APPENDIX

1. The responsibility of the State Government is to ensure fiscal stability and sustainability in order to create fiscal space for better provision of Social and Physical infrastructure for the people. When this Government assumed office in May 2001, there was no headroom left for making provisions for such infrastructure nor to provide enough resources for the social safety net. Actually, the State faced with the real threat of cutting even the allocations for the social safety net, as it was not in a position to honour the payment of bills against committed expenditure. The fiscal management of the State was in dire straits.

2. The nature of the fiscal crisis was deep rooted and it was obvious that no scrappy and adhoc reform measures would succeed. It was imperative to have methodical, wide ranging and sustained policy reforms with a medium term perspective. It was in this background, this Government proceeded with the Fiscal Responsibility Act 2003 with amendments in 2004. According to Section 3 (1) of this Act, the State Government is required to place before the Legislative Assembly a Medium Term Fiscal Plan (MTFP) along with the Budget. Section 3 (2) of this Act requires that the MTFP shall set forth a multi-year rolling target for the prescribed fiscal indicators while specifying the underlying assumptions. Accordingly, a Medium Term Fiscal Plan was presented in the Legislative Assembly with the Budget 2004-2005 with multi year rolling targets.

3. Based on the current fiscal trends in 2004-2005 an updated Medium Term Fiscal Plan has been prepared with revised projections for the period 2006-2009 and is placed before the Legislative Assembly. Table-II which is annexed sets out the MTFP for the period ending 2008-2009.

4. In 2003-2004 the State was able to reduce the revenue deficit as a percentage of the total revenue receipts to 6.6%. This was a major correction when compared to the level of 23.28% in 2002-2003. The State will strive to reduce the ratio of revenue deficit to total revenue receipts to a level below 5% in 2005-2006 well in advance of the target year 2007-2008 as per the Fiscal Responsibility Act 2003. The MTFP envisages making the State revenue surplus by 2008-2009. This is also in line with the target prescribed by the Twelfth Finance Commission. This is to be achieved by controlling non-productive revenue expenditure, debt management and enhanced revenue receipts through tax reforms ensuring better compliance.

5. The fiscal deficit as a percent of GSDP was 3.28% in 2003-2004. The MTFP envisages to bring it down to a level below 3% in 2005-2006 well before the target year of 2007-2008 and adhere to it thereafter. The reduction in fiscal deficit has been mainly achieved by the correction in revenue account without reducing the capital expenditure.

6. Revenue deficit as a percent of fiscal deficit was 71.95% in 2002-2003. This ratio will be reduced to a level below 15% by 2007-2008 so as to create fiscal space for generating useful assets and infrastructure.

7. The outstanding guarantees for each year have to be capped to be at a level below 100 % of the total revenue receipts in the preceding year or below 10 % of GSDP, which ever is lower. The outstanding risk weighted guarantees for each year will be capped at a level below 75% of the total revenue receipts in the preceding year or at 7.5% of GSDP whichever is lower. During 2003-2004 the outstanding guarantees was 46.39% of total revenue receipts and 6.45% of GSDP. The outstanding risk weighted guarantees was 12.65% of total revenue receipts and 1.76% of GSDP in 2003-2004.

8. Fiscal correction envisaged in the Medium Term Fiscal Plan puts emphasis on effecting a shift in the composition of expenditure in favour of capital expenditure for building infrastructure as well as real improvements in the expenditure on social sectors. Capital expenditure as a percentage of Gross State Domestic Product (GSDP) was at 1.05 % in 2002-2003. It is proposed to increase this ratio to 2.14% in the Budget Estimates 2005-2006.

9. The Table I clearly shows how the State is emerging out of the fiscal gloom and keeping pace with the targets set under the MTFP presented with the Budget 2004-2005.

