Economic Scene In Tamil Nadu (1997)

Economic Scene In Tamil Nadu
Rhetoric and Reality
R.Vaidyanathan
Professor of Finance
Indian Institute of Management, Bangalore

The economic development in Tamil Nadu in the last four decades shows skewed priorities.

Even in the nineties there are more than 40 percent of the population who  are  illiterates and more than 66 percent of the students dropout before tenth class. It is pertinent to note that 16 percent of households do not have all the three facilities viz. drinking water, toilet and electricity. But ninety percent of area and population is covered by TV.

Growth of employment in organized sector is declining and unorganized activities absorb some of the labour force. Others migrate to other states or outside the country.

State Government is bankrupt with large revenue deficit and not having funds for capital expenditure. From 1989-90 to 1994-95 for instance revenue expenses of the education sector has gone up by nearly hundred percent whereas capital expenditure has declined.

Greater autonomy demand so far imply larger share of Central resources and not for power to raise extra resources from the state. The state Government can ask  for more power to levy income tax on partnership/proprietorship firms since their operation are restricted to particular districts or states. Richer segment of the farmers need to be taxed since agriculture income tax falls under the state domain.

The state also needs to focus on areas where it has a competitive advantage rather than in all activities. Computer software and hardware is one such field. The role of Government needs to be reassessed and it should become a regulator rather than a owner or a  controller. The state needs to move away from rhetoric based on the past glory and present fiction to the hard realities in order to plan for the future economic growth and development.

The economic and social indicators of Tamil Nadu have shown some improvement over the last fifty years. But the level of   achievement is hardly commensurate with the immense potential that the state has in terms of intellectual capital, skilled and unskilled labour  force and the general political awareness. So much more could have been achieved if the state had been more concerned about facts than fiction based rhetoric.

Looking at some of the economic and social indicators (See table 1 to 11- annexure). We find that per-capita income in money terms has shown an increase and population growth rate has fallen from 1.63 percent to 1.44 percent between  seventies and eighties. Infant mortality has also shown a decrease in the nineties. But even in the nineties nearly 40 percent of the population is illiterate (in rural areas it is as high as 45 percent) and in all 66 percent of those enrolled  dropout of school before tenth class (for girls it is as high as 70 percent). How much of these “literates” are actually so is another issue.

There are 93  percent households who do not have toilet facilities in rural areas and 56 percent of  households do not have electricity in rural areas. 36 percent of all households do not have safe drinking water, 20 percent (one in five)  households do not have all the three (toilet, water and electricity) in rural areas. The slum population is 20 percent in urban areas as of 1991. Interestingly 90% of Tamil Nadu’s population is covered by TV, one of the highest in our country. Inspite of the tall claims periodically made by our leaders, the balance sheet of economic and social progress shows that our priorities are skewed.

The state can boast of better performance than UP or Bihar which is hardly a consolation.

It is necessary at this point to identify the possible directions which the state need to take in the future in order to achieve its full potential

State as a Saviour

It has been a tradition in the last fifty years to encourage citizens to lookup to the government as a provider and benefactor. We have encouraged and developed social attitude where government grant/subsidy is perceived as the most desired form of economic well being. Whether it is subsidized electricity, water or free dhoti or thali or any such scheme, it saps individual initiative and generates leakage. Only a small portion of the funds reaches the ultimate target groups.

Productivity and efficiency are looked down upon and it breeds a system of sloth. For example, government employment which is permanent, is considered as a desirable achievement by many younger people. This does not encourage excellence or risk taking entrepreneurial spirit.

We find that in most of the government offices, employees turn in around 11  am and leave by 4 p.m. Effective working is not even 2 hours per day. State government need to consciously take a decision to become a regulator rather than an owner or controller of activities. This  implies leaner government with possible incentives and punishments for employees. Since more than sixty percent  of the revenue of state government is spent on its employees it does not have adequate surplus  for capital expenditure. For  instance revenue expenditure (mostly salary of employees) has nearly doubled in the case of education sector between 1989-90 to 1994-94 but capital expenditure has stagnated (i.e school buildings, benches etc.) – see  Table 7.

