The price of reforms

The Tamil Nadu government resorts to massive increases in power tariffs, bus fares and prices of food articles sold through the public distribution system and a range of other basic commodities.

IN an unprecedented exercise, the Tamil Nadu government has taken a range of fiscal measures to try and mop up a whopping Rs.4,482 crores during a financial year. The extra-budgetary effort cuts subsidies; tampers with the price structure of the public distribution system; raises steeply power tariffs, bus fares and the prices of several basic commodities, including milk and sugar; and raises taxes, including those on cooking oils and diesel. A downsizing of the government's staff strength and privatisation measures have also been announced. All India Anna Dravida Munnetra Kazhagam (AIADMK) general secretary and former Chief Minister Jayalalithaa blamed the previous Dravida Munnetra Kazhagam (DMK) government for the poor financial situation of the State, which necessitated the tough measures. She said the "stiff revisions are certainly not anti-people".

The "reforms" are, according to the State government, on the lines of the Centre's ongoing efforts, and meant to conform to International Monetary Fund (IMF)/World Bank conditionalities. The announcement by the government, which lists the various measures, states: "The government may commit itself to the Government of India and the international financial agencies on holistic fiscal and sectoral reforms, covering all sectors including power, transport and food sectors. The government may initiate a dialogue with the Government of India and the World Bank for obtaining economic restructuring loans, and take action on reforms."

According to a highly placed official, the government is looking to the World Bank for loans because its finance is the "cheapest".

The two measures that will hit the common person the hardest are the increases in power tariffs and bus fares. A "rationalisation of electricity rates" has been undertaken in order to address the Tamil Nadu Electricity Board's (TNEB) revenue deficit of Rs.2,747 crores. Power for domestic use will cost 33 to 48 per cent more; for tiny and cottage industries the increase is in the range of 15 to 20 per cent; for the three rural electric cooperative societies it is 525 per cent more (from 20 paise to Rs.1.25 a unit); and there is a 9 to 10 per cent rise in the case of the Information Technology-related industry. The maximum demand charge has been doubled from Rs.150 per kVA a month. For commercial units, the increase is 40 paise a unit.

The bus fare increases range from 33 per cent to 100 per cent in the metropolitan areas and go up to 61 per cent for rural services, and are intended to deal with a loss of Rs.2,035 crores accumulated by the transport corporations. In order to reduce expenditure, the 19 transport corporations will be merged into seven entities.

Also, the government "has decided in principle to operate private buses in a phased manner in all the districts, including in Chennai," and to reduce the number of transport workers. The privatisation move comes close on the heels of the government's recent 'success' in breaking a strike by public sector transport workers.

The government plans to reduce its staff strength by 30 per cent over a period of five years. A ban on recruitments is in place. Wherever possible, drivers and security personnel, and even teachers, are to be appointed on contract basis. Restrictions have been placed on travel expenditure for government officers. The earned leave encashment facility has been suspended.

For the 'above poverty line' category of citizens the price of rice sold through the public distribution system goes up by 157 per cent (from Rs.3.50 to Rs.9 a kg), and the supply of sugar has been stopped. These steps and the differential pricing system to be followed for people above and below the poverty line, will, it is claimed, reduce PDS subsidy by Rs.600 crores from the present Rs. 1,540 crores.

The District Cooperative Milk Producers Unions and the Tamil Nadu Cooperative Milk Producers Federation have been allowed to increase the price of milk "whenever necessary". Consequently, the milk marketing bodies have announced increases in the prices (of Rs.2 a litre) from December 1. In the course of the "implementation of uniform floor rates and other taxation measures," a 4 per cent tax is to be levied on edible oil, cotton hosiery goods and computer software. A user charge is to be levied on higher education, and universities are to mobilise additional revenues.

For large sections of the population which depend on government hospitals, the decision to levy a fee of Rs.5 on out-patients at super speciality wards, as also on every visitor during non-visiting hours, has come as a shock. Considering the income level of people who usually use government hospitals, this levy is unjustifiable.

The government is to levy a duty of Rs.750 a tonne on molasses sold outside the State. The sales tax on urea, caustic soda, pressure lamps and tyres and tubes has been raised. Diesel, cement and furnace oil will attract an entry tax.

For industry, caught in a recession, many of the above steps could not have come at a worse time. Ambattur (Chennai) Industrial Estate Manufacturers Association president L. Leela Krishnan says: "The power hike has come at a time when small-scale industries were reeling under recession. This would hit us hard."

The Confederation of Indian Industry said in a statement: "While the increase is stated to be unavoidable, the government could have used the occasion to moderately hike power tariffs. Significant cost reduction could have been done through process efficiencies of the TNEB." According to Hindustan Chamber of Commerce president N. Tarachand Dugar, the steep hike in bus fares would affect the poor and have a spiralling effect on inflation.

THAT some thought went into the move is obvious from the fact that the government brought out in August a White Paper on the state of government finances. It sought to show that the previous government was primarily responsible for the situation. It also prepared the ground for the IMF-World Bank-dictated reforms.

