Tamil Nadu Public Finance and fiscal Policy | Tamil Nadu State PSC (TNPSC): Preparation - TNPSC (Tamil Nadu) PDF Download

Introduction

Public finance is a critical area of study that involves the management and distribution of a government's financial resources. It plays a vital role in shaping economic policies and ensuring the efficient allocation of resources. Understanding public finance, particularly in the context of Tamil Nadu, involves examining how public revenue and expenditure are managed and how fiscal policies are implemented to achieve economic stability and growth.

Basic Understanding of Public Finance

Conceptual Levels

• Practical Activity: This involves the real-world application of public finance by various components of public administration.
• Theoretical Area: This pertains to the study and understanding of public finance concepts and theories.

Definition of Public Finance

Public finance refers to the financial relationships and functions between public administration bodies (such as government entities) and private entities (households and businesses). It encompasses:

• Provision of Public Goods: Involves the production and distribution of goods and services for public use.
• Funding Transfers: Includes financial support in social areas, such as welfare programs.
• Regulating Behavior: Achieved through taxes, subsidies, and penalties to influence economic and social behaviors.

Fiscal System

The fiscal system, or public budgeting system, is designed to collect public revenue necessary to fund various public expenditures. This system includes:

• Public Revenue: Collected through taxes and other sources.
• Public Expenditure: Spending on goods, services, and transfers.

Causes of Development in Public Finance

• Purpose of Public Funding: Public funding aims to address the drawbacks of economic decisions made by households and companies, using fiscal tools like public revenue and expenditure.
• Quasi-Fiscal Funding: This principle involves funding public goods from off-budgetary resources, such as television licence fees for public-law television.
• Market Failure: Market failure occurs when the market system, based on supply and demand, does not efficiently allocate resources, leading to inefficiencies, instability, and unfair wealth distribution.
• Economic Optimum: The neoclassical economics concept views an economic system as efficient, fair, and stable when it reaches the Pareto optimum, where no entity can improve its position without harming another.
• Conditions for Market Efficiency: Perfect competition is required to achieve the Pareto optimum. Without it, market failures arise, disrupting the allocation mechanism.
• Types of Market Failure:
  • Microeconomic Failures: Inefficiencies in resource allocation.
  • Macroeconomic Failures: Economic instability, such as cyclical inflation, high unemployment, low growth, or foreign trade balance issues.
  • Redistribution Failures: Inequitable distribution of wealth and income.
  • Role of the State: The state uses fiscal policy to address market failures:
  • Allocation Function: Addresses microeconomic failures using tools like taxes and government spending.
  • Stabilization Function: Tackles macroeconomic instability through monetary and fiscal tools, including public expenditure, revenue, and funding deficits.
  • Redistribution Function: Corrects unfair distribution of wealth and income through progressive taxation and targeted subsidies.
• Monetary and Fiscal Tools:
  • Monetary Tools: Include open market operations, interest rate adjustments, and reserve requirements.
  • Fiscal Tools: Include public spending, revenue collection, and managing deficits.
• Redistribution Mechanisms:
  • Progressive Taxation and Transfers: Higher incomes are taxed more, and transfers or subsidies support low-income households.
  • Luxury Goods Tax and Subsidies: Taxing luxury goods and subsidizing essential goods for low-income groups to improve fairness.

Fiscal Policy Meaning

Definition

• Arthur Smithies' Definition: Fiscal policy is defined as a strategy where the government uses its spending and revenue programs to achieve favorable effects and prevent unfavorable effects on national income, production, and employment.
• Long-Term Goal: The primary aim of fiscal policy is to stabilize the economy in the long run, but this is achieved by managing short-term economic fluctuations.
• Otto Eckstein's Definition: Fiscal policy involves adjusting taxes and expenditures to achieve short-term goals such as full employment and price-level stability.

Objective

• Full Employment: Achieving and maintaining high levels of employment.
• Price Level Stability: Preventing excessive inflation or deflation.
• Economic Growth: Ensuring steady growth in the economy.
• Balance of Payments: Maintaining equilibrium in international trade.
• Development of Underdeveloped Areas: Promoting economic growth in less developed regions.

