A healthy 'White Paper' beginning

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A healthy 'White Paper' beginning

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• The story: Tamil Nadu published a white paper on its economy and financial condition, with a clear conclusion the fiscal situation in the State is dire. But the action is praiseworthy, and TN Finance Minister P Thiaga Rajan deserves praise (not many states have done this)
• Details: The state is deep in debt, with falling revenues, rising expenditure and declining investment. The average family in the State pays roughly 1 lakh in all taxes to the State and the Union government and receives 1.6 lakh worth of subsidies and services every year. The gap is funded through loans and the State carries a consolidated debt of 2.6 lakh per family.
• Solutions: As the White Paper guesses, the only solution is for the State government to raise more revenues and be more efficient in expenditure. 
• Difficult task of rasining revenues: Any State government’s more than three-quarters of revenue comes from direct and indirect taxes. After the introduction of the GST, states do not have the powers to raise income or sales tax revenues on their own. Taxes on property, fuel and alcohol are the domains that are under the direct control of the states. But the average Tamilian is already burdened with 32-33 of cess on petrol and diesel by centre, which it collects for itself and does not share with the states. So, according to the White Paper the only immediate option available to raise additional revenues is through property taxes.
• Property taxes: These are progressive and fair as they impact rich more. There is gross under-collection of property taxes by the urban local bodies due to non-revision of property tax rates, improper assessments and under-valuation. The 2016-17 Economic Survey of India suggested innovative techniques of satellite imaging of built-up areas of buildings in a city and estimated that in urban cities such as Chennai, there is a potential to collect four to seven times more in property taxes than is being collected today. 
• Focus on local bodies - The White Paper highlights the importance of the giving more powers to local bodies. Kerala has the highest allocation of expenditure for local body councils among all the States of India and its model is famous in India. Tamil Nadu ranks second and enabling local governments to garner additional resources through more property taxes will further strengthen local body administration in Tamil Nadu. 
• Government expenditure: Growth in Tamil Nadu’s revenue expenditure has been declining over the last five years while capital expenditure has been reasonably steady. Large amount of subsidies incurred in power, water and transportation. Better targeting of subsidies is the better option than cutting them. Experts suggest greater capital expenditure by the state. Higher public investment in infrastructure has been the time-tested economic cure for such crises. 
• Question marks on GST: The GST has been a political, economic and administrative disaster, with none of the touted economic benefits coming to fruition and fracturing Union-State relations in the process.
• Conclusion: Since 1960s, Tamil Nadu has been the leader of inclusive economic development in the country, with its unique model of generous State welfare, copious private investment and efficient public services. Tamil Nadu’s analysis of its financial situation is erudite and honest and could help steer the State back on track.

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