TAMIL NADU’S Weak Growth Suggests Fiscal Slippages: Ind-Ra

Tamil Nadu’s (TN) gross state domestic product (GSDP) growth as per advance estimates could be 4.61% in FY13, which mirrors India Ratings & Research’s (Ind-Ra) expectation of a fall in growth. Subdued industrial activity and drought hit agriculture derailed the growth momentum. Nevertheless, the state remained within its FY13 budget estimates (BE) in achieving revenue surplus and fiscal deficit/GSDP - nominal GSDP unrevised by state.
The state expects fiscal deficit/GSDP and revenue surplus to remain within its 13th finance commission targets for FY14. However, if the state GSDP growth underperforms expectations, concrete strategies would be required to keep its fiscal plans on track. In Ind-Ra’s opinion, the current economic climate and power crisis have impacted the industrial production outside the capital (Chennai). The global links of the textile and auto sectors in the past have fatally affected the state’s economic performance.
Nevertheless, the government has reaffirmed its commitment to restructure the discom – earlier announced plans like taking over 50% of the short-term liabilities, part financing cash losses and fresh increased assistance (42% over FY12 allocations of INR79.13bn). In Ind-Ra’s opinion, the state has the wherewithal to shoulder the additional liability and debt dynamics are favorable. Debt/GSDP would be at 18.98% in FY13 and likely to be 19.97% at FY14.
The state estimates revenue will be INR1,145.51bn in FY14, a 12.55% yoy increase over the FY13 revised estimates (RE). The state’s own tax revenue (SOTR) is forecasted to increase 11.72% yoy, giving SOTR buoyancy (ratio of growth in SOTR to nominal economic growth) of 0.94x. The state expects grants and its share in central taxes to grow 26.56% and 19.06% yoy in FY14, respectively. Ind-Ra believes optimistic revenue projections may result in low revenue realisations in FY14.
The federal government’s dual pricing of diesel has led to increased allocations to state transport corporations; the state released INR2bn in FY13 and budgets INR5bn for FY14. Committed expenses/GSDP upped to 13.48% in FY13 (RE) from 13.32% in FY12. Until the restructuring of discoms ends and there is adequate increase in bus fares proportionate to the cost increase, a fall in subsidies cannot be expected.  Revenue expenditure is estimated to increase 9.99% yoy in FY14 as against an increase of 20.86% yoy in FY13 (RE) which is optimistic. Revenue surplus primarily dipped due to high revenue expenditure in FY13 against the FY13 budget estimates.
The Vision 2023 plan was reiterated in the budget speech and the government’s initial allocation for infrastructure of INR20bn offers hope for development reforms. However, the proof of reforms will be in their implementation. The formation of TN State Highways Authority is welcome. Nevertheless, if the state could plug in issues encountered by National Highways Authority of India in the sector, it would have a salutary effect on its development. In comparison to the FY13 nominal GSDP of 18.72%, trimmed FY14 growth (12.50%) appears realistic. Nonetheless, global association and restrained industrial activity fail to dispel downward pressure on the state finances.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research - A Fitch Group Company)