1.   Tamil Nadu entered the new millennium with its public finances in complete disarray. The revenue deficit and the fiscal deficit of the State Government had reached unsustainable levels. The State’s economy, particularly the primary and manufacturing sectors, had performed very poorly, creating serious doubts and uncertainty about the future growth prospects.

2.  Hon’ble Members are well aware of the precarious financial position inherited by this Government after it assumed office in May, 2001. We had to make a choice between complete fiscal collapse and development.  This Government has boldly opted for the latter. The Government has gone about the process of correcting the fiscal position with methodical precision so as to empower the Government to redeem the faith reposed by the people of Tamil Nadu. 

3.  In pursuance of my announcement in the Budget for 2002-2003, a Medium Term Fiscal Reforms Programme had been prepared to lift the State from the fiscal morass and take it on a higher growth trajectory. It includes measures to reduce the pace of growth of revenue expenditure, enhance receipts, reduce revenue deficit and fiscal deficit, and reprioritize resource allocation in the State Budget to growth-oriented sectors while providing for real improvements in social sectors to the poor and needy. It also focuses on Public Sector and Co-operative sector reforms along with reforms in utilities such as the Tamil Nadu Electricity Board and State Transport Undertakings.

4.   The finances of the State Government are akin to the finances of any household. The financial security of a family is contingent on its members living within the total income. The financial security of a household is compromised if it chooses to spend recklessly and beyond the total income. We all save a portion of our income for the rainy day or for capital investments such as construction of house, purchase of motorcycle etc. Often, this is supplemented with a loan, which is taken keeping in mind the repayment capacity of the family. A household can choose to ignore these basic principles of financial management only to its own detriment. The same principles apply to the management of public finances of State Governments with hard Budgets.

5.    The revenue expenditure of the State Government should generally not exceed its total revenue receipts and even if it does so, it should be for a brief period, not exceeding about 5 percent. Similarly, the fiscal deficit, which represents the net borrowings of the State Government, should be below 2.5 percent of the Gross State Domestic Product or the total value of goods and services produced during the year in the State’s economy. Borrowings should be mainly used for capital expenditure with returns which sustain the interest rates.  Too much borrowing can result in complete chaos.  It is not very prudent if the ratio of revenue deficit over the fiscal deficit exceeds 35 percent. In 1999-2000, this ratio was 82 percent implying that nearly 82 paise of every Rs.1 of net loan taken by the State Government was being deployed for meeting revenue expenditure commitments rather than in capital or asset creating ventures. The debt service or interest costs on loans taken by the Government should be below 15% of the Total Revenue Receipts.  A Government can choose to ignore these basic principles of prudent financial management only at its own peril. Unless we decide to live within our means and channel our receipts towards production-oriented sectors, all round development and prosperity will remain a distant dream.

6.     The following table highlights the gravity of the fiscal problems facing Tamil Nadu.

(* The revenue deficit in 2000-2001 and 2001-2002 was artificially compressed because the State Government was unable to clear all its expenditure commitments before the close of the financial year.)

(# The revenue deficit in Revised Estimates 2002-2003 is high due to the conversion of arrears owed by TNEB to Central utilities amounting to Rs.1962 crores as a subsidy to the TNEB.  Correspondingly the debt of the Government goes up as the Government has to discharge these liabilities.  Excluding this, the revenue deficit over Total Revenue Receipts in R.E. 2002-2003 is 19.12%.)

The aforesaid table clearly indicates the need for fiscal reforms in the medium term to restore fiscal health to the State.  Without this, the State cannot undertake any development work.

7.     The main fiscal reform objectives of the Government to be achieved by 2006-2007 are as follows:

a)    We will strive to bring down the revenue deficit as a percent of the total revenue receipts to a level below 5 percent through proper expenditure and receipt management.

b)    Revenue deficit as a percent of fiscal deficit will be progressively reduced to below 35 percent.

c)    The fiscal deficit as a percent of Gross State Domestic Product (GSDP) will be brought down to a level below 2.5 percent.

d)     Interest payments as percentage of total revenue receipts will be progressively reduced to a level below 15 percent .

FURTHER MEASURES FOR FISCAL CONSOLIDATION

8.   I would now like to enumerate the agenda for fiscal and budgetary reforms, which is to be pursued by the Government.

I.  Revenues:

• This Government had constituted the Tax Reforms and Revenue Augmentation Commission under the Chairmanship of the eminent economist, Dr.Raja J. Chelliah.  The Commission has submitted several reports.  We have analysed these reports and decided to adopt the measures recommended.  They find place in the relevant sections of the Budget.

• First and foremost, based on the national consensus and the recommendations of the Commission headed by Dr.Raja Chelliah, we plan to move to the State VAT scheme.  This is a major epoch making change in the main tax revenue of the State namely, Sales Tax.  In the medium term, there could be a loss of revenue to the State, which will be compensated by the Government of India.

• On Electricity duty and Electricity tax, the Commission has recommended a single new law with clear provisions on charging.  This has been included in the Budget. 

