Dr Palanivel Thiaga Rajan, the Tamil Nadu Finance Minister, outlined his views and perspectives in his address at the Fourth R K Swamy Memorial Lecture.
Many states have announced their trillion dollar goals, including the state of Uttar Pradesh. Of course, the first difference between us is that by population and size, Uttar Pradesh is about three times that of Tamil Nadu. So even when UP gets to a trillion dollars in roughly the same time as us, it would still be—at a per capita level—one-third at best. Whereas, in Tamil Nadu, we are already effectively a ‘below-replacement’ rate society. But, slogans and targets are important in the political discourse. They are important in setting a common agenda for everybody to work towards. For Tamil Nadu, I want to discuss about how we to the trillion dollar goal with three different perspectives: one, purely a mathematical or macroeconomic perspective; two, an administrative or a top down perspective; and three, a people-based, bottom-up perspective.
The problem with targets is that there are two or three major variables beyond our control. The first is population. Economy has a very different feel, depending on the size of the population and the rate at which it’s growing. The second is that we don’t control the value of the dollar. And finally, the targets are set in nominal terms or that day’s money. When you set it in nominal terms, you have a variable of inflation or the weakening of money, which is also not in your control.
If we assume that we’re starting roughly at around 300,000 and we have to get to a trillion dollar, assuming that there is not any dramatic movement in the exchange rate, then mathematically, we’re looking at a compounded annual growth rate (CAGR) of about 14 to 15% a year, between now and the year 2030. That seems like a lot. But it is neither that big a stretch nor historically unprecedented. For example, in the years 2006 to 2011, we achieved about 10.15% real growth without the effects of inflation. If we assume inflation was 5 to 6%, we were averaging 15 to 16% growth. The odds are that inflation stays closer to 6% for the foreseeable future for various reasons around the world. So it’s eminently doable in terms of just the mathematical requirement.
The tailwinds and headwinds
We have some very good tailwinds and a couple of looming threats. From the tailwinds perspective, the diversification and logistical delinking from China and the increase in the scale and scope of the Indian economy, all benefit Tamil Nadu disproportionately. We are one of the preferred destinations of the global de-risking and decentralization. As has been the case since 1991, the year of the reforms, we generally have a levered rate relative to the Indian average. If the Indian economy grows at 6 or 7%, we tend to grow at 8 to 10%. That’s because we have relatively good infrastructure, a very well educated, large and young workforce and better connectivity than most people in terms of ports, airports, internal transportation, etc. These are some of the good tailwinds. We have seen 40 to 50% increase in global investments since last year. We’re continuously fielding new inquiries and trying to close new transactions. In many ways, we will benefit from that. This morning, I had the Vice President of Uber Global from the Bay Area here, talking about how they could help with public transportation models and new approaches.
The one real fear I have which is not unique to us, is that we are in an unprecedented situation in terms of global liquidity and global fiscal constraints. If you look at global monetary policy since 2008, there has been unprecedented excess liquidity—probably to the order of 4 or 5 trillion pre-Covid and then another 2 or 3 trillion since then—sloshing around in the system. Very few countries like Singapore are desperately issuing new securities and soaking up the excess liquidity in the market.
After the pandemic, most governments did a lot of fiscal stimulus. As long as was only monetary stimulus, inflation was contained, as the money was not actually reaching the hands of the people who could spend it. But fiscal stimulus by design gets it into the hands of every citizen or the lowest part of the economic structure. They spend it and then they invest it like low level stock investing as opposed to the big conglomerates that get access to the liquidity and buy real estate, market assets, etc.
I’ve never seen this rapid rate increase in the 20 years I lived in the US. Of course, it started from unprecedentedly low levels. I’ve never seen this kind of a rapid rate increase by the Federal Reserve of the United States and many other banks are keeping up with it. So there is a reasonable risk of a global recession and the central banks of the world cannot engineer a soft landing through an unprecedented storm of liquidity and inflation.
The Top-Down Perspective
As government, our job first is to manage the fiscals of the state properly. It is an undeniable truth that states that borrow for capital investment and states that control their interest payments as a percentage of their total revenue spending, tend to have better growth, going forward. That is a truism. I quoted it right out of the RBI book at my maiden speech in the Tamil Nadu Assembly in July 2016. It’s as true now as it was then.
So from that perspective, our first job as government is to bring the fiscal under control and meet those two criteria—that we borrow only for the sake of investment and that we control the interest cost as a percentage of the revenue. Now, both these deteriorated dramatically between 2014 and now.
