HomeIndiaTamil Nadu should target public debt-GDP level of 18.36%: Study

Tamil Nadu should target public debt-GDP level of 18.36%: Study

A paper by the Madras School of Economics states that debt stability is possible only if the fiscal deficit is reduced to 2%

A paper by the Madras School of Economics states that debt stability is possible only if the fiscal deficit is reduced to 2%

According to a recently published working paper by Madras School of Economics (MSE), Tamil Nadu will be able to achieve public debt stability only if its fiscal deficit is reduced to 2% of Gross State Domestic Product (GSDP) by 2023-24. ,

This can be achieved through revenue growth or expenditure control, or both. “Revenue growth within a limited range of the state is possible through better tax compliance, revision of tax on transport (motor vehicles) and increase in non-tax revenue. On the expenditure side, apart from better targeting of welfare schemes through efficient data management, it is imperative to cut down on unproductive subsidies and expenses,” said KR Shanmugam, director and professor, MSE, and K. Shanmugam, the former chief says paper. Secretary, who was the finance secretary of the state for more than nine years.

At the beginning of the current financial year, the state government had projected the fiscal deficit for 2023-24 at 3.17%.

Pointing out that the current level of debt-GSDP (which is estimated to be 26.29 per cent for 2022-23) is within the limits set by the Fifteenth Finance Commission, in view of the COVID-19 pandemic, the authors, however, observe that that the debt level is not sustainable.

In their analysis, a debt level of more than about 18.8% would lead to a reduction in growth, which is “not good” for the state. They conclude that the sustainable level is 18.36%, marginally lower than the 20% norm for states, as set by the Fiscal Responsibility and Budget Management (FRBM) Review Committee in its January 2017 report.

By ensuring a growth of 14%, the state should target a revenue surplus by 2023-24, even if its fiscal deficit is limited to 2%. In that case, a permanent debt level of around 18% would be achieved by 2035-36. If the state achieves a growth of 16% with the same level of fiscal deficit, the debt level could even be reached by 2030-31. However, the authors argue that “a growth rate of over 16% is a difficult task because it is overly ambitious given the historical growth trajectory.”

Calling for a nominal economic growth rate of 14% at a minimum to generate a spurt in tax revenue and additional resources to control debt levels, the authors suggest increasing the state’s own revenue by 0.75% and reducing expenditure. brought down at the same rate. ,

Analyzing the fiscal indicators of the state for 25 years (from 1996-97 to 2020-21), the authors show that the outstanding debt of the state government, which stood at ₹17,124 crore in 1996-97, increased to ₹43,915 in 2002-03. Million gone. In which the Fiscal Responsibility and Budget Management Act was implemented in the country. It increased to ₹1,11,657 crore in 2011-12 and ₹5,12,555 crore in 2020-21. Consequently, debt to GSDP (2011-12 base series) increased from 14.82 per cent in 1996-97 to 23.13 per cent in 2003-04. Thereafter, there was a steady decline and the ratio reached 16.92% in 2011-12.

Various measures, including the implementation of the Act, were responsible for this trend. However, the subsequent years showed a northward trend and the ratio touched 26.94% in 2020-21. The authors said that from 2015-16 onwards, it exceeded the prescribed level of 20% suggested by the FRBM review committee for states.

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