Raising more resources

Of course the response for the deficits in the state finances would be the demand for greater share of central resources. In the use of Agriculture income tax which is exclusively under state domain, no attempt has been made by the state government to tax the rich farmers. It seems  impossible to say, even for  the sake of argument that there aren’t  any rich farmers in Tamil Nadu.

Similarly in the case of sales tax, the coverage is inadequate with  significant leakage. In the name of autonomy what is demanded is larger share of central resources and not power to levy tax or generate resources. That is, instrumentalities for mobilising additional resources are not demanded by the state and it is more about larger share of central taxes.

Even among central taxes we find that corporate taxes (i.e taxes on companies) are not shared but other income tax namely on individuals and partnership/proprietorship firms is shared by the centre with states to the extent of 80%.

Perhaps Tamil Nadu (along with other states) can ask for power to levy the income  tax on unincorporated entities i.e. partnership/proprietorship firms who are active in manufacturing,  trade, construction, hotels and restaurant, transport and other services like medical, legal, accounting, films etc. Most of these activities of partnership/proprietorship firms are carried on within a state, mostly in single locations and to that extent a particular state can identifiably collect the income tax. This can enlarge the resources of the state and has other advantages.

The wholesale/retail trader, cinema hall owner, local transport operator, construction contractor, liquor vendor, hotelier, real estate dealer, doctor,lawyer,  educational barons etc. are organically linked to state level leaders and many of the local political leaders are also involved in these activities. Hence to some extent, this would make the state accountable and would help to raise their own resources than blame the centre.

At this juncture it is pertinent to remember that generation of black money is estimatedly 30 percent of India’s national income and a significant portion of this is generated through these activities. A good portion of this is used to finance local political activities at the state and district level. Hence extra efforts in resource mobilisation at that level would be beneficial for the economy.

Employment:

We also find that growth rate of employment  in organised sector in Tamil Nadu has shown significant reduction between 1970  to 1995. It was growing at an average annual growth rate of 2 percent between 1972 to 1981 and it came down to 1.96 percent between 1981 to 1991 and it has fallen further to 1.01 percent between 1991 to 1995. Other than this, state-wise  data from National Survey Organisation (NSO) has shown chronic unemployment in Kerala, Tamil Nadu and West Bengal in all the three measure of unemployment (used by the researchers).

This implies that larger labour force is getting into unorganised sectors  for employment and overall employment in the state is not growing. Due to this, significant migration of unskilled and semi skilled workers is taking place to neighbouring states (for instance most of the construction labourers in Bangalore are from  Tamil Nadu). Also highly skilled white  collar segments are moving to Bombay or US (witness the queue before US consulate near Gemini Flyover at Chennai).

Risk-Return Paradigm

Interestingly, inspite of the growing unemployment, inter-temporal expectations of the society particularly of the middle classes seem to have gone up significantly. In other words, in the fifties at the time of retirement a person was expected to own a house or a car and that was considered an  achievement but in the nineties at the time of entry say within a couple of years of employment these are sought after. The expectation regarding return on investments has also grown for financial assets. Short term gains (from “get rich quick” type schemes) are becoming more attractive and it leads to the proliferation of  many NBFCs (Investment Firms) who offer “attractive” returns and  sometimes a kuttuvilakku or silver bowl as compliments. In the event of the all too familiar scene of not being able to get the principal back, one can pray to god using the lamp or use the bowl  to seek alms!.

The point we  want to stress  is that even though expected returns are high  it is not realised that risk is also high. Financially speaking return and risk are inversely related and this paradigm has not been realized by the investors particularly by the middle class. Due to this, very large sums of money are diverted to speculative activities like lottery, hand loans (Kandu vaddi) racing etc.Investment culture has to be developed  if the social parameters are to be achieved. Cautious and prudent savings and investments by a frugal population alone can ensure future growth and development in an orderly fashion.

Competitive Advantage.

As we have already  seen, developmental activity seems to lack focus and is pre-dominantly government dependent. The state has to identify what are the areas/fields in which it has a competitive advantage vis-a-vis rest of the country based on its endowments both human and material.