Revenue Receipt

• Tax Revenue: Consists of taxes collected and retained by the State, as well as the State's share of union taxes under Article 280(3) of the Constitution.
• Non-Tax Revenue: Includes various sources such as interest receipts, dividends, and profits.
• Grants-in-Aid:
  • Central Assistance: Represents financial support from the Union Government to the State Government.
  • External Grant Assistance: Includes aid from foreign governments, channelized through the Union Government.
  • State Grants-in-Aid: The State Government also provides grants-in-aid to Panchayati Raj Institutions, Autonomous Bodies, etc.

Expenditure

Classification

• Revenue Expenditure: Used for day-to-day government operations.
• Capital Expenditure: Invested in creating or enhancing permanent assets.

Types of Services

• General Services: Includes justice, police, and public works.
• Social Services: Covers education, health, and welfare.
• Economic Services: Encompasses agriculture, rural development, and energy.

Tamil Nadu Budget Targets

• Priority Missions: The Government’s strategy for development is based on five priority missions:
  • Water resource management
  • Poverty reduction
  • Housing for the poor
  • Skill building
  • Clean Tamil Nadu campaign
• Additionally, eleven focus areas of development support this strategy.
• Budget Formulation: The current budget is designed to support the overall development of the State and the welfare of its people, aligned with these priorities.
• Electoral Promises:
  • Implemented: 164 electoral promises have already been fulfilled.
  • Action Ongoing: Efforts are underway for 55 additional promises.
• New Government Orders:
  • Maternity Assistance: Increased from Rs. 12,000 to Rs. 18,000 for pregnant women.
  • TASMAC Outlets: Closure of 500 additional retail outlets.
  • Two-Wheelers for Working Women: Distribution of 100,000 two-wheelers at a 50% subsidy, capped at Rs. 20,000.
  • Unemployed Youth Assistance: Doubling the financial aid for unemployed youth.
  • Fishermen Housing: Construction of 5,000 houses for fishermen.

Fiscal Indicators for Tamil Nadu

• Total Revenue Receipts (TRR): Projected at Rs. 1,59,363 crore for the budget estimate (BE) of 2017-2018.
• Revenue Expenditure: Estimated at Rs. 1,75,293 crore, resulting in a Revenue Deficit of Rs. 15,930 crore.
• Revenue Deficit: Despite increased revenue expenditure due to additional commitments (e.g., UDAY scheme, cooperative loan waiver), the Revenue Deficit for 2017-2018 is expected to remain at the previous year's level.
• Debt and Fiscal Deficit:
  • TANGEDCO Debt: In 2016-2017, the Government assumed Rs. 22,815 crore of TANGEDCO’s debt, raising the Fiscal Deficit above the Tamil Nadu Fiscal Responsibility Act’s 3% of GSDP limit.
  • Government Authorization: The Government of India authorized exceeding the 3% limit due to TANGEDCO debt takeover, allowing the State to borrow beyond the norm.
  • Fiscal Responsibility Act Amendment: A bill to amend the Tamil Nadu Fiscal Responsibility Act, 2003, will be introduced in the current session.
• Fiscal Deficit:
  • 2016-2017: Projected at Rs. 61,341 crore, or 4.58% of GSDP.
  • Excluding TANGEDCO Debt: The Fiscal Deficit would be Rs. 38,526 crore, or 2.88% of GSDP.
  • Capital Expenditure: Estimated at Rs. 27,789 crore for the BE 2017-2018.
  • Projected Fiscal Deficit: Expected to be Rs. 41,977 crore, or about 2.79% of GSDP in BE 2017-2018, within the prescribed norms.
  • Net Borrowings: Estimated at Rs. 41,965 crore, against a permissible limit of Rs. 45,119 crore.
• Outstanding Debt:
  • End of March 2018: Expected to be Rs. 3,14,366 crore, including TANGEDCO debt.
  • Debt-GSDP Ratio: Projected at 20.90%, well below the Debt-GSDP norm of 25%.