20 Aug 2021 23:59 IST

Tamil Nadu economy at the crossroads

The State’s unique economic model seems to be fraying at the edges

Tamil Nadu has always marched to a different drum beat — both politically and economically. Politically, it was the first State to be ruled by a regional party way back in 1967 when the DMK came to power, dethroning the Congress. Crucially, the Congress has never managed to regain power in the State and is now in alliance with the ruling DMK.

By 1967 the Congress Party began to lose its grip on power in a series of electoral reverses across the country. But in the Hindi belt, parties that came to power had broken away from the Congress — such as Charan Singh’s Bhartiya Lok Dal. In Tamil Nadu, the DMK was unique in the sense that it had no connection with the Congress, and in some sense was an ‘organic’ party that had come out of the Dravida Kazhagam, which itself had come out of the Justice Party that ruled the Madras Presidency in much of the 1920s and early 1930s. The Justice Party also had the distinction of being the first party to implement affirmative action policies by reserving jobs and education for the socially backward classes.

Economically too the State opted for a rather unique model where “welfarism” was the cornerstone. The mid-day meal scheme for school children, when launched by then Chief Minister MG Ramachandran in 1983 (though the original progenitor was K Kamaraj in the early sixties), was derided by most economists and analysts as wasteful expenditure. But by the end of that decade, the World Bank and a host of multilateral agencies hailed this scheme and some States such as Andhra Pradesh even started adopting it. Two decades after its launch, mid-day meal schemes became a national-level policy, implemented across the nation.


When the reforms of the 1990s unfolded, Tamil Nadu was one of the first States to tap the new-found opportunities and left no stone unturned in wooing both domestic and foreign investments. In this both the AIADMK and the DMK were alike and a host of multinationals including Ford, Hyundai, Nissan and Nokia invested in the State.

By the early part of 2000s the State was consistently topping the charts both in economic and social development. It was also during this period that a new phenomenon unfolded in the State – the “freebie culture”. Started by the DMK in the 2006 elections, which promised free colour TVs for people, both the major Dravidian parties have competed with each other in handing out white goods such as TVs, grinders, mixers, laptops, bicycles to woo voters.

Large sections of the media and the commentariat are hostile to the freebies and have derided them in no small measure. But it has its share of supporters, largely academics, who argue that free supply of such goods to poor households free up their resources for education and healthcare.

This has, of course, put tremendous pressure on the State finances. The State has increasingly started relying on revenues generated from liquor sales, (the retail segment is a State monopoly) for funding this expenditure.

Tamil Nadu’s unique way of merging growth with welfarism even attracted the attention of Western academics.

In a paper featured in the book Business and Politics in India edited by Christophe Jaffrelot, Atul Kohli and Kanta Murali, titled, ‘The Tamil Nadu Puzzle’, John Harriss and Andrew Wyatt dissect the unique trajectory of Tamil Nadu, where they say a novel “freebie culture” co-exists with high economic growth. Competitive populism or the “freebie culture”, contrary to popular perception has worked well for the States because, as Harriss and Wyatt argue, “public administration probably works better than in most of the country.”

Top concerns

But in the last 10 years dark clouds have emerged over the horizon. Though the State still consistently tops the ranks (in a survey conducted by the NITI Aayog) on social development and governance, economic growth has lagged. Tamil Nadu was a State that was particularly badly hit by the Covid-19 pandemic. The State has been consistently running a revenue deficit since 2013.

The power sector is in a huge financial mess with Tangedco, the State power distribution company, borrowing heavily to meet its needs. The State transport sector too is in a similar mess. With user charges not being revised for years together, these corporations are borrowing heavily from the market further adding to the State’s financial stress.

It was in this context that the recently elected DMK government released a White Paper on the economy. The numbers make grim reading — the State’s debt burden is at ₹4.86 lakh crore; fiscal deficit at 4.43 per cent of GSDP and falling revenue receipts at 8.70 per cent of GSDP in FY21 against 13.5 per cent in FY09. Public debt at ₹2.63 lakh per household caused much mirth and gave rise to a plethora of memes.

Though the White paper hinted at tough decisions ahead, the Budget that followed didn’t quite match that promise. The tough decision promised in the White Paper seemed to have been put off for another day. Though the reduction of duties on petrol and price was welcome from the common person’s point of view, it adds pressure to the State’s fiscal.

Silver linings

There were some positives — setting up of nine new SIPCOT parks, Tidel parks in tier 2 and tier 2 cities, the intent to improve higher education and government schools and also a job guarantee scheme for urban areas, though the details are awaited.

But there are no major revenue raising measures. There was no mention of raising user charges — power, transport, water — or raising property tax. Raising the State’s Own Tax Revenues (SOTR) is crucial given how the GST regime has taken away States’ taxation capacity and also how States such as Tamil Nadu have got a raw deal from the 15th Finance Commission award which has relied on the 2011 census instead of the 1971 census to devolve Central taxes.

Tamil Nadu ironically is paying for its impressive social development. Another pain point is the lack of help for MSMEs, of which the State has a higher proportion than the national average. The DMK government may cite the pandemic as the reason to avoid biting the bullet. But in the next four years this government will have to make some tough calls, some of them may even be politically unpalatable.

State Finance Minister PTR Palanivel Thiaga Rajan’s post-Budget remarks hint at a movement towards targeted subsidies. “A government cannot give everything to everyone equally. If a government does that it will end up bankrupt. It should be done according to social justice.” How soon and how far the DMK will travel on this road remains to be seen.