The White Paper pointed to the high gross fiscal deficit (Rs.5,781 crores in 2000-2001) and revenue deficits (Rs.3,922 crores), particularly in the latter half of the 1990s, and the depletion of cash reserves. It noted that in March (the AIADMK government took over in May), the State had a liability of Rs.942 crores - a loan of Rs.242 crores from the Reserve Bank of India and a cash liability of Rs.700 crores. The subsidies, according to the White Paper, total Rs.5,465 crores. However, included in this figure, unjustifiably, is Rs.1,798 crores as salary grants to the education sector.

Citing the above figures, the government argued that there was no other way the situation could have been dealt with, particularly as "the State cannot expect a significant growth in its tax revenues to augment its resources," given that tax as a percentage of net State domestic product (NSDP) is the highest in Tamil Nadu compared to other States. But tax as a percentage of NSDP has been declining since 1990-91 in Tamil Nadu (from 11.29 per cent to 9.14 per cent) as also in the other States. And this, as Madras Institute of Development Studies (MIDS) Chairman Dr. C.T. Kurien says, is related to the liberalisation and globalisation policies pursued since 1990-91 by the Centre.

WHAT alternative options did the government have? Says Dr. K. Nagaraj, Professor, MIDS: "There are several ways in which the situation could have been handled. First, there is a need for a dispassionate review of the situation and a comprehensive analysis of the tax policy, including its implementation."

According to Nagaraj, to begin with it is worth examining the tax-NSDP ratio. The reasons given by a highly placed government official for the decline in the tax-NSDP ratio is that between 1996 and 2001 the growth of State gross domestic product declined from 6.66 per cent per annum to 6.22 per cent per annum. The growth rate of agriculture and industry declined - from 4.33 per cent per annum to 2.66 per cent in the case of the former and from 6.92 per cent to 4.14 per cent in the case of the latter. But the 1990s was also a period when there was a change in income distribution, and inequalities increased sharply, pointing to a larger tax base. So, if at all, the tax-NSDP ratio should have increased.

According to Nagaraj, the government's move is a panic reaction to a problem that has persisted for over a decade. Without analysing the root cause of the problem and adopting a holistic approach, the government has taken the soft option of blaming the previous government and resorting to harsh measures, he says. Further, he points to the falling revenues from taxes on vehicles since 1990. This, he says, is surprising since the number of vehicles has more than doubled during the same period. Also, the revenues from stamp and registration fees, and taxes from entertainment and betting have declined, which is also surprising. The government should have tried to address all these issues before implementing measures that burden the poor, he says.

Speaking at a seminar on the White Paper organised by the MIDS, former Member of Parliament Era Sezhiyan said that the liberalisation policies pursued since 1990-91 were certain to affect the States. The first casualty would be the social welfare schemes.

Chairman of the Madras School of Economics, Dr. Raja Chelliah, another speaker, said that it was imperative that the tax administration be strengthened. Tax revenues would increase considerably if evasions were plugged and compliance was ensured. Initiating a panel discussion, Parthasarathy Shome, Director, IMF-Singapore Regional Training Institute, said that additional revenues could be mopped up by improving fiscal governance, introducing value-added taxes and decentralising expenditure.

The main factor that drained the State's coffers, according to Kurien, was the implementation of the recommendations of the Fifth Pay Commission (accounting for a total amount of Rs.8,565 crores in 2000-2001) and pension disbursements (Rs.2,927 crores in 2000-2001). Just as profit is the bottomline for industry, in public finance, people's welfare is the bottomline. There is a case for targeting the subsidies better, rather than eliminating them, Kurien said.

According to Dr. A. Vaidyanathan, Emeritus Professor, MIDS, inefficiency in the production and distribution of electricity, leakage, theft (of over 25 per cent, according to recent estimates) and underpricing need to be studied.

Another major issue the White Paper dealt with was the transfer of funds from the Centre. Of the total revenue received from the Centre, the grants-in-aid and share of Central taxes declined from 32 per cent in 1992-93 to 24 per cent in 1999-2000. This, according to Era Sezhiyan, is a larger issue involving Centre-State relations. This figure, according to Nagaraj, declined for all States during the 1990s, the period of economic reforms.

VARIOUS political parties have flayed the government's move and have planned agitations against the "anti-people" measures. Former Chief Minister and DMK president M. Karunanidhi, while refusing to comment on Jayalalithaa's charge that his government had left the coffers empty, said: "It is for the people to judge."

The Tamil Maanila Congress, an ally of the AIADMK, demanded the withdrawal of the hikes in bus fares, PDS rice prices and power tariff. Condemning the price hikes, Communist Party of India (Marxist) State secretary N. Sankaraiah urged the government to withdraw all anti-people measures and said that the AIADMK had "stabbed the people who voted for it in the back". Communist Party of India leader R. Nallakannu urged the State government to convene the Assembly to discuss the issue. Terming the hikes unprecedented, Paattali Makkal Katchi leader S. Ramadoss urged the State to withdraw its "draconian measures".