MEDIUM TERM FISCAL PLAN

1. The State has enacted Tamil Nadu Fiscal Responsibility Act, 2003 which was subsequently amended to bring it in line with the requirements prescribed by the Twelfth Finance Commission. According to Section 3 (1) of this Act, the Government is required to place before the Legislative Assembly a Medium Term Fiscal Plan (MTFP) along with the Budget. Section 3 (2) of this Act requires that the MTFP shall set forth a multi-year rolling target for the fiscal indicators like Revenue Deficit and Fiscal Deficit while clearly indicating the underlying assumptions made to arrive at those projections. In compliance of this Act, a Medium Term Fiscal Plan based on current fiscal trends and policy initiatives undertaken by the Government has been prepared with the projections for the period 2007 - 2010 and it is being placed before the Legislative Assembly. The Table which is appended sets out the Medium Term Fiscal Plan for the period 2007-2010.

Objectives

2. The Eleventh Five Year Plan for the period 2007-2012 aims at achieving an economic growth of 9% per annum. During the Eleventh Plan period, agricultural sector is expected to grow at an annual rate of 4%.

3. 60% of the population of Tamil Nadu are still dependent on agriculture and allied activities. Having regard to this fact, the Government had ordered the waiver of all co-operative loans owed by farmers so that they could start the agricultural operations afresh without carrying the burden of heavy debt. The financial commitments that arise out of the waiver of crop loans and the various welfare schemes announced and implemented by the Government have been taken into account in this Medium Term Fiscal Plan for the period 2007-2010.

4. The Act prescribes that the State contain the Revenue Deficit below 5% of the Total Revenue Receipts in 2007-2008 and eliminate Revenue Deficit by 2008-2009 and adhere to it thereafter. The Budget Estimates 2007-2008 show that the ratio of Revenue Deficit to Total Revenue Receipts is kept below the 5% level. The Medium Term Fiscal Plan envisages to eliminate Revenue Deficit by 2008-2009 and to maintain this position in 2009-2010 as well.

5. The Fiscal Deficit as a percentage of GSDP is estimated at 2.84% in the Budget Estimates 2007-2008 and the Medium Term Fiscal Plan envisages that this ratio would be further brought down to 2.58% during 2008-2009 and 2.42% during 2009-2010.

6. With the elimination of Revenue Deficit by 2008-2009, the entire Fiscal Deficit will be utilized for financing of capital expenditure and this indicates that the State will be able to generate enough revenues on its own to meet the current expenditure.

7. The State is prudently managing its contingent liabilities. The outstanding guarantees for each year have to be restricted at a level below 100% of the Total revenue Receipts in the preceding year or below 10% of the GSDP whichever is lower. The outstanding guarantee as on 31.3.2006 was 18.63% of Total Revenue Receipts and 2.99% of GSDP. The outstanding risk weighted guarantee for each year has also to be kept at a level below 75% of the Total Revenue Receipts in the preceding year or 7.5% of GSDP whichever is lower. The outstanding risk weighted guarantee as on 31.3.2006 stood at 5.53% of Total Revenue Receipts and 0.89% of GSDP. It is proposed to control the issue of new guarantees and it will be ensured that the new guarantees are given only on productive and viable projects.

8. While substantially increasing the outlay on capital expenditure, sufficient provisions have also been made for maintenance of public assets as per the Twelfth Finance Commission recommendations.

Revenue Receipts

Share in Central Taxes

9. Share in Central Taxes for the State has been estimated at Rs.7,567 crores as indicated in the Union Budget
2007-2008. The growth in the share in central taxes is projected at a growth rate of 6% for 2008-2009 and at a growth rate of 7.5% for the year 2009-2010.

State’s Own Tax Revenues

10. Tamil Nadu continues to retain the highest Tax-GSDP ratio in the country. In the Budget Estimates 2007-2008, this ratio is 11.3%. State’s Own Tax Revenue is estimated at Rs.30,988 crores which is 10.5% higher than the Revised Budget Estimates 2006-2007. For the future years, the overall growth in the State’s Own Tax Revenue has been assumed at 12%. The salient features of the major components of the State’s Own Tax Revenue are discussed below.

