Tamil Nadu debt, deficits & welfare: What Vijay's White Paper says about Stalin govt’s finances

[00:00:04]Something is near her. I've no salary increment of cargo.

[00:00:08]But I think I should try.

[00:00:10]I think mutual funds can SIP car. Top up car alley.

[00:00:14]This is the right time.

[00:00:16]Yeah.

[00:00:18]I don't know what to do.

[00:00:20]>> [clears throat] >> But I think I should try.

[00:00:25]I think mutual funds can SIP top up car alley.

[00:00:28]This is the right time.

[00:00:30]Awesome job.

[00:00:39]>> Mutual fund investments are subject to market risks. Read all scheme related documents carefully.

[00:00:45]>> [music] >> Tamil Nadu has a new government as we know under actor Chandrasekharan Joseph Vijay, let's say Vijay. And it's now looking at the situation. First of all, it's doing what every new incumbent does, which is try and tell people what the predecessor did wrong. That That is par for the course. Every state government does it. Every central central government also does it.

[00:01:10]However, within that within those parameters, the Vijay government has done something very interesting. They produced a white paper on the state's finances, on the fiscal situation, on the revenue, on how little is left to spend on capital assets, on building fresh assets.

[00:01:30]This is not very different from many other states. However, comparisons are important. Comparisons apply what the Vijay government has done in this case in this white paper is to compare the state with three peers. And the peers they've chosen are three other industrialized states generally of the same size.

[00:01:50]Maharashtra, which is a bit bigger. I'm just going by the number of MPs each state sends to parliament. Maharashtra is a bigger than Tamil Nadu, Karnataka a bit smaller. Similarly, Gujarat a bit smaller, but all four industrialized states and also coastal coastal states.

[00:02:08]So, the comparison works. In comparison to these states, they've shown how Tamil Nadu has performed fiscally and also in terms of its revenue collections. And the picture doesn't look pretty. I would say that this is a very well-written and very well produced white paper. It's 120 pages. There's a lot There are lots of It's 120 pages. There are lots and lots of figures and tables. I I will be sharing quite a few of these with you. I wish I could share more, but then this will This will go into hours and hours.

[00:02:42]I'm just picking out some highlights that tell us the story. Remember, before this, the precedent for these white papers was set by the Chandrababu Naidu government in Andhra Pradesh. When they came to power, they produced a series of white papers on the previous Jagan government or YSRCP government there.

[00:03:00]This white paper is one more step like that. I'd also like to say that it's a good idea. It's a healthy practice if more state governments do this because this way at least you get data and you get digested data. Maybe you can mine all this data. This is in the budgets.

[00:03:15]This is in state government's statistics, central government's statistics, but to put it all together and to draw a coherent picture. In which In this case, that's been done by making comparisons with the three other peer states, Gujarat, Maharashtra, and Karnataka. So, what is the What is the conclusions? The six conclusions of the white paper is what I start with. Then I will elaborate on them and also share some graphics with you. So, number one.

[00:03:42]Number one is the debt situation. You've all seen the headline. All media has picked it. It's an easy headline to pick that when a child is born in Tamil Nadu, in fact, the white paper also complains that too few children are being born, too few babies are being born. So, Tamil Nadu actually is facing a demographic challenge because it's getting older.

[00:04:01]It's the oldest state in India at 34.5 years of mean age, and it's going to get older much faster than all other large states.

[00:04:12]They are not competing themselves with Kerala. Sorry, Malayalis. The Tamils think they are a large state. You are not.

[00:04:19]They say that compared to all the large states, their population growth rate is the lowest. They are well below replacement replacement value, and that's how their population is getting older. That said, with the population as it exists today, a baby who's born carries a burden is born with a burden, a debt burden of 1 lakh 28,000 rupees.

[00:04:40]That's a headline figure. That figure has been calculated and put out for headlines, and sure enough, it has made headlines. Second thing is 5 years back. This white paper is for the post-COVID 5 years. This also coincides with the arrival of the DMK government, so their 5 years. So, basically, this is a white paper of the performance, fiscal performance, or financial performance of the DMK government. When they started, the debt burden of Tamil Nadu was 5 5.13 lakh crores or 5.13 trillion rupees.

