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 2008 - 2011 and it is being placed before the Legislative Assembly. The Table which is appended sets out the Medium Term Fiscal Plan for the period 2008-2011.

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 farm loans owed by farmers so that they could start the agricultural operations afresh without carrying the burden of heavy debt. The financial commitments due to this waiver, expenditure for the various welfare schemes announced and implemented by the Government and the likely increase in salary expenditure due to the recommendation of Sixth Pay Commission have been taken into account in this Medium Term Fiscal Plan for the period 2008-2011.

4. The Act prescribes that Revenue Deficit must be fully eliminated by 2008-2009 and fiscal deficit as a percentage of Gross State Domestic Product (GSDP) must be kept below 3%.

5. In accordance with the above targets, a Revenue Surplus of Rs.84.05 crores is estimated in the Budget Estimates 2008-2009. The Fiscal Deficit as a percentage of GSDP is estimated at 2.98% in the Budget Estimates 2008-2009 and the Medium Term Fiscal Plan envisages that this ratio would be brought down to 2.96% during 2009-2010 and 2.93% during 2010-2011.

6. Even though the target of eliminating Revenue Deficit has been achieved before the prescribed time limit, the present Revenue Surplus will decrease from 2008-2009 onwards due to the likely increase in salary related expenditure. However, it is estimated that a Revenue Surplus will be maintained in the coming years also as stipulated by the Act.

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 31.3.2007 was 14.3% of Total Revenue Receipts and 2.3% 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 31.3.2007 stood at 4.3% of Total Revenue Receipts and 0.7% of GSDP. It is proposed to restrict the issue of new guarantees and it will be ensured that the new guarantees are given only to 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.9,496.64 crores as indicated in the Union Budget 2008-2009. The growth in the Share in Central Taxes is projected at a growth rate of 15% for 2009-2010 and 2010-2011.

State’s Own Tax Revenues

10. Due to the revenue loss suffered on account of the implementation of Value Added Tax, the Tax-GSDP ratio of the State has slightly decreased. State’s Own Tax Revenue is estimated at Rs.33,156.09 crores. The Tax-GSDP ratio is estimated at 10.1% as per the Budget Estimates 2008-2009. For the future years, the overall growth in the State’s Own Tax Revenue has been assumed at 15%. 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.20,797.79 crores in the Budget Estimates 2008-2009. This shows a growth of 10.8% over the Revised Estimates 2007-2008. In 2007-2008, the loss in revenue due to the introduction of Value Added Tax in the State is higher than what was expected. Although the situation is likely to improve in 2008-2009, still there will be losses during next year. The Central Sales Tax (CST) has been assumed at a rate of 2% from 1.4.2008 and 1% during 2009-2010.

12. State Excise Receipts has been estimated at Rs.5,329.60 crores during 2008-2009. This is 15% higher than the Revised Estimates 2007-2008. For the future years, the same growth rate has been assumed.

13. A growth rate of 24% is assumed for receipts from stamp and registration fees in the Budget Estimates 2008-2009. 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.1,707.60 crores for the next year, which is 14% higher the Revised Estimates 2007-2008. For future years, growth of 12% has been assumed.

Non-Tax Revenue

15. This is estimated at Rs.3,276.93 crores in the Budget Estimates 2008-2009. 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. Also, with a view to benefiting students, this Government has waived tuition and examination fees. The interest receipts 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. Taking all these factors into consideration, Non-Tax Revenue has been projected to grow at only 8% 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 for local bodies, State specific needs, Calamity Relief Fund and Maintenance and other transfers from Union Government like Compensation for loss on account of VAT. The 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. Totally, this Grants-in-Aid from the Government of India has been estimated at Rs.5,575.96 crores in the Budget Estimates 2008-2009.

Revenue Expenditure

17. The revenue expenditure during 2008-2009 is estimated at Rs.51,421.57 crores which shows a growth of 12.75% over Revised Budget Estimates 2007-2008. This is mainly on account of filling up of vacant posts in various departments, additional expenditure for the implementation of new schemes of the Government and on account of higher expenditure expected on salaries and pensions due to Sixth Pay Commission Recommendations.

18. Salary and pension as a percentage of State’s Own Tax Revenue will be 76% 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 2006-2007 and it is expected that the same will be true for the financial year 2007-2008 also. While containing the Fiscal Deficit at below 3% level, a record capital outlay of Rs.9,372.91 crores is provided in the Budget Estimates
2008-2009.

21. The scope of social safety net has been vastly enlarged and the total outlay of social safety net has been increased to Rs.13,443.90 crores in 2008-2009.

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.