The state is already doing well in some of these areas

  • automobile and ancillaries
  • textile (handloom)
  • leather (semi-finished and finished)
  • printing
  • cinematography (technical side)
  • software

Based on the achievements on some of these fields, it would be appropriate if the State focus more in these areas and generate world class organisations. The last area has immense potential for future. Tamil Nadu has a pool of trained-knowledge based software professionals which is a major strength for the state. Even in the US a significant portion of computer professionals are from Tamil Nadu. It can encourage students after completing plus-2 system to move towards computer fields (both in software  and hardware side)

For this, the government  need to recognise studies undertaken in private computer schools (based on their rating to be done by independent agencies) and go in for massive computerisation of land records, transport offices ( for licensing and taxes),  commercial tax, entertainment tax, irrigation department, electricity department and economic and statistical wing etc. of the state government.

This will provide sound  data basis for revenue generation and planning. It will also provide development of skills which can be exported  to other parts of the country and the world.

Binary attitude and the dream world

The Tamil society has a binary attitude towards many issues. What we imply is a zero or one attitude. Either a thing is black or it is white. The ethos of the last fifty years has generated a culture where issues are always posed as Kannagi or Madhavi, Sivaji or MGR, Kamal or Rajani, DMK or ADMK, Tamil or Hindi, Tamil or English etc.

This approach distorts thinking and the shades of an issue are not comprehended. There are many a grey areas between  black and white. But  because of this approach, ideas are compartmentalised and “anybody who is not with me is against me” attitude has sunk in.

The grip of films and Television on the Tamil society is fascinating. The TV is the modern opium of the middle  classes and the dream or fictional world is substituted for harsh realities. It is high time that the society come out of this dream  state and face the realitites. The social and political leaders need to play  an important role in this.

In the absence of such a social transformation, it is possible that some  global company will erect a large screen of size 130,000 sq km over Tamil Nadu so that the entire  6 crore population can permanently be watching huge, giant size programmes on the screen. Of course, such a screen would prevent rain from falling inside Tamil Nadu and may  even upset ecology. But does it matter as long as continuous twenty four hour dream-state is ensured?.

TAMILNADU : A PROFILE

  1. 1. Area 130.06 (000 Sq.km) (3.97% of All India) Population 5.59 Crore  (6.6% of All India) (1991 census)
  2. Per capita income (current prices)

1980-81        1992-93

Rs.1498         Rs 6205

  1. population growth rate (percent)

1971-81        1981-91

1.63              1.44

  1. Infant mortality rates (per 1000 live births)

1985             1992

Rural                    95                 66

Urban                   53                 42

Total                     81                 58

  1. Literate population (%)

1971             1991

Rural                37.04            54.59

Urban               64.54            77.99

Total                45.40            62.66

  1. Dropout rates (%) 1993-94
  Classes 1 to V Classes 1 to VIII Classes 1 to X
Male 16.39 32.15 62.98
Female 18.35 41.20 69.8
Total 17.30 36.34 66.17
  1. Revenue and Capital expenditure on education including sports, arts and culture. (Rs. Lakh)
  1989-90 1992-93 1994-95
Revenue 106356 156438 196777
Capital 1039 558 1026
Total 107395 156996 197803
  1. Basic Facilities % of Households having: (As of 1991)
Toilet Safe Drinkng

Water

Electricity All three None of these

Facilities

Rural     17.17 64.28 44.49 3.98 17.79
Urban    57.47 74.17 76.80 40.51 5.48
Total     23.13 67.42 54.74 15.57 15.25
  1. % of slum population to urban population

1981                     1991

16.78%                     20%

  1. Employment in organised sector (annual growth rate in %)

1972-81          1981-91           1991-95

2.00                1.96               1.01

  1. TV Transmitters (% covered)

1985          1993        Area          Population

7             28                  91%    91%

Source: “India’s Social Sectors “.  February 1996. Economic Intelligence Service. Centre for Monitoring Indian Economy (CMIE), Bombay.