Ind-Ra: Tamil Nadu Government Faces Budget Squeeze Due to Provision for Pay Hikes

The Government of Tamil Nadu's FY17 budget presented in the state assembly reflects the weak financial position of the state, says India Ratings and Research (Ind-Ra). The committed expenditure growth is affected by the provision for salary revisions. In the FY17 budget, expenditure on salaries and pension are budgeted to grow by 30% and 35% respectively. As per the FY17 budget estimates, the state is expected to have a revenue deficit for the fourth consecutive year (from FY14). The state finances are affected by increasing committed expenditure on four key items - salaries, pension, subsidies and interest - which alone account for 93.8% of revenue expenditure. Thus leaving the state with very little funding for operations and maintenance and any other schemes. The revenue expenditure on these four sub-heads alone is budgeted at 110.7% of the FY17 revenue receipts.

The revenue deficit since FY14 has reduced capital expenditure in the last few years and capital expenditure in FY17 is budgeted to grow by a mere 7.8%. Lower capital expenditure growth does not augur well from the medium- to long-term growth perspective of the state economy.

The government's FY17 revenue and fiscal deficit is pegged at 1.16% and 2.96% of Gross State Domestic Product (GSDP) respectively. While the fiscal deficit/GSDP ratio is within the regulatory limits, revenue deficit is breaching these limits and continuous revenue deficits are a cause of concern. The quality of deficit (proportion of deficit/debt used to finance current consumption) deteriorated to 39.1% in FY17 (BE) from 26.47% in FY15.

The two crucial positive aspects of the government of Tamil Nadu's credit profile are: a relatively better state GSDP growth (FY16: 8.79%) compared to GDP growth of 7.6% and relatively lower debt/GSDP at 18.43% in FY17 (BE). Despite the pressure on the revenue front, according to RBI, in FY16 (BE) the state had a debt/GSDP ratio of 21.2% (sixth lowest among the non-special category states after Chhattisgarh, Odisha, Maharashtra, Madhya Pradesh and Jharkhand) compared to 22% average of all states.

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