[00:05:14]Today, it's doubled. It's doubled to 10 trillion rupees. However, there's a twist there to which I will come as we go along. The debt-to-GDP ratio, the white paper says, has remained elevated throughout, and there's been an effort by every state to reduce it. All other states in the peer group have managed to reduce it. For Tamil Nadu, it's remained elevated. At this point, it's 28.3% debt-to-GDP ratio. And this, the white paper says, makes the challenge tougher for Tamil Nadu because Tamil Nadu also has a demographic challenge. Its people are getting older and as time passes, its dependency ratio will become worse, which means the percentage of people who depend on younger people who earn, who work and who pay taxes to look after them or to pay for welfare, that dependency ratio will get worse as time passes while the state remains in such under such debt. Number two, it follows from this that the state spends a lot of money on interest payments. In fact, this is 23% of all of the state's income, but when it comes to state's own tax revenue, 35% of that goes to interest payments.

[00:06:30]You might ask me, I know not all of us are economically literate, nor am I. So, even I thought if it's 23% of the revenue, how is how is it 35% of SOTR or state's own tax revenue? Besides state's own tax revenues, the state also gets a share of the central revenues because central central taxes are shared with every state according to according to a formula set by the Finance Commission.

[00:06:56]Plus, the state also gets grants, especially from the center.

[00:07:00]Annual interest payment right now is about 1/3 more, about 1/3 more than capital expenditure. So, for example, to understand this better, if the state were to buy three such chairs, they would have also paid the equivalent of four such chairs only towards interest.

[00:07:21]That's the meaning of interest payments being 33% more than the state's capital expenditure. The state, therefore, is spending more on servicing its existing debt than on creating assets. This is the classical debt trap. Then, point number three, conclusion number three, the revenue deficit right now has become structural. What is revenue deficit?

[00:07:43]To understand this, we have to know what is revenue expenditure. Revenue expenditure is what we spend on ourselves, on our living, our food, our rent, our electricity, etc. So, revenue expenditure in the case of of a government is what the government spends on itself. If the state's own revenue is even less even less than what it spends on itself, that really shows a very bad situation. So, the state's revenue deficit is 78,324 crores, which itself is 2.2% of GSTP, which is the state domestic product.

[00:08:19]State, as a consequence now, Tamil Nadu is borrowing to fund consumption, not not for investment. That means to run my household, every year I'm borrowing more money just to run my household. And then I'm paying interest on that. It's a vicious cycle.

[00:08:36]Conclusion number four, SOTR or state's own tax revenue as a percentage of GSTP has collapsed. It has collapsed. It was 5.93% in 2021-22.

[00:08:49]Now, it's 5.45% in 25-26.

[00:08:53]This decline has been the steepest among the peers. Now, you might say it's only 5.93 to 5.45. What's the big deal? But the base is very high. So, remember percentages matter once you look at the base. If the base is a GSTP of about 35 trillion rupees, then a 0.5% decline in the state's own revenues is a very big cut. Conclusion number five, the government's committed expenditures are the highest among all the peers. What is committed expenditures? Committed expenditures are salaries, pensions, and interest. Those you have to pay no matter what happens.

[00:09:33]If you pay all of that out in Tamil Nadu, then there is no headroom left for any capital expenditure in its budget.

[00:09:41]Capital expenditure versus total expenditure compared to compared to the peers is the lowest. It's only 11.8% as we go ahead, I will share some figures with you. Then then you come to the last point which is contingent liabilities.

[00:09:57]What is contingent liabilities? One, you know that the state has a debt of 10 lakh crores, 10 trillion rupees. That's beside the point and that divides into 1.28 lakh per person in Tamil Nadu. In addition to that, the state has other liabilities.

[00:10:14]The state has PSUs, the state PSUs. Many of these state PSUs, in fact, almost all these state PSUs are making losses. But among these, the tigers that making losses are the power PSUs. You know the vicious cycle of cheap power, free power, not collecting your bills.

[00:10:33]In the process, in the process, all the power utilities are broke and they keep on borrowing money. When they borrow, why would anybody lend them the money?

[00:10:43]Because everybody knows they are broke and they are not going to start making profit suddenly. How will they repay?

[00:10:48]The state government has to stand guarantee for them. It's like a parent having to stand guarantee for something that the kid borrows, but the kid is a spendthrift, so kid keeps on throwing money around, spraying money around knowing that Mommy, Daddy are there, parents are there.

[00:11:04]When I need money, I'll borrow more money and they will stand guarantee for me and when need be, will pay on my behalf. These These are called contingent liabilities.

