Financial Daily from THE HINDU group of publications
Tuesday, Apr 25, 2006
States - Tamil Nadu
Reforms sway to election winds
Is there real commitment to reforms?
If there is at least one issue on which the ruling AIADMK and the opposition DMK seem to agree in the run up to the Assembly elections in Tamil Nadu, it is on the question of introducing value-added tax. Tamil Nadu and Uttar Pradesh are the only States not to switch to VAT, after the BJP-ruled States too adopted the new system from April 1.
The AIADMK has opposed VAT on the grounds that it will affect the State's revenues and that it will hit traders. In its 2006 election manifesto, on VAT, the AIADMK says: "While pointing out the stand of the Government of Tamil Nadu that VAT will not be implemented in Tamil Nadu until the Government of India brings in a suitable legislative amendment acceptable to all the traders and producers so as to remove all the problems faced by traders on account of VAT, it is assured that every action will continue to be taken to protect the welfare of the traders."
It must be pointed out that the DMK, when it was in power from 1996 to 2001, announced its intention to bring in VAT, a move it later went back on following the opposition to this mode of tax. In its 2006 manifesto, the party now says: "As VAT curtails the minimum available taxation rights of the States; creates fluctuations in revenue income in the long run; and there is apprehension among the traders, we will not implement VAT without properly examining the implications."
It is this convergence of views between the two main political parties on VAT that worries industry. Any further dilly-dallying on such a crucial issue will definitely make the State uncompetitive and push manufacturing out to more attractive destinations. The Jayalalithaa Government too had prepared itself for a change over to VAT. The government had prepared a draft Bill.
As in the case of VAT, the Jayalalithaa Government's performance during the last five years as far as the economy is concerned is a mixed bag. The first half of the tenure was marked by a rash of reform measures and indications of the government letting go of controls in a number of areas, including selling some State-owned undertakings. However, the next half, especially after the rout in the May 2004 Parliamentary elections, marked a complete about turn in policies.
One of the first acts of the Jayalalithaa Government after it assumed office in May 2001 was to come out with a white paper on Tamil Nadu's finances. The white paper portrayed a bleak picture of the financial health and lay the blame for the mess squarely at the doors of its predecessor, DMK government. That white paper was to form the basis for a number of actions of the AIADMK regime.
The Government despite the political uncertainty over whether Ms Jayalalithaa could continue as chief minister and even during the period when Mr O. Panneerselvam was chief minister as an interim measure till the AIADMK supremo could absolve herself of the court cases and contest elections went full steam ahead with its reform measures. It initiated steps to disinvest its stake in some public sector undertakings, beginning with the Tamil Nadu Industrial Explosives Ltd, for which bids were invited for consultants to guide in the process. For the proposed disinvestment, the Government could conveniently rely on a report of a committee set up by its predecessor.
The Cabinet had also finalised a list of undertakings that could be privatised and the plan was to appoint advisers for each sale process, almost akin to what the Centre was doing. The State's 2002-03 Budget even talked of appointing a commission again modelled on the Centre's Disinvestment Commission giving rise to the impression that the Government did indeed mean business. However, the process to find a buyer for Tamil Nadu Industrial Explosives Ltd, in which the Government owned slightly more than 80 per cent, did not make much headway. And, with that the Government's attempts at privatisation too died a quiet death.
The belt-tightening and reform measures initiated by the Government included hiking fares in public transport buses; restructuring the public distribution system, one of the biggest drains on the exchequer; increasing power tariffs; and tackling its wage bill and pension liability. The Government has enacted a medium-term Fiscal Responsibility Act, committing itself to fiscal discipline.
Another important measure that the Government took was to fill up the vacancies at the Tamil Nadu Electricity Regulatory Commission, paving the way for the Tamil Nadu Electricity Board to file a tariff petition, its only one so far, and for the commission to come up with an order. Significantly, the commission levied charges on farm connections and hut dwellers. The Government stepped in and said it would bear the charges for small farm connections and hut dwellers by paying them the money for their consumption and they could in turn pay the Electricity Board.
Even this measure was acceptable to reformers who felt that the exact amount that went to subsidising farm connections would be accounted for. While Opposition political parties cried hoarse, industry and reformers silently applauded. At last, they felt, the Government was really serious about putting its house in order and was willing to tackle the problem of the State's finances rather than just come up with more welfare schemes or appointing committees to identify the problems.
But all this euphoria was not to last long.
At some point in time as the 2004 Lok Sabha elections approached the Jayalalithaa administration started doing an about-turn. Even earlier, there were indications that reforms would be short-lived and the Government would continue to exercise control, perhaps more of that. It nationalised the business of quarrying sand on the river-beds, ostensibly because a mafia was operating in this area, pushing up sand prices and depriving the government of sizeable revenue.
Then followed the Government take over retail sale of alcohol. The Government has justified its move on the ground that excise revenues have jumped appreciably. But it would still make more sense to find out where this extra revenue was going in the previous scheme and rectify it, leaving retail sales in the hands of the private sector rather than the government run it.
In the last session of the Assembly, the Government passed a Bill to take over cable television operations in the State. Without trying to hide its intentions, the Government said this was because SCV a multi-system operator belonging to the Sun TV group of Mr Kalanidhi Maran, grand nephew of the DMK President, Mr M. Karunanidhi had a monopoly over cable operations in the State and that it indulged in practices that were against viewer interest.
OVERFLOWING COFFERS, REALLY?
If privatisation and fiscal prudence were the mantras in the first half of the tenure, it was the exact opposite in the second. The debacle in the Parliamentary elections was a turning point all the steps taken to improve finances were reversed and additional sops announced as the Assembly elections approached. None has bought the Government's arguments that it is able to restore these concessions as its coffers are overflowing now thanks to good tax collections.
It only goes to show that there is no real commitment to reforms. If political (or fiscal) expediency pushed the government to take the steps it did in the early part of its tenure, it was for the same reason that it went back on all those measures. It was fortuitous that the Government was helped by buoyant commercial tax revenues, that again was because of the growth in the economy.
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