From 2003, the passage of the FRBM act in Delhi and the FRA act in Tamil Nadu, till 2014, across all parties, the fiscal of the state kept improving. Debt-to-GDP came down from 28% to 16 or 17%. Interest revenue came down from 21-22% to 10 to 11%, till there was a serious political leadership vacuum. Our view may have been different than that of Ms Jayalalitha of ADMK. But as long as there was some leadership executing some view, the fiscal was in control. After her incarceration in 2014, things turned dramatically worse. And for eight years in a row, we had record revenue deficits, culminating in a revenue deficit of about 62,000 crores in 2021.
We have started to make a big dent in that in 21-22, though coming to office after 10 years and spending about 20,000 crores more than what was planned in that February in the interim budget and losing about 8000 – 9000 crores in revenue due to multiple lockdowns for second and third waves. We reduced the revenue deficit and the fiscal deficit by 16,000 crores last year, the first turnaround in eight years. And we are on track this year to do something similar. So when we borrow less for revenue expenses, we are able to invest more.
We have a debt ceiling, both in terms of the FRA act and more stringently by the one imposed by the union government on all states using their Article 293(3), the equivalent of first lien rights where they limit our borrowing. So, the less we borrow for revenue spending, the lower we pay in interest later. The more we invest this year, the more capacity we build as buffer for the future. Under the terms of the 15th Finance Commission, if we do not use the allowed borrowing limits, we are able to roll them over till the period of expiry of the 15th Finance Commission, which is 2026, after the one year extension that the Prime Minister gave them due to COVID. So, we are doing that part properly.
Caring for MSMEs
The second part is to improve the ease of doing business. Because the government can only do so much, what we really need is private investors, private entrepreneurs and independent businesses, particularly the MSME sector, which creates about 70 to 80% of all jobs, to step up. We need to make it easier for them to do what they do, which is to take risk, build rewards for themselves, create employment for people and improve the overall economy of the state.
We are doing quite a lot. We are now actively engaged with the state-level bankers’ committee, ensuring access of credit and distribution of client base, to reach as many entrepreneurs as possible, partly through improving communication and training through the MSME department whose Secretary happens to have double hat as the expenditure secretary in my department. So we work closely together. There’s a lot more we can do. Guidance Tamil Nadu, which is a single window promotion agency, almost routinely wins Best Agency of the Year awards. We are generally reducing the red tape.
I’m also starting to have discussions with my counterparts in Andhra, Telangana and Kerala, particularly with Telangana, which is the most direct competitor to us. I’ve had a couple of conversations with my friend KTR to make sure that we don’t get cannibalized into transactions that are disruptive or destructive of value. But that’s something that’s on the fringe.
Need for execution skills
The biggest constraint for the government of Tamil Nadu is not money but the capacity to execute on time, under budget, and deliver finished outcomes as planned. That’s not new or unique to the government of Tamil Nadu and that’s all over the place. But in Tamil Nadu, we have a problem because our capital expenditure ratio went down from almost 3% of GSDP in 2011 to about 1 to 1.5% at the bottom, in 2021. Now, when you reduce your spending that much relative to the scale of the economy, clearly, the capacity of execution does not sit around idle waiting for you to spend that kind of money. So some people go out of business, some machines get moved, some companies diversify, some relocate. And so overall, our ability to execute as quickly as we can provide the funds is in fact a bit constrained. And that’s partly a legacy problem. After seven, eight years of falling investment, it’s not likely that you can just turn that switch on overnight. So it will take us a while. Particularly, we’re very focused, therefore, on more and more PPP model, rather than the Government of India’s model where you build something first, and then try to monetize it later. We believe that doing it as PPP—not for core things like citizen services like drinking water but for construction, for infrastructure, for ports, airports, roads, and so forth.
Ms Jayalalitha too had a model under her Vision 2023, though it never got executed. The vision was to double capital expenditures from 3% to 6%. By having the 3% borrowing plus 1.5% surplus in revenue plus 1.5% of private investment, either through funds or directly into projects or in partnership with the government in some other PPP way, we can get to 6%.
But certainly our ambition is to get to 3% and to find another 1% or 1.5% in PPP. The greater value of a PPP model is not just that we leverage capital but they will bring the execution skills, the EPC capacity, the engineering talent, the ability to deliver on time under market discipline of the capital they have raised and their need to answer to. So top-down, this is the way we see it. We need to ramp up annual capex back to 3% of GSDP.
