced last year, the Government has now set apart Rs. 200 crores as corpus to establish an infrastructure development fund. The roads development programme that was spoken of for two years is expected to take off this year, with the Government also approaching the World Bank to assist a massive Rs. 2,118-crore project. After presenting a White Paper on the State's finances last year, the Finance Minister has provided a well-researched appendix to his budget, offering an overview of the fiscal reforms and consolidation measures. One thing is obvious — there is no easy way out of this fiscal crisis and no quick-fix solutions. When the World Bank also steps in with an economic restructuring loan, more unpopular decisions will have to be taken and the burden on the people will only increase — bus fare and power tariff revisions, tax on the service sector, targeting of subsidies will become sharper and an annual exercise. There will be no more free lunches.

To raise additional resources, the Finance Minister has not only relied on the usual avenues such as motor vehicles tax and fine-tuning of existing sales tax, but also extended his arm to the telecom sector. Relying on a Supreme Court judgment, he has introduced a tax of 12.5 per cent on telephone rentals collected by BSNL, other private operators and also the mobile telephones, to net Rs. 200 crores a year. The retrograde Entry Tax is being extended to cover a few more items such as washing machines and low-density polyethylene. Though the Centre has agreed to a 100 per cent compensation for the introduction of Value Added Tax this year, the full impact of the new system will have to be studied when it comes into force. Whether it is industry-friendly, revenue-neutral or anti-consumer remains to be seen. As expected, the entire Opposition walked out of the Assembly, reiterating the sharp political divide in the State. Unfortunately, there has been no attempt in Tamil Nadu to delink economic issues from the divisive politics that is consuming the State.

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