TN should ensure growth, says rating agency

CHENNAI: Global rating agency Fitch Ratings on Wednesday said Tamil Nadu needed to maintain its growth momentum, control untargeted subsidies and reduce its power sector deficit if it had to meet its own medium term fiscal targets for 2013.
The report's conclusions are by and large in line with the state government's stand that its debt position is relatively low and sustainable and that its current fiscal situation is a fallout of higher expenditure on welfare schemes and salaries in a low-growth year, and once the state moves into a higher growth trajectory in the next two years, it would result in fiscal consolidation and its medium term targets are achievable.
"Deterioration" in the state government's fiscal profile due to salary and pension revisions, a high growth in subsidies and dismal performance in collecting non-tax revenue put the state's revenue account in deficit mode in 2009-10, the special report said. However, it added that the state's fiscal situation was improving and that its economic growth was also likely to increase.
Fitch maintains ratings on two bond issues of the Tamil Nadu Electricity Board. It rated them as ones with low default risk as they came with structured payment obligations and were driven by unconditional and irrevocable guarantees from the state government and described the outlook for them as stable.
"The state government's credit quality benefits from its improving fiscal situation, driven by its position as the fifth largest state economy in India, good social profile and demonstrated evidence of adherence to fiscal target," said Devendra Kumar Pant, director (international public finance) in Fitch Ratings.
Noting that the state government had kept its debt at a sustainable level, the report said most of the fiscal targets indicated in the government's medium term fiscal plan (MTFP) were "achievable". The targets for 2012-13 including bringing down fiscal deficit to 2.37% of the gross state domestic product (GSDP) and revenue surplus to 0.71% of the GSDP. But achieving these would be conditional on the government maintaining growth momentum, improving non-tax revenue buoyancy, controlling subsidies, especially untargeted ones. "Fiscal profligacy without augmentation of revenue, especially non-tax revenue, could worsen the deficit, debt and debt servicing indicators," it warned.
Elaborating on these factors, Fitch noted that only some of the state government's subsidies were developmental. "Some of these schemes, such as free health insurance and housing for poor families, are developmental and aimed at improving the quality of life of the poor. However, universal and untargeted schemes such as providing cheap rice, lentils and cooking oil to the entire population put pressure on the state's finances."
It advocated a "judicial mix of controlling expenditure and increasing revenue" as factors that would be key to maintenance of the state's fiscal profile. On the MFTP targets spelt out in the 2010-11 budget, the report said its economic growth assumptions were realistic and likely to be achieved.
"However, the government's forecasts on the buoyancy of its own tax collections are optimistic and difficult to achieve," it claimed. "The MTFP does not contain a specific roadmap for improving non-tax revenue, which is projected to increase to Rs 3,740 crore by 2013," it added.