Tamil Nadu's economic streak has the sword of demography hanging over it

Pioneer in many social security measures, the state now faces a future of compulsive welfare and competitive politics

Forty years ago, former Tamil Nadu chief minister M G Ramachandran made history by providing mid-day meals for school children in the state. Today, India’s central government spends Rs 13,000 crore (close to $2 billion) on a nationwide programme of this kind, on which states top up their expenditure. 

The southern state, which is going to polls at the end of March, has been a pioneer in several other areas, but also has an overhang of its welfarism on the state of its finances. While it is an investment puller, a manufacturing powerhouse, and well-known for its state-funded populism on one hand, its power generation and distribution utilities have made its financial situation feeble, and the load of its committed spending on salaries, pensions and interest is only going to look up in the years ahead. 

The current government, run by All India Anna Dravida Munnetra Kazhagham (AIADMK), came to power despite being the incumbent party between 2011-16, when Jayalalithaa was alive and at the peak of her popularity. It was followed by factionalism, reunion, and alignment with Bharatiya Janata Party, which rules at the Centre. The chief opponent, the Dravida Munnetra Kazhagham, is hoping to ride on the anti-incumbency of a decade. 

The absence of a towering leader like Jayalalithaa, the rising presence of the BJP, and the impact of small but important forces like Kamal Haasan, make the contest interesting for the main challenger, DMK. 

But are Tamil Nadu’s finances set to service its every growing requirements? Did the current government live up to its promises? 

Demographic changes and welfarism 

Apart from being the country’s most urbanised state among the large states, Tamil Nadu is largely an ageing state along with Kerala. A tenth of the population is above 60 years of age. But one has to look at the future. 

In less than a decade, one in five Tamil Nadu residents will be above 60 years of age. An ageing population will put pressure on state coffers, as about 20 per cent of the populace would be dependent on social security via state support to a good extent, and would not contribute in the form of taxes, savings which form the pool for investments. Going by Tamil Nadu’s legacy of populism and public provisioning of private goods, the state may have to spend a fortune on senior citizens going forward.

This will be an additional burden on the state’s expenditure account in the form of committed spending in coming years, rising each year. 

Now, committed expenditure mostly consists of interest payments towards outstanding debt and salaries and pensions. Put together, these three spending heads take up a massive 50 per cent of total spending of the state even today, similar to other states. 

In the decade long rule to date of the AIADMK, Tamil Nadu’s debt has grown four-fold, from Rs 1.3 trillion in 2012 to an expected value of Rs 5.7 trillion at the end of March 2022, the state Budget notes. From 17 per cent of gross state domestic product (GSDP or the annual size of the state’s economy), it will go up close to 27 per cent of GSDP at the end of next financial year. 

The interest burden on the state is thus slated to rise. In fact, it has grown 45 per cent in the last three years. With such a rising committed spend, even if the state controls the spending on salaries and pensions, the pie available for social security and new kinds of welfare spending will inevitably shrink. 

Apart from providing social security, recently announced measures may also add pressure. Days after the DMK announced a monthly cash support of Rs 1,000 per month to every woman head of household, the ruling AIADMK announced their version with Rs 1,500 per family per month. 

They also added six free LPG cylinders to the freebie basket. A non-subsidised LPG cylinder costs more than Rs 830 in Chennai, the capital, and spending per family only on LPG subsidy would go to Rs 5,000 per year. 

To its credit, Tamil Nadu spends better than average on secondary and tertiary public health, and ensures horizontal equity and access to health care, a 2020 paper by the National Institute of Public Finance and Policy by Mita Choudhury and Jay Dev Dubey notes. 

“Public spending, particularly at lower levels of care, is significantly high in relatively poor districts and is therefore, pro-poor,” it says.

With having embraced the epidemiological transition to non-communicable diseases fastest among other states, Tamil Nadu also tops in the share of diabetics per million people. 

Economy, Employment, Manufacturing and MSMEs 

Tamil Nadu is the second biggest state economy in the country after Maharashtra, and is currently vying with Uttar Pradesh to save its second spot (according to Budget estimates for 2021-22). 

Organised manufacturing, the biggest generator of organised and secure jobs, contributes 20 pre cent to the state’s economy, higher than the 14 per cent contribution at the national level. Construction, another booming employment provider, is 10 per cent of the economy pie of TN, higher than 7 per cent at the pan-India level. 

This has ensured that per capita incomes in Tamil Nadu are way better than the national average. 

Labour force participation for people above 15 years of age was 53.6 per cent in Tamil Nadu—meaning 53.6 per cent of people of working age group had jobs or were looking for a job—higher than 48.5 per cent for India, in 2018-19, according to the Periodic Labour Force Survey by the National Statistical Office. 

The state has seen new investments from automakers, mobile phone manufacturers and the likes in recent years. In fact, TN attracted the highest foreign direct investment between April and September 2020, the period most affected by the pandemic and lockdowns. 

New deals by TN government include Tata Electronics (Rs 4,684 crore), Ola Electric (over Rs 2,200 crore) Apple's contract manufacturer Pegatron (Rs1,100 crore) among others.

In fact, B C Datta, vice president, Ola Electric and state convener for Ease of Doing Business at Confederation of Indian Industry, said that the New Industrial Policy 2021 has put in place more attractive sops for investments in regions other than Chennai.

“One of the key objectives of the new industrial policy is to achieve inclusive industrial growth. Of course, investment decisions are taken by the companies based on several factors—not just attractive sops,” he said.

Of the 304 MoUs signed in the Global Investors Meet (GIM) that happened in 2019, as many as 81 projects have commenced commercial production and 191 projects are at various stages of implementation, according to official data.

Subsequent to the GIM, the state has attracted 166 projects with a cumulative investment of Rs 1 trillion potentially opening up 250,000 jobs, an industry spokesperson said.

The state has been supportive towards small companies, or the Micro Small and Medium Enterprises (MSMEs), a recent report by the Reserve Bank of India noted. The subsidy to MSMEs to account for their capital investment, power, and New Entrepreneur-cumEnterprise Development Scheme (NEEDS) has almost doubled in four years.