Strategic Plan Overall Fiscal Strategic

Overall fiscal strategy

Vision 2023 envisages an expenditure on physical infrastructure of Rs. 15 lakh crore over 11 years (average of Rs. 1,35,000 crore per annum). Given that the annual expenditure on Capital account of Government of Tamil Nadu in 201111 was about Rs. 14,000 crore, it is important to understand how infrastructure creation is going to be financed. This is more so in the context of fiscal tightening that is

called for under the Fiscal Responsibility and Budget Management Act (FRBM) that stipulates that the Revenue Deficit (RD) of the state government shall be eliminated by FY2012 and that the Fiscal Deficit (FD) shall not exceed 3% of GSDP after FY2012.

Under Vision 2023, the funding for infrastructure will mainly come from four sources, as follows:

  • The Government of Tamil Nadu will fund its share of the infrastructure requirement from the fiscal space created within the fiscal deficit of 3% of GSDP.
  • By carrying out sectoral reform as appropriate, to make the infrastructure services selffinancing and sustainable by ensuring suitable cost recovery.
  • The Government of Tamil Nadu will seek Central government funding to the extent it can.
  • Government of Tamil Nadu will be seeking participation from private sector (including FDI, domestic investments, and bank funding) in infrastructure projects including under PPP mode

The following paragraphs describe the fiscal management strategy the Government of Tamil Nadu will adopt as it implements Vision 2023 over the next 11 years

Relative historical growth rates: When we analyse the growth patterns of Tamil Nadu’s economy over the past 15 years (1995-2010) in comparison with those of India’s economy and four other benchmark states (Maharashtra, Gujarat, Karnataka, and Andhra Pradesh), the following conclusions can be drawn:

The chart below indicates the average annual growth rates of several developing countries during three periods, 1970-89, 1990-99 and 2000- 10. Most of the Asian nations have maintained high growth rates for more than two decades although they slipped during the 1997 crisis. Both China’s and India’s growth rates have shown a healthy

increase over the past four decades. The Planning Commission is aiming for an annual growth rate of 9% per annum in GDP for the XII Five Year Plan Period. Most analysts and economists believe that in the long term India can sustain an annual growth rate of 8-9% per annum.

Given that Tamil Nadu has grown at a higher rate than India in the past 10 years, and that two other states, namely Gujarat and Maharashtra, have posted double digit growth rates during this period, Tamil Nadu seeks a stretch target for growth that is 20% above the national growth rate. Accordingly, the target annual growth rate that Tamil Nadu seeks to achieve under Vision 2023 is 11%12 in real terms.

Tamil Nadu enjoyed a Revenue Surplus for a few years (2004 through 2009) as shown in the chart below. The Fiscal Deficit improved from a level of (-)4% of GSDP in 2002-03 to (-1)% in 2007-08 and thereafter has worsened to (-3)% in 2011. The FRBM Act requires all states to eliminate their RD completely by 2012 and curtail their FD at (-3%) of GSDP. Vision 2023 envisages that Tamil Nadu will improve its Revenue Surplus to a level of (+) 1.5% of GSDP and limit its FD to (-)3% of GSDP and maintain these limits till 2023, and ensure that its economy grows at the target rate of 11% per annum from 2016-17 onwards.

Year GSDP at 2010-11 prices Rs. Crore Investment in infrastructure Rs. Crore
2011-12 634,829 25,393
2012-13 694,503 41,670
2013-14 767,426 61,394
2014-15 848,006 84,801
2015-16 937,046 93,705
2016-17 1,040,122 114,413
2017-18 1,154,535 126,999
2018-19 1,281,534 147,376
2019-20 1,428,910 164,325
2020-21 1,593,235 191,188
2021-22 1,776,457 213,175
2022-23 1,980,749 237,690
Total 14,137,352 15,02,129
Rounded off 15,00,000

The Own Tax Revenue of Tamil Nadu is estimated to increase from 8.7% of GSDP in 2011 to 10% by 2012, and to 11% by 2016-17. Similarly, non-tax revenue as a proportion of GSDP is estimated to increase from the present six year average value of 12.4% to 13% of Own tax revenue of the state by 2012. The share of Central taxes is pegged at 2.58% of GSDP in line with the recommendations of the Thirteenth Finance Commission.

The expenditure on infrastructure creation in Tamil Nadu has been estimated at 5% of GSDP at present (this includes infrastructure creation by government and the private sector). The XII Five Year Plan is targeting an infrastructure creation at the all India level at 10% of India’s GDP. In line with this, Vision 2023 seeks to increase the annual infrastructure spend13 in Tamil Nadu to 10% of GSDP to be achieved by 2015 and further to 12% from 2021 onwards and maintain thereafter at this level.

The following table captures the above governing assumptions for the economy of Tamil Nadu and the investments in infrastructure sector over horizon of Vision 2023 (2012-2023)

The projected GSDP, Investment in infrastructure for Tamil Nadu based on the above assumptions are shown in the following table:

The investments planned under the six heads of Infrastructure under Vision 2023 are as follows:The above amounts are aggregate value of investments over the period 2012-2023.

Key Assumptions Present Projected
Revenue surplus (estimates for 2011-12) -0.25% 1.5% (by 2015)
Fiscal Deficit 3.04% 3% (by 2012)
GSDP Growth (estimates for 2011-12 at constant prices) 9.4% 11% (by 2017) 11.5% (by 2020)
State own tax revenue to GSDP 8.7% 10% (by 2012) 11% (by 2017)
Non tax revenue as a % of tax revenue 9.7% 13%
Share of central taxes as a % of GSDP (13th Finance commission) 2% 2.58%
Infrastructure investment to GSDP 5% (approx) 10% (by 2015) 12% (by 2021)

Funding the infrastructure creation: At present, the three major sources of funding infrastructure are State government (60%), Central Government (25%) and private sector (15%)14. Going forward, the share of the private sector is expected to increase while that of the state and central government will correspondingly be readjusted. The expected funding mix of the infrastructure plan under Vision 2023 is as follows:

Year Investment in Infrastructure (Rs. crore) State Government (%) Central Government (%) Private Sector (%)
2010 25,000 60% 25% 15%
2016 93,705 33% 30% 37%
2023 237,690 28% 30% 42%

The state government will resort to deficit financing (limiting its Fiscal Deficit to 3% of GSDP) and the Revenue surplus (of 1.5% of GSDP) for funding its share of the infrastructure and for funding the social programmes (welfare, subsidies, and other transfer payments) that the State government would have on its agenda.