We’ve just put that in a quantitative model this year. Nominal GDP is estimated about 24.5 lakh crores. If we continue down this path, we will be at 30 lakh crores or so in two years. So, 3% of 30 lakh crores will be about 90,000 crores. If we have reduced or eliminated the revenue deficit by then, which is the track we are on, barring a global recession, we will end up tripling our capex in two or three years. As long as we can find the execution capability to do that much capex in time, then, we will suddenly see a huge multiplier effect and not have a problem in reaching our 15-16% CAGR in nominal terms.
The People Perspective
But there’s a third component or a third perspective to this. Just because I have the money or engineering capability or a company with the administrative bandwidth or systems, it does not guarantee outcomes. At the end of the day, it is the people that are the most important asset or limitation of any society, community or state. And since we are in a global economy, whether we like it or not, the final deciding variable is per capita productivity. The higher we have per capita productivity, the more globally viable and competitive we are and the better the quality of life that we can deliver to our citizens, if we do everything else right.
And in particular, I would focus first on the notion of inclusion. Different people have different philosophies. The Economist recently carried an article and was called the Gujaratification of India. It basically showed how the investment ratios have changed—how much towards capex, towards social spending, and so forth. They compared Gujarat and Tamil Nadu and said the two of us have roughly the same per capita income. But the poverty rate in Gujarat is four times the poverty rate in Tamil Nadu. We are fundamentally different societies in terms of the distribution of wealth, consumption, education and access.
This is a very important distinction. When you build refineries and robot driven manufacturing plants, you’re going to pick only the cream of the crop. But if you want to build a wide-based average productivity model, where many people get better off and not a few, then you have to increase per capita productivity and increase inclusion in the quantifiable economy.
Investment in children and women
So from that perspective, I would say the more we invest in children, the better. For example, in the remedial education program, Tamil Nadu is a pioneer. Our Illam Thedi Kalvi scheme has now been presented at the UN General Assembly. For 2% increase in spending, we have achieved a 17% improvement in the remedial upside of children coming back to school. We have started under the chief minister’s leadership, a pilot program to provide free breakfast to young children. Most mothers are not able to get up, cook and supply food to their children before they go to work or before the children go to school, which is often very early – 7or 8 o’clock in the morning.
The other huge variable, I think, is to truly be inclusive of women in every aspect of the economy. We take some pride in Tamil Nadu, in that, with the Justice Party government at the helm, starting in 1921, women were given the right to vote and stand for office. We had women legislators. We had a woman deputy speaker or leader of the Madras Legislative Council. Compulsory elementary education when legislated in 1921, covered both boys and girls.
We have almost 85% of all our 18 year old girls either graduated from high school or gone through high school. That’s not so in most other places. In Gujarat, it’s 50%. But that is only a beginning. That is nowhere near enough. Every time I go to a school or a college, especially women school and women colleges, I exhort them to continue. Having gotten good education, having come this far, having more girls as rankers in the exams too few of them get to operate in the quantifiable GDP calculable economy. Many of them get married or for other reasons, they don’t participate.
So the government is focused on increasing their activity in multiple ways, starting with something as simple as providing free bus transportation, so they’re not dependent on anybody and can actually find their way to work, even if it is a domestic work or anything above that. The free bus rides enable them, empower them and free them up from constraints. We focus on a lot of other ways to bring more women into the workforce.
We found Tamil Nadu has the highest gross enrolment ratio into tertiary education at 52%, almost double the national average and 15 points higher than the second state which is Kerala. But there is a dismally low college enrolment rate for girls coming out of government sponsored or government run schools. So, we have now put out a new scheme where any girl who comes out of a government school and joins ITI or a polytechnic will get 1000 rupee a month scholarship. And anyone who comes out at 12th class and joins a regular college will get 1000 rupee scholarship.
Matching jobs and skills
In Tamil Nadu, like most places in India, we have a surplus of college educated graduates who are looking for work on the one hand, and many companies who say that they don’t have enough employment-ready or skilled-ready workers to recruit, on the other hand. When you expand the scale of education, this is only to be expected. Partly to fix those problems and partly to give proper career guidance and counselling to current high school students and their parents, our CM Mr Stalin has inaugurated his pet scheme, called ‘Naan Mudhalvan.’ It provides the kind of skill and work ethics to increase the employability of the workforce. This is for both existing young people who don’t have jobs, as well as future generations that will come out of school.