[00:11:14]These have come to 3.18 lakhs. So, the state's total debt is not 10 lakh crores, it is 13.18 lakh crores. That is 13.18 trillion rupees. I'm trying to get us all used to the use of trillion and billion now instead of crores and hundreds of crores and thousands of crores, that gets a bit confusing.

[00:11:35]This, the white paper says, says has created an intergenerational burden as the state is locked into a debt cycle.

[00:11:44]Fiscal deficit is now expected, according to the white paper's calculation, to be 1.64 lakh crores.

[00:11:52]That will be well above the 3% limit that the state FRBM Fiscal Responsibility and Budget Management Act has stipulated, but the state state has been amending amending this all the time. In fact, since 2003, when the law first came in, the center passed the law, the Vajpayee government, and the states also passed theirs. Since then, Tamil Nadu has amended its FRBM Act 13 times, each time pushing the deadline ahead. Each Each time pushing the deadline ahead and giving itself a pass.

[00:12:24]You have the power, you have the assembly, you can vote, you can give yourselves a pass for being irresponsible. If 1.64 lakh crore is the loss is the deficit this year, then the maximum the state can borrow under the constitutional situation is 1.52 lakh crores. It can borrow a little bit more for its power utilities. That's about 0.5% of its GSDP. That's what the center allows you.

[00:12:50]Even with that, it will be left with 11,600 crores of unfilled deficit. Where will that come from? At which point the white paper quotes Thiruvalluvar, the great Thiruvalluvar. The translation is not very good, so I've just tweaked it a little bit. My apologies to whoever did it. For all I know, somebody used AI to do it. Now, I don't know if it was done with AI, but if it was, let me say AI was not very well trained. It'll get better. However, this is what the great Thiruvalluvar said, and I'm I'm giving you the English translation. As the depth of the water, so the height of the lotus. As the resolve of the people, so the ascent of the state. Right? This is this This is an inspirational line from Thiruvalluvar. You can always find an inspirational line. We've seen Union Finance Ministers P. Chidambaram and Nirmala Sitharaman routinely use lines from Thiruvalluvar. I told you about the state's committed expenditure. We come to this figure. Please see this figure.

[00:13:51]This tells you the state's committed expenditure. And where is it going in terms of its own revenues?

[00:13:59]Salaries take 28.4% interest takes 22.8%.

[00:14:05]That's on old debt, and pensions take 13.2%.

[00:14:10]If you If you add all of these up, you already come to about 64%. So, 64% more than 64% of the revenues, the state spends on itself. If you see this chart, this tells you that once again, the the picture for Tamil Nadu is the ugliest. I will not say the least pretty. Everybody has problems. It's the It's the ugliest.

[00:14:33]Then, capital expenditure. Capital expenditure, now Tamil Nadu spends only about 1.44% of its GST DP on capital expenditure.

[00:14:43]The total amount is 50,911 crores.

[00:14:48]In 2000 21-22, it was 37,000 crores, but it was 1.79% of GST DP. Once again, the decline has been the steepest amongst all peer states. Outstanding liabilities, as we told you earlier, have gone from 5.13 lakh crores to 10 lakh crores. Debt on the state of Tamil Nadu has had a CAGR, that's compounded annual growth rate, of 14.3%, whereas the CAPEX is only 8.3%, which is way below the nominal growth in the state. So, state is not able to build capital assets even to support its own growth. You can see the figure in table that give you the comparisons and the trends of capital expenditure as compared to GSTP for for the peer states as well. See this very telling table and chart that tells you that Tamil Nadu's capital expenditure expenditure to total expenditure is 11.8% and as percentage of GSTP is 1.44% in comparison Gujarat, which is the state at the top among these four peers, the capital expenditure as a percentage of total expenditure is 26.8% and it's 2.86% of GSTP, which is almost almost exactly twice as much as that for Tamil Nadu.

[00:16:10]Then one more chart that shows you rising fiscal deficit for the state as a percentage of GSTP. It was 3.56% in 21-22. Now it's on a much higher GSTP, it's 3.77% and if you add contingent liabilities also also to this, which mostly come from power utilities, which are completely broke, civil supplies corporation. Now civil supplies corporation in the state does not have any income of of its own besides the subsidies it might get from state government and some from the central government and this is constantly in deficit and it's been borrowing money and where does this borrowing come from?

