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From welfare to wealth [Tamil Nadu model of human development]

Discussion in 'World Economy' started by INDIAN NATIONALIST, Aug 30, 2015.

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    Oct 15, 2011
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    From welfare to wealth

    TNN | Aug 12, 2015, 10.12 AM IST

    With their emphasis on PDS, education, healthcare and population control, the Dravidian parties have helped to make Tamil Nadu a leading state in human development. For much of the last 50 years, however, the state's economy has grown slower than the national economy. Efficient governance and improved tax collection can help sustain the turnaround that started in 2006-07.

    Asurvey of Tamil Nadu's contribution to nation al output over many years gives us impor tant insights into the state's development trajectory. It also gives us a roadmap for the future, regarding policies that will help put the state on a highgrowth track while building on its impressive human development record.

    We can look at long-ter m growth by calculating the proportion of Tamil Nadu's net state domestic product to the national income of the country since 196061. This ratio shows how much Tamil Nadu contributes to the national economy . Whenever this ratio increases, it implies the state economy has grown faster than the national economy.

    It is illustrative to see that when the Congress left the state administration in 1966-67, Tamil Nadu's contribution to national economy was 7.9% and it took nearly 27 years for the state to touch this mark in 1994-95. TN slipped once again to regain this position only in 2005-06 and thereafter maintained that level. But, during this period -when Dravidian parties have ruled -human development has proceeded at a faster pace. Tamil Nadu has been in the top 3 to 6 positions among the major states in the country in terms of human development index.

    Besides a strong public distribution system, we also cannot ignore the growth in education and healthcare, and the consequent reduction in population growth. As a result, the per capita income of the state has been more than the nation's per capita income by 40% in most of the years since 1994-95. Though the state can be proud of a higher level of human development and a higher per capita income, it needs to sustain and improve on these indicators in the years to come. The post-2006 recovery needs to be on strong footing.

    Though the state's direct borrowing is within limits, does it raise enough revenue for meeting its growing expenditure? The state government has raised concern over declining financial transfers from the Union government in spite of the fact that the 14th Finance Commission recommended a higher share for states in central tax revenue. Tamil Nadu will receive a lower share under the 14th Finance Commission's distribution formula and also a reduction in plan grants from the Union government with the replacement of Planning Commission with NITI Aayog. In the face of reduced central transfers, the state government should raise enough of its own tax revenue.

    Liquor fetches nearly 30% of state's own tax revenue. Even a phased introduction of tighter regulation on distribution and consumption of liquor will significantly reduce tax revenue.Another 14% to 15% of the state tax revenue is collected through sales tax on petroleum products.Thus nearly 45% of the state's own tax revenue is received through just two commodities.The sales tax from petrol depends on its price, which fluctuates with the rupee exchange rate and variations in global crude prices. The cost of collecting these two taxes is not high, and that has likely induced the government to be lax in collecting other taxes.

    Stamps and registration fees, taxes on vehicles, taxes on goods and passengers and taxes on electricity are some of the other important tax sources for a state.With increasing urbanization and industrialization, the base for these taxes should increase. In this regard, we can compare the experience of Gujarat and Maharashtra with that of Tamil Nadu as the three states have comparable levels of urbanization and industrialization. Let us exclude the sales tax and excise duty revenues, cise duty revenues, primarily to remove liquor and petrol from the equation. In the period 2011-14, Gujarat had a net tax-GSDP ratio of 5.4 and Maharashtra had 3.8, while TN stood at a much lower 2.9. There is an urgent need to tone up tax administration in Tamil Nadu to improve tax collection and reduce the dependence on volatile tax sources like liquor and petrol.

    GST, when introduced, will subsume all taxes except sales tax on liquor and petroleum products and stamps and registration fees.Given its large industrial production base and a growing services sector, the state's tax base under GST will widen and increase its tax potential. Moreover, with the concurrent powers available for both Union and state governments to levy GST, the tax administration will improve along with tax collection. Of course, zero rating of GST for inter-state trade will substantially reduce the tax revenue for Tamil Nadu. We have to carefully weigh the relative costs and benefits of moving to the new tax regime, before making any final judgment.

    An area of concern is the fluctuating and low level of agricultural output , particularly foodgrain production. The contribution of agriculture and allied sectors is less than 8% of the state income. The lower value addition from agriculture and allied sec tors with a large workforce employed in it shows the extreme inequality in income distribution in the state. Further, in the last three years, the average foodgrain production has been less than 340 grams per day per capita in the state -less than 70% of national figures.

    A state of the size of a west European country in terms of population and land mass should be self-sufficient in food production. It is true the state can always bring in foodgrains from other parts of the country, yet the argument for self-sufficiency is valid in the context of fluctuating and inadequate food inadequate food grain production in the country as a whole.

    The collection of non-tax revenue in terms of user charges is very low in Tamil Nadu. The non-tax revenue in Tamil Nadu over the last three years the last three years has been around 6.5% of its own revenue (leaving out Central transfers) and this ratio is one of the lowest in the country . With a public expenditure of more than Rs 1.5 lakh crore, it is essential to collect more non-tax revenue. The fact that power and transport utilities also raise larger amount of loans shows the cost recovery in such utilities is low.

    The delivery of public services is indeed a serious matter of concern in public policy. The growth of private sector in education, healthcare, transport, and drinking water reflects the inefficiency of the public sector and also people's willingness to pay for such public utilities. As school education, public health, drinking water and sanitation should be provided through tax financing, it is not essential to price them based on willingness to pay. Improving transparency in public administration and quality of services will go a long way in meeting public demand as well as contributing to sustainable development of the state. If high-quality public services are provided at low tax rates, then there will be little public opposition to paying optimum user charges for other services like transport and power.

    (The author is an associate professor at the department of econometrics at Madras University)

    From welfare to wealth - The Times of India
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