Accounting year	2001-02	2002-03	2003-04	B.E. 2004-2005	R.E. 2004-2005	B.E . 2005-2006
	(Rs. in crores)
Revenue Deficit	2739 *	4851#	1565	3336	1687	1404
Fiscal Deficit	4739	6742	5591@	6922	5452	6351$
	(Percentage)
Revenue Deficit over Total Revenue Receipts	14.56 *	23.28#	6.60	13.46	6.24	4.64
Revenue Deficit over Fiscal Deficit	57.80 *	71.95#	27.99@	48.20	30.95	22.11$
Fiscal Deficit over Gross State Domestic Product	3.30	4.36	3.28@	3.86	2.90	2.97$
Interest payments over Total Revenue Receipts	18.67	19.84	19.82	21.09	18.43	17.56
Capital Expenditure (Rs. In crores)	1777.91	1627.54	3589.90@	3335.01	3607.62	4791.64$
Source: Finance Accounts by CAG and Annual Financial Statement 2005-2006

(* The revenue deficit in 2001-2002 was artificially compressed because the State Government was unable to clear all its expenditure commitments before the close of the financial year)

(# The revenue deficit in 2002-2003 is high due to the conversion of arrears owed by TNEB to Central utilities amounting to Rs.1962.14 crores as a subsidy to the TNEB. Correspondingly the debt of the Government goes up as the Government has to discharge these liabilities. Excluding this, the revenue deficit over Total Revenue Receipts in 2002-2003 is 13.86%.)

(@ The fiscal deficit in 2003-2004 includes adjustment of prior period capital expenditure amounting to Rs. 1423.38 crores met from bonds raised by TIDCO. Correspondingly the debt of the Government goes up as the Government has to discharge this liability. Excluding this, the fiscal deficit over GSDP in 2003-2004 is 2.44% and revenue deficit over fiscal deficit in 2003-2004 is 37.56%.)

($ The fiscal deficit in B.E. 2005-2006 includes adjustment of prior period capital expenditure amounting to Rs. 232.30 crores met from off budget borrowings. Correspondingly the debt of the Government goes up as the Government has to discharge this liability. Excluding this, the fiscal deficit over GSDP in B.E.2005-2006 is 2.86% and revenue deficit over fiscal deficit is 22.95%.)

10. Tamil Nadu’s share in the divisible pool of Central taxes based on the recommendations of the Eleventh Finance Commission is 5.385%. The Twelfth Finance Commission's recommendations have been made applicable for the period 2005-2010. The State’s share in the divisible pool of Central Taxes has been reduced slightly to 5.305%. However in view of the increase in size of the total divisible pool from 29.5% to 30.5% the effective share of the State will be 1.618% as compared to 1.598% during 2000-2005. This implies that there will not be any sharp reduction in Tamil Nadu's share of Central taxes. The assumptions in the Medium Term Fiscal Plan are based on the corrected devolution formula. It assumes a nominal growth of about 12% in the tax collection of the Government of India. For the year 2005-2006 the estimates are on this basis, although the Union Budget projects higher tax collections. This is being done as every year the actuals are lower than that projected in the Union Budget.

11. Tamil Nadu maintains the numero uno position for tax effort in the country. The ratio of State’s own tax revenues on the Gross State Domestic Product (GSDP) at 9.86 in the R.E. 2004-2005 is among the highest in the country. In Tamil Nadu the focus has now shifted to tax reform, simplification and transparency leading to better compliance. The State has already implemented most of the recommendations relating to Agricultural Income-tax, Electricity Duty and the Tax on Consumption of Electricity, Stamp duties and Registration fees made by the Tax Reforms and Revenue Augmentation Commission headed by the eminent economist Dr. Raja J. Chelliah.

12. The projections in the Medium Term Fiscal Plan in respect of Sales taxes are on the basis of existing rates and the existing structure. This may undergo a change, based on the implementation of the State Value Added Tax system. The growth in Sales tax collection for the current year is about 18%. The projection for 2005-2006 assumes a buoyancy of 1.00 and for the future years, it has been assumed at 1.05.

13. Even with the reduction in rates of stamp duty, the receipt under Stamps and Registration fees is showing a growth of 5% during the current year. The projection for 2005-2006 assumes a growth of 5%.

14. The growth in Excise receipts has been assumed at 5% in 2005-2006. In view of the already high tax levels projections assume a growth of about 3.5% per annum.

15. The growth in receipt from Taxes on vehicles has been projected at 10% for 2005-2006. Future year projections assume a growth of 8%.

16. Receipt under Taxes and duties on electricity is projected to grow at about 6% in the MTFP.

17. As most of the services are being provided by Boards and Corporations, the user charges collected are outside the State Budget and the potential of raising non tax revenue is not much in the case of Tamil Nadu. Even receipts from royalty on minerals will stagnate if the Union Government does not revise the rates. As the State does not extend a high amount as new debt to line agencies, interest receipts will also show a declining trend during the MTFP period. Taking all these factors into account, the State’s own Non-tax revenue has been projected to grow at about 3%.