• On TNEB’s tariff reform, the Commission’s report has been taken note of by the Government and it has been decided to provide a direct subsidy to small and marginal farmers as also to hut dwellers.

• The State will review all non tax revenues and go by the principle of adequate cost recovery for services.

 II  Expenditure Management:

A) Wage, allowances and pension commitments of the Government:

• The basic objective of governance is to ensure planned and equitable development and maximization of the welfare of people. We are today faced with a unacceptable situation where the bulk of the State’s own tax revenue goes towards meeting employee compensation and pension commitments of Government employees. There is very little that is left for other current expenditure and nothing for capital and development-related investments. These are invariably funded only through borrowings.

• The Staff and Expenditure Reforms Commission under the Chairmanship of Dr. A.M.Swaminathan, I.A.S. (Retd.), has made a detailed study of every Department, its staffing needs and has made detailed recommendations.  Surplus employees have been identified.  We propose to match the recommendations of the Commission on surplus strength with existing vacancies in Government.   We shall abolish such identified surplus posts lying vacant. This process of adjustment will facilitate rightsizing of the Government with minimum hardship to existing surplus employees. The controls on employee emoluments and other benefits will have to be continued in 2003-2004 in view of the requirements of fiscal consolidation.

• The pension commitments of the Government of Tamil Nadu are the highest in the country.  No other State has to face such a huge commitment.  The pension entitlements of the State Government employees in many aspects have been more liberal than that of the Government of India, which has unlimited powers to raise resources and also a much larger fiscal capacity. According to experts, the situation in our State is not sustainable. This Government has had to make some corrections in the pension entitlements of employees to ensure that the entire pension scheme does not collapse. We propose to undertake detailed studies and come out with further pension reforms in order to control the unprecedented growth of these liabilities. A Contributory Pension Fund Scheme for all new employees appointed after 1.4.2003 will be introduced.

B)  Restructuring outstanding high-cost debt:

• There has been a phenomenal growth in the total debt and debt service commitments of the Government of Tamil Nadu. We have initiated the process of restructuring our outstanding debt to control the debt service costs. In 2002-2003, an estimated Rs.1045.89 crores of outstanding high  cost debt with the Government of India has been swapped.   This will be continued in the coming years until all the high cost loans are retired.  The Government has also gone in for resetting the interest rates of high cost loans obtained earlier from HUDCO to reduce interest payment commitments. This will be continued in the next financial year. We will also keep a strict watch on the total borrowings, and deploy them mainly on schemes and projects, with revenue returns to cover the costs of operation and maintenance and interest payments. The contingent liabilities of the State Government through Government guarantees will be strictly monitored.

C)  Targetting Subsidies:

• The subsidy burden of the State Government has to be reduced through proper targetting of benefits to the most deserving sections  and through recovery of cost-based user charges from the ineligible beneficiaries. We will focus on cost recoveries for various services being provided by the Government.

III.   Budgetary Reforms:

The Government plans to introduce a bill on Fiscal Responsibility in the current session of the Legislative Assembly. Its main objective is to set out the principles of prudent fiscal management and secure its adherence.  The Government would also strictly enforce budgetary and fiscal discipline. While the Administrative Departments will  have a greater say in formulation and execution of their Budgets, they will have to also ensure proper budgetary and fiscal discipline.

IV. Disinvestment and Restructuring Public Sector Enterprises and Institutions in the Co‑operative Sector:

• This Government proposes to generally withdraw its presence from the manufacturing sector.  We have formulated our Disinvestment Policy on the lines set out by the Government of India.  The Government will take up disinvestment of its stake in all public sector and co‑operative sector enterprises in the manufacturing sector.  We shall also restructure all the remaining public sector undertakings to make them efficient and cost effective.  We have implemented a Voluntary Retirement Scheme for employees in the State Public Sector Undertakings and co-operative institutions to facilitate such restructuring. Necessary amendments to the Co-operative Act will be introduced in the Legislative Assembly to facilitate the transition.

V.  Restructuring Utilities such as Tamil Nadu Electricity Board and State Transport Undertakings:

• The Tamil Nadu Electricity Regulatory Commission has announced its decisions on electricity tariff. It has also indicated measures to reduce costs.  The Tamil Nadu Electricity Board will undertake these measures to reduce costs.  It will be the effort of the Government to make the TNEB commercially viable.  It will concentrate on efficiency improvements, improving quality of energy supply, reduction in costs and prevention of theft.

• In public transport, the policy of the Government is to introduce competition and better service.  State Transport Corporations will be restructured through amalgamation.  The viability of these corporations which was restored by this Government has again been affected by the high diesel prices.  Measures to handle this situation will be examined. 

9.        Fiscal reforms without development have no meaning. The basic objective of correcting the public finances of the Government of Tamil Nadu is to ensure real and tangible development for the people of the State. We shall undertake further fiscal consolidation so that Tamil Nadu can be taken on a higher growth trajectory. 

***