We are working closely with many different models, including with multiple organizations from Germany, where they have a skilled apprenticeship model of very highly paid skilled trades, particularly in the automotive and robotics and other sectors. I learn that IBM is working closely with us and creating a lot of certified programmers for particular kinds of needs.
So I would say in conclusion, that, barring a global recession, we will get to our goal in time. On the other hand, if we were to see a global slowdown, Tamil Nadu is better hedged than most others. Above all, I was a risk manager in my career in the financial service industry. I’ve applied my own way of thinking and will ensure that we’re properly hedged as best as we can be. A recession doesn’t mean that money disappears. It just means that growth slows down or goes negative. That’s when governments really need to step up spending and support the bottom of the pyramid and stimulate demand.
Need for 3 Cs
In the final analysis, there are probably three important things that I can see if we have to achieve relatively above average outcomes. The first is, we should have compassion. To me, the overarching quality of a public servant, of a government, of a party is humanity. We are here for improving the lives of people, starting with those that are the worst of the least and provide them with opportunity. Not that everybody stays at the same place all the time. Some people improve, some fall behind, some get hurt, some lose their jobs. So we ought to have a system that is flexible and dynamic enough and we should be able to find those in need today. There is no such thing as permanently in need and permanently not in need. So we need to think more dynamically about that.
The second quality, I would say is competence. Everybody talks big. The question is: Can you deliver what you say you will deliver? I think very few people focus on that and very few people actually deliver that. I’m very proud to say that my chief minister every day holds us to that standard.
To do all of this, you really need political courage, because without reform, there is no improvement. You can’t keep doing the same things and expect that suddenly the world will give you better results. You got to do things differently and better. And in politics, reform is a very dangerous word.
Many of you may have seen the comedy series called ‘Yes Minister’ and ‘Yes Prime Minister.’ The civil servant, Sir Humphrey who wants to put a noose around his minister’s neck, waits till the minister makes a proposal and he says, “Yes, yes, that’s all good. Very good. That’s great.” And then he says, “But Minister, that’s a very courageous decision.” That’s the anathema in politics. Not many people can make courageous decisions. I’ve been very fortunate to have a chief minister, who, himself makes courageous decisions and most importantly, backs me limitlessly when I have to make courageous decisions.
Elections in India – Past, Present and Future
Dr N Gopalaswami, Former Chief Election Commissioner
The Election Commission was formed a day prior to India becoming a Republic, to convey the message that it is an independent body. In the first election that was held in 1951-52, there were only 17.32 crore electors. There were 403 constituencies. Contrast this to 2019 elections when we had 543 constituencies; 91.19 crores of voters and 10 lakh and 10 thousand booths, said Dr Gopalaswami.
According to him, the makers of the Constitution deserve applause for believing in universal adult franchise, even though 15% literacy rate was found in men and only 7% in women. However, when it came to voting, women participation was very low to start with. In the 51-52 election, it was only 1.15%. But in 2019, women have overtaken men by 0.17%.
Tracing the evolution of election commission over the years, he touched upon the crucial role played by former CEC Mr T N Seshan in making the election commission an independent and powerful body, enforcing the model code of conduct, introduction of voter ID cards, etc.
He also traced the evolution of EVMs. In 1982, the then EC started using the EVM but in 1984, its use was stayed by the SC and ballot paper was restored. It took another 8 to 9 years before the constitutional amendments were made and EVMs were re-introduced. EVM has gone through various iterations. The latest machines allow a maximum of 384 candidates to fight an election in a constituency. TN was the first state to use EVM for an entire state election, followed by Punjab. In the 2004 Parliamentary election, the entire country went with EVMs. Integrity of the machines has been verified through VVPAT, he said.
Dr Gopalaswami highlighted that there are many reforms that need implementation and listed some of them: giving rule making power to EC, proxy voting for overseas Indians, need to relook at electoral bonds, power to de-register political parties, preventing people with serious criminal records from contesting and so on.
On one nation, one poll, he said that it is technically possible but politically, it may be difficult. As a pre-requisite for this, Article 365 should be done away with. Regretting that electoral participation in cities is very low, he paid tributes to India’s first voter Shyam Saran Negi from Himachal Pradesh, who died at 105 years recently, having voted in 17 parliamentary elections and upholding the spirit of democracy.