Much is made of the more than doubling of Tamil Nadu’s debt at the time the late J Jayalalithaa was at its helm, from Rs 114,470 crore in March 2011 to Rs 235,260 crore in March 2016, since this is probably the fastest growth in debt among the bigger states – Maharashtra’s debt, in contrast, rose from Rs 230,630 crore to Rs 379,360 crore and Gujarat’s from Rs 143,020 crore to Rs 229,280 crore in the same period. Needless to say, the debt flows from the late Jayalalithaa’s expensive freebies, from the Amma canteens to the subsidized medicines and the gold for mangalsutras on marriages, among others. Certainly a check needs to be kept on subsidy expenditure, but it is important to put this in context. Subsidies like mid-day meals, for instance, have positive externalities since they raise enrolment ratios in school and that is why most states offer these facilities. Given how unexpected medical expenses are the biggest trigger to pull back families below the poverty line, subsidizing these are a good idea – if bulk government purchases cut big manufacturer margins, this is a good idea, but done badly, the result can also be large-scale purchase of spurious medicines; in this context, the centre organizing low-cost accident insurance (9.7 crore persons have already bought this) and life insurance (3 crore persons have bought this) is an example of a good subsidy.
There is little doubt Tamil Nadu’s subsidy-driven expenditure was high under the late chief minister – the state’s revenue expenditure was 13.3% of its GDP in FY16 as compared to 10.4% for Gujarat and 10.7% for Maharashtra; within this, non-development revenue expenditure was 4.3% of GDP vs 3.6% for Gujarat and 3.9% for Maharashtra. But this was matched by rising tax ratios, and on a GDP base that was also rising fast. While Gujarat’s own-tax-revenues fell as a proportion of its GDP, from 7.4% in FY14 to 7% in FY16, and that for Maharashtra from 7.2% to 6.9%, this rose from a high 8.6% for Tamil Nadu to 8.7% in the same period. The high growth in the state’s GDP also ensured interest payments on the accumulated debt was 1.5% of GDP in FY16 which was similar to Maharashtra but lower than Gujarat’s 1.7%. In other words, it would appear Amma bought peace with the poor while pushing for higher industrial growth.
As long as her successor O Panneerselvam is able to attract industry to the state and grow the economy, the social sector spending can carry on without a problem – but if investment, and growth, slip, Amma’s legacy of freebies will have to be unwound.