18. The State Government does not have any say in the formula based grants as well as discretionary grants. The projections made under this category will be revisited once the Government of India communicates the acceptance of various components recommended by the Twelfth Finance Commission. The Budget Estimates 2005-2006 assume a receipt of Rs. 800 crores from the National Calamity Contingency Fund for tsunami related relief expenditure. The projections for future years assume a growth of about 4%.

19. Since Tamil Nadu has a high percentage of State’s Own Tax Revenue to GSDP, the correction required in the revenue account was mainly dependent on slowing down the growth of revenue expenditure. Implementation of the MTFP was critically dependent on the pace of compression in revenue expenditure. This process had to be front loaded as the State was on the verge of a fiscal collapse. Tamil Nadu was successful in controlling the growth of revenue expenditure in the first year itself. The rate of growth of revenue expenditure has been brought down to 10.16% in the Budget Estimates 2005-2006 from a high of 19.16% during 2002-2003.

20. This adjustment was possible through some restraint on overall salary and pension related expenditure. Expenditure on salaries and pensions, which reached a high of 102.85% of the State’s Own Tax Revenues in 1999-2000, 93.18% in 2000-2001, 88.70% in 2001-2002, has now been stabilized at about 70%. Incidence of salaries and pensions expressed as a percentage of total revenue receipts has also declined from a level of 68.78% in 1999-2000 to about 46% in R.E. 2004-2005.

21. The State has been very successful in bringing down the rate of growth of the interest commitment. Interest payments presented as a percentage of total revenue receipts after reaching the danger mark of about 20% has started coming down. This correction was achieved through swapping / foreclosing of high cost loans and by good control and management of debt. It is the intention to continuously monitor the sustainability of debt. The MTFP envisages stabilising this ratio at 17%. This needs to be brought down further to a level of 15% in view of the Twelfth Finance Commission's recommendation on debt relief to States.

22. The outcomes of the MTFP are heartening in the first year itself. Correction in the revenue account has created enough fiscal space for the State to go in for a record Plan outlay of Rs. 9100 crores. The State is going in for an unprecedented increase in the Capital outlay during 2005-2006. The total capital expenditure (excluding prior period capital expenditure) is estimated at Rs. 4714.28 crores. This will be an increase of about 290% over the capital expenditure during 2002-2003.

23. With the correction in the overall fiscal situation, the attention will be on providing enough resources to priority sectors such as health and family welfare, education, nutrition and maintenance of public assets etc.

24. Looking at the performance of the State during 2003-2004 and in the current year, the rolling targets set out in the MTFP are quite achievable and the State is well set on its path of fiscal consolidation.

25. The Budget for 2004-2005 estimated total revenue receipts at Rs.24792.30 crores. According to the pre-actuals for the quarter ending December, 2004, the total revenue receipts of the State Government have been Rs. 19351.91 crores. This is 78.06% of the Budget Estimates. The following table provides details of the components of the total revenue receipts.

Trends in Total Revenue Receipts of Government of Tamil Nadu upto 31-12-2004.

	Items	B.E. 2004-2005	PRE-ACTUALS TILL 31.12.2004	% OF BUDGET ESTIMATES
		(Rs. in Crores)
1	Share in Central Taxes	3,709.82	2788.70	75.17
2	State’s Own Tax Revenues	17,438.64	14,023.37	80.42
3	State’s Non-Tax Revenues	1,899.90	1547.82	81.47
4	Grants-in-Aid from Government of India	1,743.94	992.02	56.88
5	Total Revenue Receipts	24792.30	19351.91	78.06

26. The above table clearly shows that except Grants in Aid from the Government of India, State’s own revenue (tax and non-tax) is doing well and is keeping to the target.

27. The Budget 2004-2005 provides Rs.31463.74 crores towards Revenue Expenditure and Capital Expenditure (excluding net loans and advances). The total Revenue and Capital Expenditure till end-December 2004, according to the pre-actuals, is estimated at Rs.20,767.03 crores. This is 66.00% of the total Budget provision for Revenue Expenditure and Capital Expenditure. Even though the revenue expenditure has increased in the Revised Estimates 2004-2005, with increased Revenue Receipts, the budgeted level of Revenue Deficit and Fiscal Deficit have been reduced in the Revised Estimates. Overall the latest fiscal trends in 2004-2005 indicate that the goals set out in the Medium Term Fiscal Plan will be achieved for the year.