TN reports higher debt and budget deficit in 2021 budget, experts say “no reason to panic”

The AIADMK government of Tamil Nadu presented its last budget for this legislature on Tuesday. Deputy Chief Minister O Panneerselvam was all smiles as he read the provisional budget for the year 2021-2022 for the state of Tamil Nadu to the applause of his colleagues at Kalaivanar Arangam in Chennai. Two main aspects of the budget that stood out are the state budget deficit, which is expected to be around Rs 1 lakh crore by March 31, 2021, and Tamil Nadu’s overall debt burden, which is expected to earn Rs. 5.7 lakh by March 31, 2022.

“The overall outstanding debt as of March 31, 2021 is estimated at Rs 4,85.502.54 crore and as of March 31, 2022 it is estimated at Rs 5,70,189.29,” OPS said. He added that the budget deficit in the revised 2020-21 estimates is expected to widen to Rs 96,889.97 crore, or 4.99% of the state’s gross domestic product (GSDP).

Minutes after the speech ended, Opposition Leader MP Stalin criticized the budget by tweeting that the AIADMK government led by Edappadi K Palaniswami and O Panneerselvam resulted in high debt for Tamil Nadu at Rs 5, 7 lakh crore. He further said that when DMK ended his tenure, he left the government on a surplus budget and the AIADMK’s 10-year rule pushed the state into a deep debt position.

TNM spoke with economic and financial experts to understand how to understand these figures provided for in the state budget.

“The budget deficit is a relative number”

The budget deficit is the difference between the inputs and the budgeted expenditure of a government. G Saimukundhan, a Chennai-based accountant, says almost every country in the world has budget deficit. “Governments always borrow money and use it to meet all planned expenses. In general, the public deficit is not bad, ”he explains.

According to Tuesday’s budget, the Tamil Nadu government’s budget deficit is expected to rise to Rs 96,889.97 crore, or about 4.99 percent of GSDP, by the end of fiscal year 2020-21. The Deputy Chief Minister also added that this is within 5% of the GSDP recommendation of the 15th Finance Committee.

Venkatesh Athreya, an economist, explains that it is important to consider the budget deficit as a percentage of the state’s GDP and not as an absolute number. “The absolute number doesn’t really matter. This number should be viewed as a share of the state’s GSDP. The budget deficit is a relative measure, not an absolute measure, ”he said. Adding that the budget deficit obsession is foolish, especially in this pandemic year, Venkatesh Athreya says government spending can increase demand and jumpstart the economy.

“No way for states to generate income”

Venkatesh Athreya accuses the Union government of having wrested the means of revenue from state governments. “The Union government has withdrawn all state resources and thrown all spending on state governments. The Union government also levies surcharges that it does not have to share with the States. The criminal in this case is the Union government. State governments are particularly vulnerable because there are far fewer resources to fundraise, especially after the GST, ”he points out. He adds that the pandemic, which was unexpected, found its way into state governments bearing much of the expense.

“The GST has deprived the state government of all taxing powers except for four things. And these (state governments) are elected governments. The exemption we have in this country is atrocious and unfair, ”he adds.

Focus on how loans are used

Both experts say unanimously that the focus should be on how the borrowed money is used by the government.

Saimukundhan points out that the fear of borrowing stems from the fact that when governments borrow too much and fail to repay, the economy will be in ruins. “Borrowing is not a bad thing. But the key question is what is this money spent on? The loan should ideally go to development infrastructure. The underlying point is that whatever is borrowed must be for development, which will eventually generate returns on investment, not expense, ”he explains. He also adds that due to the coronavirus, every country borrows money and has deficit budgets, and Tamil Nadu has also done the same.

On the other hand, Venkatesh Athreya says that the first option for any government to raise money should be to tax the rich. Borrowing should be a secondary option, he says. “But borrowing, in and of itself, is not necessarily bad. It depends on what is done with the borrowed resources, how they are used, can she repay herself or not, etc. In India, we have a very disproportionate share of indirect taxes that are independent of the level of personal income. Indirect taxes disproportionately burden the poor. Any civilized society must seek to increase income by taxing the well-to-do. He adds that a large budget deficit is justified when the economy is in decline.