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

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Capital Market
Last Updated : Jul 28 2016 | 12:11 AM IST
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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First Published: Jul 25 2016 | 11:51 AM IST

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