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Tamil Nadu hasn’t really had a political government for close to a year. Yet on August 8, when the Reserve Bank of India (RBI) sold debt papers of 15 state governments, Tamil Nadu got the market’s version of an ovation. The state’s papers were priced better than all, except Maharashtra and Goa, at 7.21.
At the same auction, Uttar Pradesh, despite having a government with a strong majority, got priced much worse than Tamil Nadu, at 7.23.
It is the equivalent of the Indian government’s crib against the ways of the international debt markets, where its papers are rated mere investment grade while debt-rattled Spain or Portugal get far better ratings.
Make no mistake, Tamil Nadu (TN)’s finances are beginning to melt. At an auction a fortnight ago, Chennai’s papers were better priced at 7.18. Lucknow’s was at 7.19. The political climate in the two states has not changed in a fortnight, but why has the spread widened?
This is incidentally the first year when state government papers will be sold in far bigger quantity than the Centre’s papers. So the markets are also coming to grips with the pricing of these debt papers, usually of 10-year tenor.
Despite the caveat, it is clear what gives the market confidence is the financial history of the state, even as Tamil Nadu’s political groups now careen and clash. The state has a history of stable financial management, irrespective of who comes to power at Fort St George. The same cannot be said of, say, Uttar Pradesh where the best of governments have at times committed financial hara-kiri.
In Tamil Nadu, politicians give tax bureaucrats more space than those allowed at fiscally weaker states. Former finance minister Yashwant Sinha says: “Tamil Nadu has traditionally had a strong finance department. I found the politicians willing to listen to the advice of civil servants. It isn't surprising that quite a few of my finance ministry officers were picked from there.”
This is significant as the states push for larger market borrowings to run their financial house. Their history of financial management will be prised open by banks and insurance companies before committing to buy states’ debt papers.
The market appraisal is also borne out by the reports of the national auditor on the state of the fisc of Tamil Nadu, specially its record on raising revenue. That is what tells the market how the state will service its debt — will it have enough taxes and other revenues to meet its obligations or will it have to raise more debt to pay earlier debt.
Compare the Comptroller and Auditor General’s (CAG) reports for Tamil Nadu and Uttar Pradesh. Thanks to a slide in the absence of a credible political government, Tamil Nadu is expected to run a fiscal deficit of 2.79 per cent of its state domestic product in 2017-18. Uttar Pradesh is expected to clock 2.97 per cent for the same year. Both numbers are perilously close to the 3 per cent upper limit set by the 14th Finance Commission.
So where do the comparisons come in? From the revenue raised by successive Tamil Nadu governments.
During 2015-16, the state collected 69 per cent of its revenue through taxes and other receipts. It was 71 per cent in the preceding year. The trend has been the best in India. As 2011-12 data show, the state’s marksmanship in collecting sales tax has been impressive compared with its annual Budget estimate. (We exclude state excise which is largely built from liquor sales). The numbers start to fray from 2014-15 (political tension had begun to rise by then). But, every year, the actuals were better than the year before.
This story holds true for comparable better-administered states such as Maharashtra or Gujarat but is quite different from states like Uttar Pradesh. The conversion of Budget estimate against actuals has happened only once in the comparable years for Uttar Pradesh.
To understand why the numbers have so far held up for Tamil Nadu, one needs to see how the arrears of the same tax have been dealt with. This holds a mirror to the efficiency of the bureaucracy. The more empowered they are, the more diligently they can pursue arrears. For the latest reported year, ended March 2016, the arrears for Tamil Nadu were Rs 25,930.42 crore, almost half of the 2015-16 collection of Rs 57,522 crore.
But a banker poring over those numbers will be comforted that of the total arrears, just a quarter was pending for more than five years. Set it off with the numbers for Uttar Pradesh: It has an almost similar level of arrears (Rs 27,188.58 crore) but the percentage dating back more than five years is close to 50 per cent. This is at the heart of the difference in the spread of pricing of the debt papers.
But as the politicians stay away from work in Chennai, bad practices could swamp the state. While the state had less than 5,000 tax arrear cases pending as on March 2015, by next year that number had shot close to the levels of laggard states, at 7,639. The goods and services tax (GST) system, prone to more litigation, will be grafted on this difficult base.