11. The receipts under Commercial Taxes is estimated at Rs.21,599 crores in the Budget Estimates 2007-2008. This shows a growth of 8.6% over the Revised Budget Estimates 2006-2007. The loss in revenue due to the introduction of Value Added Tax in the State and compensation of 50% of this loss by the Government of India for the year 2007-2008 have been taken into consideration in this Medium Term Fiscal Plan. The Central Sales Tax (CST) has been assumed at a rate of 3% from 1.4.2007, 2% during 2008-2009 and 1% during 2009-2010.

12. State Excise Receipts has been estimated at Rs.4,370 crores during 2007-2008. This is 15% higher than the Revised Budget Estimates 2006-2007. For the future years, the same growth rate has been assumed.

13. Having regard to the increasing number of immovable property transactions, high buoyancy is assumed in stamp and registration fees. The receipts from stamp and registration fees is assumed at Rs.3,259 crores in the Budget Estimates 2007-2008 which reflects a growth of 20% over the Revised Budget Estimates 2006-2007. In the future years, receipts under this head has been projected at a growth rate of 20%.

14. The receipts from Taxes on vehicles has been projected at Rs.1,410 crores for the next year, which is 10% higher the Revised Budget Estimates 2006-2007. For future years, growth of 12% has been assumed.

Non-Tax Revenue

15. It is estimated at Rs.2,845 crores in the Budget Estimates 2007-2008. The State’s Own Non Tax Revenue contributes only 6.4% of Total Revenue Receipts and there is not much potential to increase this component as most of the user charges has been collected and retained by various agencies who are providing these services. The interest receipt also will show a declining trend in the coming years in view of reduced lending by the Government to various Public Sector Undertakings and Statutory Boards. Also, with a veiw to benefiting poor students, this Government has waived tution and examination fees. Taking all these factors into consideration, Non-Tax Revenue has been projected to grow at only 5% in the future years.

Grants-in- Aid from the Union Government

16. The projections have been made taking into account various grants recommended by the Twelfth Finance Commission and other transfers from Central Government under various Centrally Sponsored and Shared schemes. Grants accruing on account of Externally Aided projects sanctioned before 1.4.2005 have also been reflected in the projection for receipts under Grants in Aid. Grant-in-Aid from the Government of India has been estimated at Rs.3,131 crores in the Budget Estimates 2007-2008 and for the future years a growth of 6% has been assumed.

Revenue Expenditure

17. The revenue expenditure during 2007-2008 is estimated at Rs.44,634 crores which shows a growth of 9.6% over Revised Budget Estimates 2006-2007. This is mainly on account of filling up of vacant posts in various departments and additional expenditure for the implementation of new schemes of the Government. For the future years, 11% growth has been assumed in the overall revenue expenditure.

18. Salary and pension as a percentage of State’s Own Tax Revenue will be 69% and Medium Term Fiscal Plan envisages to maintain this percentage in the future years also.

19. The State will swap high cost loans to bring down the interest commitment. The Government will continuously monitor the sustainability of the debt stock and Medium Term Fiscal Plan envisages to keep the ratio of interest rates to Total Revenue Receipts below 15% as recommended by the Twelfth Finance Commission.

Outcomes

20. The State has achieved all the targets fixed under the Medium Term Fiscal Plan for the financial year 2005-2006 and it is expected that the same will be true for the financial year 2006-2007 also. While containing the Fiscal Deficit at below 3% level, a record capital outlay of Rs.7,861 crores is provided in the Budget Estimates 2007-2008.

21. The scope of social safety net has been vastly enlarged and the total outlay of social safety net has increased from Rs.11,292 crores during 2006-2007 to Rs.13,179 crores in 2007-2008.

22. Provisions for maintenance of existing assets have been provided for as per the Twelfth Finance Commission recommendations. The outlays on Education, Nutrition and Health have been increased significantly. These outlays would be ensured during the future years also.

23. The State will achieve all the targets set under this Revised Medium Term Fiscal Plan which is presented now.

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