APPENDIX
MEDIUM TERM FISCAL PLAN
1. The present Government of Tamil Nadu assumed office in
May 2001. At that time, the Government was in the grip of a major fiscal
crisis. This fiscal crisis also had very serious effects on the economic
growth prospects of the State. After a careful analysis, the Government of
Tamil Nadu determined that a higher level of economic growth was essential to
bring all round prosperity to the people of Tamil Nadu. In order to achieve a
higher level of economic growth on a sustained basis, public finances of the
State had to be put in order. A new economic reforms programme has been drawn
up, which includes fiscal correction and sustainability, improvements to the
investment climate, good governance leading to improvements in service
delivery and a poverty reduction strategy.
2. The New Economic Development Programme
(NEDP) can take
off only on the basis of fiscal correction and sustainable public finances. It
has therefore become imperative to undertake a medium term fiscal plan leading
to better outcomes in terms of higher capital outlays, improved allocations
for operations and maintenance and protection of social sector outlays with
better results. As the fiscal crisis which engulfed Tamil Nadu in 2000-2001
was deep rooted and problematic, a Medium Term Fiscal Plan has become a
necessity.
3. In view of the seriousness of the fiscal crisis, the
Government presented a White Paper on Tamil Nadu Government's Finances in the
Legislative Assembly on 18th August, 2001. This document brought
out in great detail the complex nature of the fiscal crisis, the deep-rooted
structural problems affecting the State’s public finances and the need for a
fiscal reform programme. The summary of the fiscal position over a period of
more than a decade is set out in Table-I below
Table-I : Fiscal
Performance in the past decade
(* The fiscal deficit in the year 1991-1992 is less than the
revenue deficit because of adjustment of Rs.1109.99 crores towards repayment of
loans from the Tamil Nadu Electricity Board.)
4. The consequences of not attending to proper fiscal
management are extremely serious. It has resulted in a collapse of capital
expenditure. It has also resulted in a continuous deterioration in the
allocation for operations and maintenance. This has resulted in the
deterioration of existing assets. The lack of adequate capital expenditure
has considerably slowed down building new infrastructure. In a globally
integrated world, the lack of adequate world-class infrastructure can be a
major factor affecting the investment climate in the State. Public
investment in infrastructure has to be maximised. Unfortunately, the
unstable fiscal situation leading to a major crisis has crowded out
investment in infrastructure. Likewise, the outlay on operations and
maintenance has been badly affected.
5. In an earlier fiscal crisis which affected the State
in the period 1990-91, the State had adequate capacity to mobilize new debt
to tide over the crisis. Further, it was possible to undertake fiscal
reforms to set right the fiscal position from 1991-92 onwards. The results
can be seen in 1995-96 when the fiscal position had improved dramatically.
This was a good launching pad for increased investment in infrastructure and
operations and maintenance.
6. Unfortunately, the fiscal position deteriorated
sharply in 1998-99 and by 1999-2000 serious fiscal instability had already
set in. The revenue deficit over total revenue receipts had shot up to
26.95%. The share of the revenue deficit in the total fiscal deficit was as
high as 81.75%. Interest payments over total revenue receipts went up to
16.6%. Consequently, there was no possibility to significantly mobilize new
debt. The fiscal deficit over Gross State Domestic Product had surged to
4.22%.
7. This was followed by a full blown crisis in 2000-2001
when payments could not be made. The reduction in the State's share of the
Central Taxes following the Eleventh Finance Commission's recommendations
compounded the problem. The fiscal crisis became so serious that by the end
of 2000-2001 payments to the tune of Rs.700 crores on the State account
itself could not be honoured. There was a major fiscal collapse.
8. The consequences of such fiscal unsustainability were
serious. First of all, it affected the very basis of governance. Secondly,
the belief that the Government would be a model in making prompt payment was
shaken. A credibility gap was clearly emerging. Thirdly, a clear collapse of
capital outlay occurred leading to serious effects on the medium term
economic growth prospects of the State. Fourthly, the adverse effects on
maintenance of existing assets were very serious. Assets would be lost
totally if the provisions for maintenance were not improved. Above all, even
the social safety net meant for the poor was seriously threatened and real
cuts were a reality.
9. Inheriting this situation fraught with the grave
danger of total chaos, this Government realised that fiscal sustainability
has to be ensured through proper planning and implementation. The State
Legislative Assembly has enacted the Tamil Nadu Fiscal Responsibility Act,
2003 (Act No. 16 of 2003). According to Section 3 (1) of this Act, the State
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
prescribed fiscal indicators while specifying the underlying assumptions.
10. Accordingly, a Medium Term Fiscal Plan has been
prepared and it is placed before the Legislative Assembly. Table-III which
is annexed sets out the MTFP for the period ending 2008-2009.