[00:16:49]So, see how Tamil Nadu politics or Dravida politics, I'm trying to pronounce that correctly, Dravida politics has taken welfareism to another extreme. See the Pongal example and that is what the white paper talks about. On Pongal, the state government from 2016 started started a tradition of giving away gift to the people. It started modestly, but then it went up. It reached its peak in 2000 of 5,000 something crores. That is to be expected. That was the election year. In spite of that, the previous government lost. That was the election year. Until today, between 2016 and 26, in 10 years, this Pongal gift has consumed 24,023 crores, averaging 2,184 crores per year. And what is it that the Pongal gift contains? I know people in Tamil Nadu knows it. This is for eligible people, people with the eligible ration card, which is actually a lot of people. It It It is 3,000 rupees in cash now. It is 3,000 rupees in cash now. In fact, the DMK government, as it was heading for elections in January, announced there'll be 3,000 rupees in cash as a Pongal gift, plus 1 kilo of rice, 1 kilo of sugar, one full sugarcane that that is ceremonial, and a sari or a then a sari and a dhoti. You add it all up, it's a large population, it's a lot of money.

[00:18:14]All of that is done through the supplies corporation. That's why the civil supplies corporation also has a big deficit. Civil supplies corporation, power corporations, and and the transport corporation. In fact, a bunch of transport corporations all have deficits because everything is subsidized and everything is badly maintained. Fleet has become old. All of that the government stands guarantee for. Just the Just the accumulated debt of six PSUs, all in power, transport, and civil supply sectors, adds up to 3 lakh 18,000 crores in Tamil Nadu that the state government has stood guarantee for.

[00:18:53]State government's own own tax collections are very poor. Its excise collections, for example, are a disaster. Wherever going Tamil Nadu, you see you see liquor shops and government transit liquor shops. But the white paper hints that a lot of their revenue is taken out by way of rent seeking or other people come and collect that revenue, it doesn't come to the government. Tamil Nadu's liquor revenue is actually way lower than Karnataka, which is the highest, and and Maharashtra. Gujarat we don't talk about because Gujarat, at least officially, is a dry state. If you see excise collection, which is mostly liquor, for for for Tamil Nadu is 0.34% of the GDP, for Maharashtra is it's 0.67, so exactly twice as much as as Tamil Nadu. And Karnataka is 1.25%, so effectively almost four times as much as as Tamil Nadu. Tamil Nadu, therefore, does very poorly with its liquor excise collection, although the government runs the liquor business business or maybe because the government runs the liquor business. Tamil Nadu's collection on excise is 11. 3,000 crores, 11 Okay, 11,836 crores.

[00:20:12]Maharashtra is 34,170 crores, and Karnataka is 41,000 crores.

[00:20:19]Tamil Nadu is not a dry state.

[00:20:22]To those in Tamil Nadu, I don't have to explain it, but in Tamil Nadu, liquor business is run by a government corporation called Tamil Nadu State Marketing Corporation or TASMAC. So, if you add it all up, you see a picture of a disaster that's been a long time in the making. I know that Tamil Nadu politics or Dravid politics, in fact, starting from an era before the DMK came into power, even from Kamaraj's era, it's been it's been the poster child of welfareism. In this case, however, it's welfareism gone too far. You're spending far too much more than you can afford.

[00:20:56]Does the white people tell us what they're going to do? You see some platitudes. You have to do this, you have to do this, you have to do your best, try your hardest. If you are sincere, you can achieve anything. But, the fact is that Vijay also has made really exaggerated welfareist promises.

[00:21:13]Unless unless he gets to build a mint of his own and he starts printing money, he's not going to be able to pay for all that. Maybe the state can start getting more excise on liquor etc. And plug some other areas of leakages and rent seeking, but this kind of welfareism has now become unaffordable. But the message of this white paper is that this kind of welfareism is actually profligate, it's irresponsible, and it's unaffordable.

[00:21:40]Now, we can only hope that the new government which has put out this white paper will learn the right lessons from this. They've got a lot of data out.

[00:21:48]They've made very interesting points, very important points. They've also expressed all the right intentions, but this is realpolitik. They are going to be tested every day as the new government gets going. This is by no means an exhaustive look at a 120-page document. This is what it is. It's cut the clutter. I'll be sharing the full document with you. The link is with the description to this video.