According to a study for the Fourth State Finance Commission of Tamil Nadu, co-authored by D K Srivastava, director, Madras School of Economics (MSE), between 2005-06 and 2009-10, the real growth rate of Tamil Nadu’s economy was 9.76 per cent per year, as against the all-India average of 8.52 per cent. The state’s GSDP growth has come from services, which grew at more than 12 per cent per annum. Tamil Nadu has the potential to grow at more than 10 per cent per year, the study concluded.
Srivastava spoke to Business Standard’s T E Narasimhan and Gireesh Babu about the state’s economic situation, the Jayalalithaa government’s Vision 2023, its performance in the past year and the way forward.
Tamil Nadu’s fiscal situation seems to be relatively comfortable, since the revenue account is in surplus, revenues are by and large buoyant, and the debt-GDP ratio is also relatively low compared to other states. While these are positive developments, the challenge for the government will be to attract capital and create the basic requirement of a manufacturing sector, which is going to lead the growth.
The two main events during the first year of Jayalalithaa’s government were its full- year budget and its Vision document, a road map for economic strategy and growth up to 2023.
The fiscal deficit is below the Fiscal Responsibility and Budget Management Act limit of three per cent. The debt-GDP ratio is also low compared to other states and is slated to come down further. These are positive developments.
Now, the forward-looking Vision 2023 document of the state government aims at 11 per cent annual growth of the state economy, which would be led by the manufacturing sector, which is expected to grow by 14 per cent annually.
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In this context, a few qualifications need to be understood. One is that manufacturing sector-led growth is going to be highly capital-intensive. Therefore, Tamil Nadu needs to attract capital.
Second, energy-intensive growth tends to be a binding constraint for the state’s economy. Unless the constraint is reduced, the chances of high growth are meagre.
Third, industry and manufacturing cause pollution, so there will be further environmental pressure on the economy, which will call for additional health expenditure.
Creating skilled and unskilled manpower is another challenge. The government should look at the quality of education, since graduates who are coming out from colleges are unemployable, because of either language or conceptual difficulties.
The other challenge is to find markets for products made in Tamil Nadu, both domestically and abroad. If the state grows at 11 per cent yearly, the demand for products from Tamil Nadu should also grow at such a rate. But the rest of the country is not slated to grow at this rate — it is slated to grow at a more modest rate of seven-eight per cent. So, there will be a demand-supply mismatch.
Exports depend on global demand, and global demand is weak. The world economy is slated to remain in slowdown mode for a long period and therefore one doesn’t expect export demand to be very good.
Sectoral targets
There needs to be a clear division of this growth target (11 per cent yearly by 2023) into sectoral growth targets of GSDP growth in the coming years, a clear linkage between the state’s growth and the country’s GDP growth, and an understanding of the global economy and the potential of export growth from Tamil Nadu.
Further, there has to be some sequencing in achieving this target. It is one thing to say that we will achieve 11 per cent target, but what will be the sequencing of that? What will happen in the first few years? What adjustments will be made? These issues need to be sorted out.
“I think that for the country as a whole, the service sector appears to be the growth option.” The capital requirement in the service sector is also much lower than what is required in the manufacturing sector. So as far as sectoral allocation of investment is concerned, it may be better to focus on the services sector almost equally, if not more than, manufacturing.
On the first year of the Jayalalithaa government
In the first few months after taking charge, the new government concentrated on meeting all the electoral promises and expenditure was more focused on the social sectors. Although the government has faced a lot of criticism, costs have been kept in check and if one analyses the issue, the cost involved might be not be too large.
In the near future, Tamil Nadu will be able to attract savings from all over the country because the credit-deposit ratio shows that there is an inflow of investment from the rest of the country. This feature is likely to continue, as long as the growth rate in Tamil Nadu is higher than the average growth of the rest of the country.
Besides making more policy announcements, the government should also provide better quality infrastructure, including power, road and transport. There is nothing else that industry will need. The government can at best facilitate the availability of land to them. Beyond that, they don’t need any fiscal measures.
As far as agriculture is concerned, the chances are not bright, owing to water scarcity, lack of proper irrigation systems and untimely arrival of seeds.
Prices have been increased both for electricity and some of the other items of mass consumption and I would support that initiative of the state government. This was long overdue and unless we take such strong measures, you will not be able to generate enough savings in the economy.